To support entrepreneurs registered on VC4Africa we have created an easy to use format for the financial plan. In a series of articles on VC4Africa, financial coach Arnout Kroezen goes through the key points. Also see the previous post with the introduction. Below the first steps: Costs & Revenues!
Step 1 Costs
The first step in writing a financial plan is to look at the cost you will make as a company. The costs are not that difficult to forecast. If you do a little research about prices you can accurately detail the costs you will make over the course of the first year. The years that follow (Year 2 and Year 3) will depend more on the success of the company’s sales and the expected growth of the organization. We can divide costs in a few key groups (granted you might have one or two specific to your particular business):
When will people be employed? What position? What is the right salary and which costs (taxes) are involved? Don’t forget to include training costs and other employee benefits.
Cost of renting can be determined beforehand. Do a little research about costs of water and electricity, Internet / telephone / postage, Interior / furniture / etc.
Advertisement & promotion, make this coherent with the marketing section in the business plan and show the relationship these costs have to forecasted revenues.
Bank charges, registrations, legal costs; Accounting costs; these can all be determined with good research. Expected travel expenditures; Interest.
As explained before, we look at the cash needed, so predict when the cash for an investment is needed and don’t depreciate (don’t deduct values over time) (If you are familiar with finance of course you can make a different choice here!).
Questions an investor will ask:
What is the burn rate (expenditure) per month and is this realistic, enough, and/or necessary?
What salary do the entrepreneurs pay themselves?
Are there costs that are not taken into account?
Are all calculations right and consistent?
Step 2 Revenues
Revenues are more difficult to predict than costs. Still, we need to find ways to get to a good, reasonable and attractive forecast on what the future of the company looks like in terms of its ability to generate revenue.
As a starting point, produce a well-supported research that outlines the size of market. When you know what type of client will be interested in your product(s) and you know how many potential clients there are, then you have to estimate what percentage of the market might be realistic for you to reach by year 5. Once this is determined you can calculate backwards to year 1.
The second step is to break down the first year into 12 months. In this month-to-month breakdown you want to show how the number of clients is expected to increase. Here, investors are looking to see how fast you are planning to grow the business. They will be asking themselves if this analysis is realistic, too aggressive, or too slow.
When you sell a product (not a service), there will be costs involved directly related to the product sold, these costs are normally presented in the revenue section as “costs of goods sold” and not in the cost structure. For example, if you have a shop, you buy products for 0,50 and sell them for 1,00 the net revenue per product will be 0,50 (and not 1,00).
Questions an investor will ask:
When are sales expected? is that realistic?
Are the sales compatible with the market volume and with the marketing campaign as described in the business plan and cost overview?
Will the money truly be paid in that period?
Is the organization ready to handle this amount of clients? Is production ready? Is the help desk ready? Are costs increasing accordingly?
Are these sales still realistic when a strong competitor enters the market?
In the third and final installment we will look at writing a financial plan to convince investors – Step 3: The summary. VC4Africa welcomes you to share your experiences and insights in the comments below! Do you have questions? Just ask them below in the comments!