Your friend is getting ready to write a business plan for a new business. Your friend told you the plans are to prepare the financial statements first to get that job out of the way before the rest of the plan is developed. Explain the flaw in this approach. What value does it provide the entrepreneur to write the financial section as the last part of the business plan?
1) The financial statements portion of a business plan is always at the back of the document, but is arguably the most important section. According to a recent article in Entrepreneur magazine online most prospective investors and lenders scrutinize this portion the hardest to determine the actual viability of a business. The article compares the charts, tables and spreadsheets found in this section to the pulse, respiration, and blood pressure of a patient. Like a doctor uses those vital signs to determine the survivability of a human being so do investors determine the survivability of a business proposal. (Entrepreneur, N.D.) With this portion being possibly the most important one could argue that it makes the most sense to write this portion first so as to give appropriate attention to details required to compose it. This however would be a false assumption because without forming the rest of the business plan the information needed to create the financial section will not be complete. According to the class text, the financial plans are created last because this section uses all of the previous plans created for the entire document and expresses them in financial terms. As one creates the financial statements they will be constantly referring to earlier sections to prepare the projections. (Barringer, 2009) No matter how skillfully written the rest of the plan is, if the financials are sloppy or incorrect it sends a clear message to prospective investors or lenders that the owner doesn’t know their business. If the financial section is incomplete or lacking information banks or investors will not have the information they need to make an informed descisi0no about investing or offering a loan. (Barringer, 2009)
2) The financial part of the business plan is very important for investors. Investors and bankers use the financial aspect of the business plan to decide whether they want to contribute to the business financially. According to our text, “many of the readers of your business plan will consider your pro forma cash flows to be the most valuable of your financial statements. The statements provide an indication of whether a firm will be able to maintain a sufficient cash balance and run successfully” (Barringer, 2009, p.233). Starting a business is very costly and some companies take a huge loss in their first year. Investors want to see that the company can survive a financial loss and continue to aim toward success. It is a good idea to do the financial part last because you have to have everything you will need money for mapped out. For example, the operations model and flow diagram gives a step-by-step description of what is needed for the business to succeed. An operations model is just one way to document the steps in the product or services. Creating an operations model prior to a financial statement paints a picture of where the expenses will go. Each section in the business plan prior to the financial statement is a detailed description of its importance to the business. The financial section “takes the plans you’ve developed and express them in financial terms” (Barringer, 2009, p.232). Going straight to the financial section puts the company at risk of an unexpected expense.
3) Respond to your friend’s question: “How in the world do you project income and expenses for a business that doesn’t exist?” Respond to at least two of your classmates’ postings.
I actually asked myself the same question when I was creating my own business plan. That is when I started to do some research. I researched companies that were in the same business or similar. I looked for my competition and called and requested quotes. Some were high and some were low. I decided to average them out and use that price as a base. The problem was that my company was very niche. We specialize in Sterilization Departments, Operating Room and Materials Management. Most of our competition does not offer these services so it was a little easier to price out. What I would tell my friend is that part of the business plan is the market analysis as well as the products and services. There is really no specific order in which you should do research, so I suggest you start there. This will give you an idea of the direction you want to take. In the article How to Forecast Revenue and Growth,It recommends to start with the expenses. I never thought of starting with that but it makes sense. It will give you an idea as to how much things are going to cost there fore you can start thinking how much you want to charge to cover these expenses.
4) I think forecasting expenses such as fixed cost and overhead which can be rent, utility bills, phone bills and communication cost, marketing, licensing fees; and salaries. Then there the variable cost which is the cost of Goods Sold. Materials and supplies. Direct Labor Cost as in customer service, direct sales and direct marketing. Then the next step would be to forecast my revenues what is my low price point for the product, and what higher price for my premium product. How many products introduce for the first year? This is new to me but I am learning a lot on writing a good business plan.