Financial plan

What is a financial plan?

Let's now move on to the backbone of the business plan, as it demonstrates the fundamental feasibility and economic viability of your company and shows how future investments should be planned and, of course, financed.

The preparation of the business plan involves a precise list of your financial resources and the derivation of your capital requirements. This also includes listing all costs and creating a liquidity forecast. You should also pay particular attention to profitability planning and investment planning: these are not only interesting for potential investors, but also for yourself in order to check the economic development of the company.

Structure of the financial plan

A financial plan is basically divided into four main sections: Liquidity planning, capital requirements planning, financing planning and profitability planning. In order to prepare the liquidity planning, a sales, cost and investment plan is drawn up beforehand. We explain what the individual points involve below.

1) Sales planning Sales planning comes first in the financial plan. The question here is: What turnover will be generated by the products or services created? The turnover for the first few weeks, months and years should be calculated here. Of course, this is only an estimate for the time being, but it should be as realistic as possible. You should also bear in mind that newly founded companies in particular often grow very slowly at the beginning and first have to establish themselves on the market.

2) Cost planning Cost planning follows the planning of expected sales. This involves calculating which variable and which fixed costs will be incurred. Variable costs are all those costs that can be directly allocated to a product. For example, they are incurred for materials when creating the products. Fixed costs, on the other hand, are costs for machines, salaries or rent. At this point, you should carry out a contribution margin calculation, i.e. what part of the revenue remains to cover the fixed costs after deducting the variable costs. Please note: The contribution margins should always be positive, otherwise the product in question will not pay off. If a company is able to cover its own fixed costs with increasing sales from a certain point onwards, the break-even point is reached and the profit zone begins.

The start-up costs should also be included in the cost planning. These include, for example, costs for the notary, fees, costs for entry in the commercial register and basic equipment.

3) Investment planning Investment planning includes all costs incurred for investments, such as the machines or factories to be purchased. It is also important not only to factor in the initial investment, but also to consider expansion and replacement investments that will have to be made in the future. The respective depreciation of the machines is then taken into account in the profit and loss account.

4) Liquidity planning Liquidity planning is the most important part of your financial planning. Now that all preparations, such as sales, cost and investment planning, have been made, these calculations flow together in liquidity planning. Liquidity planning systematically calculates all income and expenditure and shows how and that you will remain solvent in the long term. The shortfall, i.e. the amount of costs and investments that is not covered by sales and the starting capital, is then used to calculate the capital requirement.

5) Capital requirement planning How high is the anticipated capital requirement for my start-up project? How can I avoid financing and liquidity bottlenecks? Draw up a short and long-term income and expenditure statement. We would like to use a simple example to illustrate how this works: Let's assume you reach your break-even point after 12 months. Until then, you have to pre-finance €100,000 of your running costs. The start-up and initial investment costs are € 50,000. Your starting capital is € 20,000. The liquidity planning then results in a total capital requirement of € 130,000. These now need to be financed, so the next step is to draw up a financing plan (simplified representation).

-100,000 € running costs

-50,000 € start-up and investment costs

+20,000 € start-up capital

= -130,000 € capital requirement

6) Financing plan The capital requirement has been determined but the equity capital has been used up. So outside capital is needed. But what amount of financing is needed and when? What type of investor is right for me and my project? All these questions are answered in the financing plan. It specifies which part of the capital requirement should come from equity and which from borrowed capital.

7) Profitability planning Finally, profitability planning summarizes all the most important key figures of the operating business. A potential investor is interested in a long-term view and would like to be able to assess future development on the basis of possible costs and sales. For this reason, the profitability plan should show the profit you will generate with your business idea. In addition to the profit and loss account, other indicators such as the contribution margin, gross profit or gross margins are also included.

Key challenges of the financial plan

With new disruptive business models, the market size, the composition of competitors and their efforts to gain market share are unknown. This makes forecasting cash flows problematic, as profitable operations and clearly positive cash flows can only be expected in the medium term. This means that no historical data can be used to derive cash flows, which leads to a high degree of uncertainty.

Our tips

1. Describe the market in its (future) maturity phase in terms of market volume and your market shares
2. Create a detailed forecast of your start-up's value drivers (e.g. number of customers, CR, shopping basket, market share, etc.) and link these to your financial figures by margin, cost margin, etc. The best way to do this is to use a peer analysis
3. Now vary the most important value drivers (e.g. prices, margins, number of customers) depending on the scenario and assign probabilities to the individual scenarios. This gives you the opportunity to assess future developments more accurately.

You should pay attention to this in the financial plan:

1. Develop a short-term liquidity plan and a long-term profit plan.
2. Plan the sales line according to the bottom-up approach (price-volume planning) and switch to top-down forecasting as soon as necessary.
3. Develop scenarios to anticipate different business developments and become aware of the critical aspects of your business model.
4. Align the financial model with your business model (e.g. SaaS model and fixed cost degression)
5. Justify all assumptions made and check their plausibility (as well as possible) using market data/comparable companies.
6. Create a completely deformed, dynamic/integrated financial model (P&L, cash flow, balance sheet if applicable) without hard values in calculation fields. Be transparent!

Briefly summarized:

In the end, the most important thing is to be clear about the target group of the document. Is it a bank or chamber of commerce or is it a classic venture capital investor? For the latter, you should not submit a business plan as a 30-page Word document, but a pitch deck that explains everything in a nutshell. So think about who you are and what you want and what you need to create for it.