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Where to Start with Investment Planning
July 27, 2016
Many often confuse their accounting statements with financial projects, and whilst the two are closely linked in terms of planning growth, the calculations you do will be vastly different.
Accounting is looking at what your business currently generates, whereas investment planning effectively involves making an educated guess as to where the company will be in a set amount of time.
You’ll need to present a plan to those you are seeking investment from (venture capitalists and investors) and from any bank or lender who will want proof that you are able to repay your loan. It’s also beneficial for you as a business owner to see where your monetary projections are at.
It can be tempting to project your financials to be better than they actually are, but as they say you are only cheating yourself if you do this, so be realistic, and most importantly stick to the facts in front of you to make your projections.
There are a number of ways to ensure your figures are as accurate and precise as possible. We’ve previously discussed on our blog the ways in which Invest for Excel can benefit your business, but there’s also a number of other ways to begin your investment planning.
Expense Budget
In order to predict how much your sales forecast is going to cost you, it is necessary to create an expense budget detailing the costs involved in order for you to reach your target. This will include fixed and variable costs – things such as rent and payroll and marketing and advertising costs respectively. These can be difficult to predict as things such as interest rates and taxes are liable to change in the future.
In order to grow your business, you need to prove that your sales are growing, but as your sales grow so will the expenses required to make those sales happen. Whilst a lot of it can seem like guesswork, once you’ve worked out set formulas and ratios of cost to sale, it becomes easier to work out your expenses.
Sales Forecasts
Ideally you want to predict your sales for the next 3 years. This will enable investors and banks to see that you hopefully have a reliable source of income for the foreseeable future, making your business seem like a great vehicle for investment.
In your first year forecast separate this out month by month, the following two years can be forecast quarterly if you haven’t the energy to do so monthly. You will also want to calculate your gross margin.
Cash Flow Statement
Your cash flow will show the movement of money in and out of your business. If you are already in business, then your cash flow statement will be based on other documentation including your; profit and loss statements and balance sheets.
If you’re new to business, then you will be required to complete a 12 month cash projection of how much money will be going in and out in any given time period. You’ll need to consider when invoices will be paid and the period in which you require this money if it’s needed to pay expenses.
Project your Income
You’ll need to show your income for the next 3 years in a profit and loss statement. This will involve you looking at your sales forecast, expense projection and cash flow statement combined to make your statement.
Sales minus the cost of sales is your gross margin. Your gross margin minus expenses, interest and taxes leaves you with your net profit.
Assets and Liabilities
Your assets and liabilities won’t have been included in your profit and loss statements so you will need to detail them in your balance sheet. Your balance sheet will then show the net worth of your business at the end of the fiscal year.
Some of your costs may only last for a minimal amount of time, for example your start-up costs. Your assets will also detail the month you have to hand and accounts receivable. Your liabilities will include your debts, including any interest from loans you have taken or given out.
Breakeven Analysis
Breaking even is the moment every business owner dreams of and is the moment when your expenses match your sales volume. Your revenue, if your business is viable, will then begin to overtake your expenses to leave you making a profit.
Investors will be crucially looking to see the breakeven point in your business as they will be keen to know that the business they are investing in is profitable and growing.
Continual Evaluation
Don’t fall into the trap of adding investment planning to your to-do list and ticking it off once completed. When it comes to your finances, things are never completed and you should continually work to evaluate your financial position.
Invest for Excel allows you to evaluate your finances easily and compare different scenarios, allowing you to choose where your money is best placed based on facts and figures rather than inaccurate guesses.
Investment planning is something you should be continually working on, so make sure you keep your financials up to date. With so many software tools available to help there really is no excuse to be slack.