Today, I launch a series on business modeling. As a complement to business plan development, I thought it would be useful to explore the thoughts that make a business idea work centered around the idea of capital development. A business model is your process for creating capital. It can be social or economic capital, but the point is to articulate how that capital sustains the activities of your business. When beginning to think of a business model, consider your financial plan, your team, your market, and your sales funnel. Financial plan is our topic today.
Your business has financial goals. It may also have social goals expressed in a mission. Increasingly, customers are making their choices based on the social goals and corporate citizenship of businesses. This does not lessen the importance of a clear financial plan. Your financial plan needs to accomplish a short list of tasks:
- Present Your Financial History
- Project Revenue
- Outline Assets & Liabilities
- Manage Revenue, Credit, and Expenses
- Set a Schedule of Review
Financial History. You may not have a history if you are just starting out, but consider the pedigree of your business, comparisons with other business models, and key differences in the market, timing, and technology that may set your business apart from others. If you started the business as a hobby, participated in competitions, operated as a vendor at events, an accounting of your financial success would be useful in this section of the financial plan.
Project Revenue. Financial plans must include revenue projections. This is presented in a pro forma profit and loss statement. Pro forma because it is a projection of what you expect in the business. These are typically written presenting 3 to 5 years of operational revenue. You may also include a break-even analysis as a part of the narrative of the revenue projection or as a separate report.
Assets & Liabilities. Your financial plan presents a balance sheet that outlines the assets and liabilities of the company. You may have inventory, equipment, money owed to you, or even space in your home that you count as business assets. Liabilities include loans and other debts.
Revenue, Credit, & Expenses. Your financial plan must keep the business afloat. Even if the business is not making a profit, it needs to meet its expenses and pay its bills. That means that revenue, credit, and expenses must be managed closely. Each of these is expressed in slightly overlapping reports including a cash-flow statement, business credit report, and expense budget respectively.
Schedule of Review. You will do well to consider the purpose of your financial plan. Many financial advisors suggest that you review your plan monthly to consider the actual performance of your venture. Update projections with the numbers you actually experienced each month. Make adjustments if needed to account for slow sales or sales that outstrip your expectations.
Finances are a critical component of your business hopes and dreams. Keep in mind that you can start small, and build competence in the financial aspects. But, also realize that quicker competence acquisition results in a quicker and more sustainable handle on your business growth.