Calculating profit and loss is the ultimate objective when writing a business plan. Doing so accurately is a vital component for managing cash flow and evaluating future company performance.
For start-ups in particular, drawing out your first business plan may be trickier than expected. It’s unlikely you’ll know every financial detail at this stage – and some unexpected expense always seems to pop up out of nowhere – so working out profit margins can be as much guesswork as it is anything else.
To help with this, we’ve put together some tips for writing out your first business plan, allowing you to visualise which areas are performing well and those that need tightening up.
It’s easy to get a bit carried away when thinking of the profit you’ll make if everything goes to plan, perhaps in 3-5 years’ time. However, the year one forecast is the most crucial to get right, with quarterly estimates also useful. Your future forecasting will also be more accurate with this solid base to work from.
It’s recommended to put down expenses before revenue, mainly because they’re easier to predict. Obtain quotes, research market prices and outline all your costs, no matter how big or small. Here are some typical expenses start-up businesses will incur, although your company will probably have ad-hoc payments to deal with as well:
- Office rent and utility bills
- Purchasing stock
- Staff payroll
- Legal and insurance fees
- Advertising and marketing
- Website purchase and hosting
An ideal business plan should be sensible, pragmatic, and most of all, financially prudent. Overestimate costs slightly, anticipating unexpected payments as well, whilst remaining cautious with income. Also make room for inflation, perhaps with the fall in the pound after Brexit, and suppliers raising their prices in the future.
Use spreadsheets to document your finances. Divide figures into monthly and yearly sections, inputting columns of expected revenue, expenses and profit. There are various spreadsheet templates to be found online, whilst automatic accountancy software can make things easier as well.
Three basic documents are generally used to make up overall financial projections – these are the income statement, cash flow statement and balance sheet. By having this information at your disposal, you can forecast the break-even point and make investments knowing it won’t create unmanageable debt.
The amount of income you’ll generate at the start-up stage may be unclear. Conduct thorough market research into how much the product or service can be sold for, analysing rival company prices and conducting focus groups/one-on-one interviews with friends or members of the public for greater clarity.
Seek Professional Guidance
If you’re looking to obtain finance or an investment, the business plan must be spot on. This is where a specialised accountant is worth their weight in gold, minimising mistakes and allowing you to grow the business with less hassle involved. They can also help when dealing with the HMRC, pinpointing which areas can be tailored to reduce excessive tax payments.
Would you like to know more? Check out What is Business Forecasting and How Do You Do It?
For more information and guidance on creating your first business plan, get in touch.