9 essential financial plan elements

You will need to cover all of these pointers if you want to raise capital.

I’ve put together the essential elements of a financial plan. You will need to cover these points if you want to raise capital. I’ll give you these points over the next couple of weeks.

To make the preparation of your financials easier, use some form of financial modelling software. There is plenty available on the market. Do not develop your own spreadsheets. It is like opening a Pandora’s Box but much worse!

The basic financial statements you need are:

Balance sheet – a static snapshot of the business at a given point in time.
Profit and loss statement for the next three years.
Cashflow statement – showing the timing of cash receipts and payments.
Financial ratios.
Costings.
Breakeven.
Project evaluation.
Track record.
Funds statement – showing the source and use of funds over time.

Provide a summary of these financial statements in your plan and attach the detailed spreadsheets to your documents. Investors will want to get into the detail. Do not frustrate them by hiding your working papers.

1. The balance sheet

The balance sheet reports a business’s financial position at a particular point in time. It is a snapshot of the business and indicates the following:

The amount of the business’s assets (what the business owns).
The amount of the business’s liabilities (what the business owes to creditors).
The amount of capital contributed by its owners and generated by the business (what the business owes to the owners).

The balance sheet shows not only the total value of assets, liabilities and owners equity, but also the kinds of assets owned by the business, the various types of claims that can be made on the business, and the details of the owners’ interest in the business.

2. Profit and loss statement

The profit and loss statement summarises the changes in profitability that has occurred over a period of time between one balance sheet and another. The profit and loss statement collects together:

The total revenue of the business for a period (for example, from sales made or services rendered by the business).
The expenses of the business for the same period.

3. Cashflow statement

Cash and profit are not the same! The profit and loss statement reports the business’s profitability. The cashflow statement reports the business’s cash position. It describes where the cash comes from, where it goes, and when and how much additional cash (if any) will be needed from outside sources for the business to remain solvent.

In the early stages of a business, cash is more important than profit. If you have no money in the bank then you cannot continue to trade. You may go out of business while being profitable!

4. Financial ratios

Financial ratios are used to analyse and interpret the financial statements. Financial ratios are used because you might be misled by a comparison of absolute dollar figures rather than overall trends etc. They are a very effective control technique and can often identify financial problems before they become serious.

Financial ratios in isolation have little significance. They should be used comparatively to determine policies for future operations in at least two ways:

Trend analysis (over time).
Interfirm and industry comparisons.

Useful ratios include:

Liquidity ratios
Working capital ratio
Current ratios
Acid test ratio
Capital structure ratios
Gearing ratio
Equity asset ratio
Number of times interest earned
Profitability ratios
Gross profit margin
Operating expense ratios
Rate of return on assets
Rate of return on equity
Activity ratios
Stock turnover
Accounts receivable turnover

I’ll cover the remaining five points next week.

Till then…

Gail Geronimos, is the founder of Achaeus, which helps entrepreneurs develop their businesses and she has just started a new site www.pitchingtoinvestors.com with tools and tips about how to develop killer presentations to raise capital.

To read more Gail Geronimos blogs, click here.