Why is it important to understand the key elements of a financial plan for your business? Creating a financial plan for your business can seem quite challenging, but once you understand the key elements, it becomes a much simpler task.
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What is a Financial Plan?
Know that a financial plan is an overview of your business’s current financial situation and the future projection of its growth. A financial plan for your business helps you understand everything about your finances, to set realistic goals, and build a strategy to grow your business while avoiding potential setbacks.
A financial plan is the key to a successful business and helps you plan for the future.
What Makes Up a Financial Plan?
A financial plan is made up of eight elements:
- Profit and loss statement
- Operating income
- Net income
- Cash flow statement
- Balance sheet
- Sales forecasting
- Break-even analysis
- Operations plan
Whether your company is new or well-established, a financial plan is essential to make your business succeed. As well as for borrowing or raising capital, bringing in partners and obtaining licenses.
The Eight Key Elements of a Business Financial Plan
Before you get started, make sure you understand the key elements of a financial plan for your business.
Profit and Loss Statement
The profit and loss statement is an income statement and indicates your business’s profit or loss over a period by analyzing your income and expenses.
- Revenue is not the same as profit. Revenue is the total income your business makes from its regular business activities.
- A variable expense is the funds used to generate revenue and includes marketing and employee compensation, etc.
- Expenses that are fixed are operating expenses and are not connected with sales.
- Variable costs are the cost of goods that get sold and fluctuates based on your inventory and sales.
Your gross margin is the net profit or loss. You’ll calculate it by subtracting total expenses from total revenue. Revenue, expenses, and gross margin indicate how your business makes a profit or loss.
Gross margin – Operating expenses = Operating income
Operational costs are fixed and don’t change and include rent, electricity, etc. By subtracting these costs from the gross margin, you will get the operating income.
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