The financial plan of a business, new or existing, has to prove that the business idea is viable and that the business will survive on the start-up capital until it makes a profit. It will also explain how much money is needed to start and operate the business, and in the case of a new business, what the break-even point will be (the break even point refers to the level of turnover where the gross profit is equal to the estimated operating costs, thus, the minimum turnover necessary for covering all costs.)
The first aspect to consider, is the establishment costs. Establishment costs are the costs involved before operations start, and will usually be one-off, for example:
· Registration of the company · Product testing costs · Market Research · Professional services (such as a business plan compilation service). · Cost of business premises · Cost of machinery and equipment · Buying of stock
The next aspect to consider, is the operating costs. Operating costs can be defined as the cost to run the businesses on a montly basis, in other words, the monthly expenses. Examples of these are:
· Salaries and wages · Auditors’ fees · Rental of buildings · Rental of machinery and equipment · Insurance · Telephone · Printing · Office stationary · Advertising
After the operating costs have been calculated, one can determine what the break-even turnover will be. It is essential that the turnover be higher than the required level for breaking even, in order to realise a profit.
To break even, gross profit = Operating costs
Say for instance, that the gross profit percentage for your business is 15%, and the annual operating costs are approximate to be R100,000. The break-even turnover will be calculated as follows:
Gross profit = 15 % (remember, to break even, gross profit = operating costs)
Thus, 15% = R100,000.
Thus, 100% = R666,666.66 (R100,000/15 x 100)
Mark-up % can be calculated as: Gross profit/Cost of Sales x 100
Gross profit % can be calculated as: Gross profit/Sales x 100
After you have calculated the Operating costs and the break-even point, you will know how much capital is needed to start the business.
In order to obtian financing , most financial institutions will want to see a Pro Forma Cash Flow Statement, a Pro Forma Income Statement, and a Pro Forma Balance Sheet.
Cash Flow is not the same as profit. Profit is the result of subtracting expenses from sales, whereas cash flow is calculated based on actual payments received or paid.
An Income Statement is used to calculate the projected net profit, by subtracting cost and expenses from sales and other income. When you are preparing your pro forma income statement, sales by month must be calculated first. You can use Marketing research, Industry sales or some trial experience to provide the basis for these figures.
A Pro Forma Balance Sheet summarizes the projected assests, liabilities, and net worth of the new venture. Assets can be defined as items that are owned or available to be used in the venture operations, where liabilities can be defined as money owed to creditors. Owners equity represents the amount owners have invested or retained from the venture operations. The pro forma balance sheet reflects the position of the business at the end of the first year, and will require the use of the pro forma income and cash flow statements to help justify some of the figures.