The construction of the financial plan is an important stage of the business plan which consists of planning the inflows and outflows of cash.
It is a tool that should not be overlooked because having good cash is a fundamental element for a successful creation project.
Too many projects do not go through 3 to 5 years because of cash flow problems. In addition, this step allows the creator to ensure one last time that he has the financial means necessary for his ambition and that his economic model holds up! If this financial evaluation alone does not make it possible to decide whether or not to embark on this project, it remains decisive as to its success!
The construction of the financial plan is carried out in several stages:
- Construction of the project operating account
- Analysis of project financing needs: investments and working capital requirement (WCR)
- Construction of the annual cash flow plan (and monthly for the first year)
- Calculation of project profitability indicators
- Asset-liability balance of the project
- Analysis of the sensitivity of the project profitability
- Ways to improve profitability
1 – ANALYSIS OF THE PROFITABILITY OF THE PROJECT
To carry out this analysis, several questions should be asked:
- Does this project make money (operating account)?
- What are the funding needs, and for what purpose?
- Will profit be generated and when will there be a return on investment?
- Is added value (to the existing offer) created?
- What are the sources of funding? How do we use this funding?
- What are the risks? Opportunities to get started?
The responses to these queries are outlined in the operating log for the enterprise. The latter allows analysis of projected revenue and planned expenditure. When sales surpass expenditures, the company produces a result which enables it to expand, otherwise it must realize a loss to be financed.
Try partnering for a person who understands well the costs of operating a corporation and the precision of your estimates makes you appreciate your company’s economic model in the making. Do not hesitate to contact a chartered accountant to support you if you are confused by the financial aspects. The Blog of the Manager will help you choose one free of charge of its partners.
2 – FINANCIAL NEEDS OF THE PROJECT
Funding needs are akin to the money that will be put on the table to carry out the project. There are two types:
Start-up investments which can be more or less important depending on the nature of the business (start-up costs, development costs, fixed assets, marketing, commercial launch, etc.)
Working capital or working capital requirements (difference between the needs linked to the operating cycle and the resources arising from this cycle): customer invoices awaiting payment, stock of finished products, raw materials, etc.
3 – THE CASH PLAN OF THE PROJECT
Again, a watchword: do not neglect the cash, so as not to go into the wall!
This project, which will see the light of day, will have consequences for the company’s cash flow.
It is necessary to be able to measure, monthly the first year (yearly thereafter), the financial needs, then the “cash” contribution (positive cash) that it will generate.
4 – PROFITABILITY INDICATORS
What do you learn, at the beginning, whether the project is going to be profitable? Confederation on many measures, including:
The return on investment period (ROI), which makes it possible to assess the period of time that will elapse before recovering the money injected into the project,
The net present value (NPV), which measures the creation of value brought by the project,
The internal rate of return (IRR), or rate of return on the project, which makes it possible to assess the profitability of said project compared to other financial investments,
The return on capital employed, which measures how many euros of operating margin are produced by one euro invested,
5 – BALANCE SHEET (ASSETS – LIABILITIES)
The balance sheet forecasts there, it is a little the photograph of the situation of such or such company, at a given moment. Why can it be interesting to draw it up during the construction of the business plan?
To see the evolution of the project, year after year, and make it “concrete” in the eyes of the shareholder;
To study the funding cycles of the future business. The balance sheet makes it possible to measure the WCR, which represents the financial amount necessary to run the business as well as the long-term financing cycle called FR (Working Capital Fund). In the end, this allows you to anticipate the cash flow of the company being created over the coming years.
6 – SENSITIVITY ANALYSIS
All the calculations made until then to build the business plan are based on basic assumptions. The manager must anticipate certain modifications or parameters that would require revising, upwards or downwards, the figures presented. The sensitivity analysis of the project consists in calculating the variations (positive or negative) of the assumptions made.