Any financial planner will tell you that to start up a business, you need to draw up a business plan. But as important as the plan is, it is the financial section of it that is the most important. Without this section, all the rest is basically just a concept – an idea. Without the financial planning – that includes estimates of cost and income, no lender of finance will be interested in offering you a loan.
People with a dream of starting up their own business are often more interested in the other parts of the plan. Where their business will be located, what kind of tools and equipment they will need and even what colour scheme the place will have. These things are of great importance to the prospective business owner, but not to the bank manager. A financial advisor is the best person to help you with the financial part of your business plan, so lenders can see it is going to be a viable business; one that won’t go broke in the first year.
How is a financial plan different from accounting? While accounting is an essential part of any business, it uses numbers from the past. Until you actually start your business there will be no figures to use in accounting. While the financial plan looks similar to accounting figures, it is a forecast of the future you expect to see for your business. However, the figures used won’t be totally accurate because they are based on research, your own knowledge of the market and what you expect and hope to see for your business.
When creating a financial plan, some people make it quite unrealistic with a sharp increase in sales for no reason, which is unlikely to actually happen. Lending institutions are not impressed with this at all. To have any hope of getting a loan to start up your business, your analysis and financial forecasts have to be realistic. No income suddenly rises without a reason. If you sell goods, the prices don’t suddenly increase dramatically in a week, nor is it likely that your business will suddenly sell 50% more stock in some random week or month in the future.
Rather, a gradual increase should be the expected norm, as you start business and people get to know about it and become your customers. Further down the track, you may expand your business in some way and then expect to see an increase, but for the present, before you’ve even started, your lender will want to see evidence that the business is viable and that you can be trusted to use their money wisely, not waste it on frivolous purchases that have little to do with making your business solid and stable.