As an entrepreneur who has started or is about to start a business, having a business plan is essential to the success of that venture as it plays the role of a guide and reference for the future, to assess growth. The sections of a business plan are multifaceted with each one being beneficial to unique parts of a business.
This article is going to give an overview of the elements contained in the finance part of a business plan typically known as projections and it can be created using Excel sheets.
The first element is the Revenue Projection and this simply has to do with how a business would make money, either through a service or product. This is where the number of customers projected to patronize the business for each year (s) of the projections and the amount they would be paying, are highlighted.
The second element that needs projecting is the Cost of Goods Sold. This has to do with the manufacturing price of the product per unit– this can be skipped for a service-based business. Knowing this, helps to an extent in proper calculation and estimation of the profitability of a business, not forgetting that other deductions will still be made from the net revenue. This is done by subtracting it from the total amount the customer will be paying for the end product.
Having highlighted those the next element to factor in is the Operating Expenses. These are the expenditures present in the daily running of the business – labour, advertising, rent, power, etc. If the business would be paying for any of these they need to be highlighted in the financial model, the reason being that it would have to be deducted from the total revenue in the course of the business. This would help to show what the gross profit and / or operating income are. Gross profit and operating income are represented in accounting figures and percentages.
At this point, Tax projection (if necessary) comes to play.
The final element in this basic financial model is the Net Income – in accounting format and percentages too! This is the stage where all final deductions are made– the cost of goods sold, operating expenses, and tax.
The benefits of creating projections for a business is that it allows business owners and investors alike to assess the viability of a business. These numbers paint the bigger picture – plus or minus what is to be expected once the business runs over some time, it is not set in stone but is open to changes.
Get modelling now to assess that business you have had in mind– whether you are a start-up or you have been in business, a financial model and a business plan as a whole will help you gain clarity.