by Charmayne Smith,
The business financial plan commonly appears in the overall business plan for a small business. However, the financial plan is a self-supporting document intended to support and direct the actions of the business. It explains what your business can afford, how it can afford to do it and what the expected profits will be. For a small business, a well-written business plan can be the difference between you carrying the business or the business carrying you.
Your small business financial plan should include four standard forms that attached documents support. The standard financial forms include the personal financial statement, the balance sheet, the income statement and the cash flow statement. These forms provide a well-rounded financial view of your business, from your personal finances to the business finances. The forms explain how your business generates income, how it spends the income and whether it can support itself.
The supporting documents of the financial plan are those that place merit into your financial figures. Depending on the information provided in your statements, these documents can include stock documents, life insurance policies, real estate deeds, tax statements, bank statements and register receipts and accounting ledgers. Within the business plan, these supporting documents are included in the document’s appendix and are organized in a fashion that provides easy reference.
You can easily go wrong with your financial plan if you simply pull out your documents and fill in the numbers. The financial plan is an analysis of your business that lenders and investors use to determine your business’ viability. The information within this plan helps determine your business’ financial ratios, or scorecards. Institutions and financial specialists use an array of ratios to identify the information they seek about your business. Some of the most common financial ratios include the liquidity ratios, such as the working capital and acid test, as well as the asset management ratios, such as the debt management ratios like the accounts payable turnover and leverage tests.
The break-even formula is one of the most important aspects of the small business financial plan. This formula uses the information within the income statement to determine the point at which your company begins to generate a profit. The break-even formula is the company’s fixed expenses divided by its margin percentage. The margin percentage is determined by subtracting your business’ total variable expense from its total net sales and then determining what percentage that margin represents. For instance, if your company has $100,000 in net sales with $50,000 in total variable expenses, the margin would be $50,000, or 50 percent of the net sales. The break-even point of your business with $150,000 in fixed expenses is $75,000. Therefore, all business income you generate above $75,000 is a profit.
Once completed, your financial plan will not only display a snapshot of your business’ finances, but also forecast what it expected. As a result, your financial plan will eventually become outdated and require revisions. Periodic reviews of your financial plan will not only assist you in keeping your small business on track, but it also will help you to identify the areas where you need restrictions and expansions. MasterCard International explains that the quarterly review of the financial plan is an effective schedule that will help to keep you ahead of unexpected financial developments.