Developing a Financial Plan for Small Businesses

The financial plan of a new business has to prove that the business idea is viable and that the business will survive on the start-up capital until it makes a profit.  It will also explain how much money is needed to start and operate the business, and in the case of a new business, what the break-even point will be (the break even point refers to the level of turnover where the gross profit is equal to the estimated operating costs, thus, the minimum turnover necessary for covering all costs.)

 

The first aspect to consider, is the establishment costs.  Establishment costs are the costs involved before operations start, and will usually be one-off, for example:

Registration of the company

Product testing costs

Market Research

Professional services (such as a business plan compilation service).

Cost of business premises

Cost of machinery and equipment

Buying of stock

The next aspect to consider, is the operating costs. Operating costs can be defined as the cost to run the businesses on a monthly basis, in other words, the monthly expenses.  Examples of these are:

Salaries and wages

Auditors’ fees

Rental of buildings

Rental of machinery and equipment

Insurance

Telephone

Printing

Office stationary

Advertising

After the operating costs have been calculated, one can determine what the break-even turnover will be.  It is essential that the turnover be higher than the required level for breaking even, in order to realize a profit.

 

To break even, gross profit = Operating costs

Say for instance, that the gross profit percentage for your business is 15%, and the annual operating costs are approximate to be R100,000.  The break-even turnover will be calculated as follows:

 

Gross profit  = 15 % (remember, to break even, gross profit = operating costs)Thus, 15%     = R100,000.Thus, 100%   = R666,666.66   (R100,000/15 x 100)

Mark-up % can be calculated as:   Gross profit/Cost of Sales x 100

Gross profit % can be calculated as: Gross profit/Sales x 100

After you have calculated the Operating costs and the break-even point, you will know how much capital is needed to start the business.

 

In order to obtian financing , most financial institutions will want to see a Pro Forma Cash Flow Statement, a Pro Forma Income Statement, and a Pro Forma Balance Sheet.