Explaining how much money your business will make is a crucial part of writing your business plan. Let’s be honest, unless you are a charity the main reason you are in business is to make money.
If you are preparing a business plan for investment or funding, you will have to explain when you will start making money and how much you will make. Investors will want to know when they will make a return on their investment and loan providers will want to be confident your business is sustainable so you can repay them.
In your business plan, you will need to include your sales forecast and profit-and-loss statement for at least the next 3 years, preferably 5 or more years.
The key components in a financial plan are:
Business Model:
Will your revenue come from sales, advertising or additional products/services?
There are many business models to choose from, you need to prove in your plan you have chosen the most suitable business model for your business, customer and market.
Look at the business model for similar businesses in your sector. Do not overcomplicate your business model, simplicity is the key to success.
Sales Forecast
In your sales forecast, you should explain your sales assumptions, explaining in detail how you will make sales.
This information should be broken up by each sales channel and product/service.
The major mistake most entrepreneurs make with their sales forecast is they just state their forecast and do not explain how the numbers are made up.
Clearly state in your business plan the key assumptions and KPI’s behind your sales projections. Your numbers may be under/over ambitious but at least you will be able to explain how they were calculated.
Pricing
How much you price your goods or services and can the difference between breaking even and losing money and adversely affecting your cash flow
There are several pricing techniques to choose from. The most common pricing technique is to work out your variable and fixed costs and charge a markup (profit) on top of that.
Before you decide what you will charge you need to budget your costs and see how much each unit costs you to make or deliver.
Whatever pricing method you use, you have to make sure you make enough money from each sale to make your business sustainable. If this doesn’t occur, you will have to analyse your expenditure budget and make savings.
Breaking Even
Whether you sell a product and require stock or a sell a service it is important for you to understand how many units you need to sell to make your business profitable. A simple break-even chart should be included in your business plan, showing the investor or funder how many units you need to sell to break even.
The Break-Even calculation for units is:
Fixed Costs / (Price – Variable Costs) = Break-Even Point (Units)
No matter how large the profit is on each individual unit is you will have to set yourself a specific sales target each month to ensure you make enough money to cover your costs.
Any unit you sell above your Break-Even Point will be a profit.
The breakeven point is great for double-checking if your sales targets are realistic. If your breakeven point exceeds your sales forecast, you may need to re-start your planning process.
Market & Sales Planning
Allocate a significant portion of your expenditure budget for marketing. You should demonstrate your knowledge of your target market and not only list the marketing channels you will use to engage them. You need to explain how specific campaigns you launch that will convince potential customers to buy from you and not your competition.
Depending on the business model you have, you should be able to work out in your business plan how much money it will cost to acquire a lead and a customer.
The calculations are simple.
Cost Per Lead: Total Marketing Spend / Leads Generated
Cost Per Customer: Total Marketing Spend / Customers
The lower the cost is, the more profitable your business will be.
Conclusion
To get investors and funders interested in your business, the financial section of your business you must make a profit. It need not be straight away, most investors will be aware it takes time to make traction your industry. This doesn’t mean you have to present unrealistic, overly ambitious financial plans. Your numbers have to be realistic and substantiated.
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