We use three components in building a financial plan:
- expenses
- revenues
- cash flow
This makes financial planning very easy.
Expense Planning
First, we’ll put together a list of things you’re going to spend money on. We have a standard list on the shelf we can use to spark our thinking. This will give us a list of ‘objects of expenditure.’ Once we know what you’re going to spend money on, we’ll put together a calendar for the next three to five years and build a table. The table will have row headings with the objects of expenditure and the column headings will have the months.
Revenue Planning
Unlike most financial planners, we don’t like to start with the financial figures. Instead we use a three step process that is easy to think through and easy to defend to a banker or investor.
- Step 1: Develop a list of things you are going to sell and their prices. This is much like a restaurant coming up with a menu listing the food items for sale and the price of each.
- Step 2: Estimate the number of items of each type you are going to sell for each month over the next few years. This is far easier than estimating gross revenues and it requires you to think about your business in a way that makes a lot of sense.
- Step 3: Multiply the number of items sold per month by the corresponding price. This generates a sales forecast you can easily defend.
Cash Flow
For business plans, it makes sense to use EBIDTA – Earning before interest, depreciation, taxes, and amortization. The cash flow projections are calculated solely on a cash basis — no accruals.
Cash flows are easy to compute. We start with the opening bank balance at the beginning of the month, add all the revenues, deduct all the expenses, and compute the closing bank balance of the end of the month.
The opening bank balance for the following month is simply the closing bank balance from the previous month. Easy!