Creating a business plan brings some specific challenges, especially around predicting cash flow, sales and costs. How can you get accurate figures for your plan when you’re starting from scratch?
Here’s some tips to help you estimate the figures for your business plan, to ensure it’s as useful as possible.
Business plan financials
There are several areas that you’re likely to need for your plan. These are:
- Sales forecast
- A simple profit and loss
- What funds are available and any finance needed
How to estimate your figures
Many people feel intimidated by the financial side of business planning. Jennifer O’Toole, Senior Partner at accountancy firm Thomas R Dixon, acknowledges “it can often be difficult to predict sales and costs if you have nothing to work from but it’s not impossible”.
Remember that it won’t be perfect but if you can estimate fairly accurately, it will be helpful – and can save any nasty shocks later. So where should you get the data?
Jennifer says: “Look for information in the public domain such as competitors’ accounts to give you examples of sales, costs and ratios that are relevant to your market”.
What to focus on for each section
Once you have an idea of where to go for some raw data, you’ll need to begin to apply the figures to your prospective business. Here are some key things to consider when…
Calculating your sales
This is a key measure for your business and its success. Your sales forecast should show a month-by-month breakdown for the next 12 months and then an annual overview for the two years following.
There are a number of ways to calculate your sales but the following approach can be useful:
- List each of your products or services.
- Work out the price for each of those products or services.
- Think about the market and how many sales you may achieve each month. This might be as a percentage of capacity (e.g. available hours or tables occupied in a restaurant) or as a number of units. Remember that you won’t be at capacity all the time (if at all).
- Allow time to get established. It may take you some time to get your first sales or you may have an initial flurry of sales from your first contacts, followed by a quieter period.
- Consider seasonal effects on each type of sales or service. This doesn’t just happen for people selling deckchairs and Christmas trees. For example, if you sell to businesses, you may find sales drop during the summer and over Christmas as people are on holiday.
- If you have a new product, look at sales figures for similar types of products.
Calculating your costs
Every business has costs, either to produce the products, buy in materials or manage overheads. You need to estimate these costs in your plan:
- Work out what costs you will have.
- Do some research into what prices you may need to pay. Remember that as a new business, you may be charged a higher amount than more established companies.
- Buying in bulk can lower costs, but you need the cash to be able to do this and it ties up your money in stock.
- If you’re unsure what your costs may be, take a look at what the margin may be.
Your costs should have a month-by-month breakdown for the next 12 months and show annual figures for the two years following.
Calculating your cash flow
Your cash flow forecast will show when the money comes in and goes out. Once you have your sales and costs figures, you’re part of the way there. However, do remember:
- You may not get paid for a sale when you make it. Factor in time for people to pay invoices – and the unfortunate reality that some of these will be paid late.
- You may be able to get credit with your suppliers, which can delay when the costs affect your cash flow. However, some small businesses can’t get credit when they first start, so check with your prospective suppliers to see what terms may be available.
Once you have that information, you can create your monthly cash flow forecast for the next two years.
Calculating your profit and loss
This will show all of the income and expenditure for your business and should cover at least two years. In addition to your sales and costs data, it will show any income other than sales, together with costs such as marketing, fees, salaries, travel, rent and insurance.
Keep it realistic
Some business plans contain figures that are clearly unachievable. If you’ve watched Dragons’ Den, you’ll see this can be a common scenario.
Most entrepreneurs are optimistic people, so they can get carried away with their numbers. It pays to err on the side of caution as the income pays for your day-to-day living expenses and the future of your business.
Jennifer says: “Be realistic about your abilities and that of your team. It can often be demotivating to set targets that are unobtainable. That said, you need to set goals that raise the bar.”
- You won’t capture the whole market
- It takes time to build up a business
- You won’t win all work you pitch for
Look at your figures again and ask yourself if they are achievable. If you’re unsure, your accountant (if you have one) may be able to offer some advice.
Getting the finance in place
Of course, access to good figures also gives you an indication of how much capital you might need and how long it will be before your business is profitable.
Some businesses “bootstrap” their launch and make use of owners’ savings to get started. For others, they will need funding.
If you are looking for investment, it’s important that you know what your numbers are – not only what you’re looking for but also how the money will be used and when investors can see a return. You should know your figures inside out as this will show confidence and an understanding of your business.
How to start your business
Want to start your own business but not sure how to proceed? Read this guide for tips on creating a business plan, working out who your customers will be and much more.