Design a sound financial plan with this piece of advice
- Is a financial plan mandatory?
- What exactly is a financial plan?
- What does a financial plan consist of?
- How do you draw up a financial plan?
Is a financial plan mandatory?
Are you starting up a sole proprietorship? Then you are not obliged to draw up a financial plan. Yet, it often pays off. Because a financial plan provides guidance for you as an entrepreneur. It gives you an insight into your anticipated expenses and income (projected income statement). And into your investments and means to finance them (projected balance sheet).
Is a financial plan mandatory for a company ?
If you opt for a company, you will usually have to draw up a financial plan. It’s only not mandatory in the case of a partnership. You must account for the start-up capital in your plan. A financial plan enables the government to assess whether you have provided enough funds to bridge your first two years.
If your business goes bankrupt within three years and you did not provide enough capital, you can be held liable and lose, for example, the protection that your company otherwise affords. This is called the founders' liability and should not be overlooked.
What exactly is a financial plan?
When you start a business, you often prepare a business plan. The financial plan is an important part of it. As mentioned, it’s a means of mapping out the investments, financial resources, expected expenditures and revenues of the first few years. This way, you can see:
- whether your company is viable
- whether it’s profitable
- what financial risks you might run
Your financial plan is based on various elements, such as your objectives, the market data, your chosen products and/or services and your expected staffing requirements. Think of it as a GPS for your business: a financial plan allows you to monitor whether you are still on track.
You may well find, as you draw up your plans, that you will have to adjust your idea or else it won't be viable. That's not fun, but you better find out before you start up or during the start-up phase, so that you can still correct it.
Tip: Looking for start-up capital? With a sound financial plan, you are in a much better position to negotiate with the bank or with potential investors.
Components of a financial plan
Your financial plan must contain the following components:
- A description of your activities
- An estimate of the expected turnover (sales)
- A calculation of the estimated profitability
- How you finance your business (capital, loan, other …)
A valuable tip: don't underestimate costs. Create sufficient financial leeway for your business to remain viable.
Drawing up a financial plan: 6 tips
Your financial plan should cover at least two years, but in practice it often spans three years to match the duration of the founders' liability. You can do it yourself, but most entrepreneurs team up with a bookkeeper or accountant.
- Describe your planned activities in detail. For example, don't simply write 'carpenter', but explain what furniture you make and whether you install it on your customers' premises.
- Explain how you finance your business. What is your own contribution, who will provide external funds and on what conditions or guarantees.
- Prepare a balance sheet of your assets at the start of your business, after the first year, and after the second year.
- Provide an income statement in which you estimate the profit.
- Budget your expected income and expenditure to have an overview of your cash flow.
- Explain clearly why you have opted for these assumptions in your financial plan. Why do you think they will hold?
Tip: also read this guide of the Professional Institute of Chartered Accountants and Tax Consultants.
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