”By failing to prepare, you are preparing to fail” – Benjamin Franklin
”By failing to prepare, you are preparing to fail” – Benjamin Franklin
Process Street’s Financial Planning Process is a guide to aid you through the process of producing a financial plan for your small business.
This Financial Planning Process should be used in conjugation with Process Street’s Financial Plan Template. The Financial Plan Template is for the actual production of your financial plan, this Financial Planning Process is to be used to gather the required information and data to produce the financial plan.
You should, therefore, complete this Financial Planning Process before you attempt the Financial Plan Template.
Process Street’s Financial Planning Process has condensed the process of creating a financial plan into the following tasks:
1963 marks the time when the first ever financial plan was produced. John Keeble and Richard Felder, founders of the Financial Services Corporation, were the parents of this first financial plan procedure.
Keeble and Felder certainly had the foresight to determine the benefits producing a financial plan could have.
As the majority of small businesses fail in the first five years, it is important you manage your small business to prevent this failure statistically stacked against you.
78% of small businesses fail due to the lack of a well-developed business plan, 77% fail due to incorrect pricing, and 79% fail due to starting out with too little money.
The above are failings which can be avoided with an effective financial plan.
The aim of Process Street’s Financial Planning Template is to help you produce a financial plan for your small business, to prevent business failure, and to enable you to actively plan ahead.
In this template, you will be presented with specialized questions given as a form field. Different form fields are used, such as subtasks, dropdown menus, short answers, long answers, and weblinks.
You can populate each form field with your own specific data.
Our stop task feature has been used to enforce task order when needed.
In addition, our conditional logic task has been used as required to guide you through the correct process path specific for your entered data.
In this Financial Planning Process, you will be presented with the following form fields, which you are required to populate with your own specific data. More information is provided for each form field via linkage to our help pages:
To begin the Financial Plan Template, enter the required details into the form fields below.
This is a stop task, which means you are unable to move onto the next tasks in this Financial Planning Process until all form fields in this section are complete.
The first step of the financial planning process is to make sure you have created the required financial statements.
Check off each task in the subtasks below on the completion of each financial statement.
The final task under this heading ‘State assumptions using your income statement’ is a stop task, you cannot move forward in this template until your assumptions are clearly defined as such.
Your assumptions made for your future forecasts can be added to the financial statements. Highlight what are forecasts and what are your actual current numbers so it is easy to distinguish the two when viewing your financial statements.
A financial model is defined as a tool used to forecast the financial future of a business into the future.
Once you have completed the required financial statements, you can look at the data in these statements to make make your assumptions.
Assumptions are a key part of the financial planning process, to create your financial model, to project what will happen in the future.
Check off each task from the subtasks below on their completion.
The dropdown form field provided presents a conditional step in this process. You will be directed to the relevant page based on your response selected.
There are other ways to calculate your average growth rate, the simplest has been considered above. The average annual growth rate does not account for the effects of compounding. Consider using compound annual growth rate to account for compounding effects.
Revenue is defined as the money your business will receive during a specified period and is found on the income statement, also known as sales.
Compound annual growth rate shows the progressive growth rate over time. Compound annual growth rate takes into account compounding effects.
See the below video which details how compound annual interest is calculated.
The next assumption to make in the financial planning process is the projected cost of goods sold.
The dropdown menu provided represents a conditional step in this process. You will be directed to the relevant stage in this process depending on your response given.
The cost of goods sold is defined as the costs directly attributable to the production of the goods sold or services provided.
Cost of goods sold are the direct costs related to the delivery of a product or service. View the file we have uploaded to assist you through the process of calculating your cost of goods sold.
Your cost of goods sold should be present on your income (profit and loss) statement.
Alternatively, see our detailed template to be used as a guide, guidng you through the process of creating your profit and loss (income) statement, and thus finding the cost of goods sold.
See Process Street’s Income (Profit and Loss) Statement Process
Take your general and administrative expense values from your income statement for each period under consideration.
General and administrative expenses both expenses associated with selling and more general administrative expenses.
Depreciation is usually not revenue driven. Depreciation is usually as a percentage of net Property and Equipment (net PPE).
Net PPE as a value can be found on your balance sheet for each period under consideration.
See Process Street’s Balance Sheet Statement Preparation Checklist
You are presented with our dropdown form field which represents a conditional step in this process. You will be directed to the relevant stage in this Financial Planning Process dependent on your response.
The net PPE represents the net Property and Equipment value at the end of the year. Therefore you must take the sum depreciation and amortization values within the period under consideration and divide by the periods before sum depreciation and amortization.
Depreciation is defined as the reduction of tangible assets over time due to particular wear and tear.
Net Property and Equipment is the total value of land, furniture, buildings, machinery, and other physical capital.
Amortization is the process of spreading intangibles asset costs over the assets useful life. Amortization typically is an expensed on a straight-line basis, meaning the same value is deducted each time. The assets expensed using the amortization method typically do not have resale or salvage value.
Depreciation and amortization are costs incurred on your fixed intangible and tangible assets through use and time.
View the file we have uploaded to assist you through the process of calculating depreciation and amortization.
Depreciation and amortization should be present on your income (profit and loss) statement.
Alternatively, see our detailed template you can use to guide you through the process of creating your profit and loss (income) statement, and thus finding the cost of goods sold.
See Process Street’s Income (Profit and Loss) Statement Process
Interest expense is driven by balance sheet values, such as long term debt and what your companies interest rate is.
The interest expense is a non-operating expense shown on the income statement. The interest expense represents interest payable on borrowings such as bond or loans.
Unusual items include discontinued operation, extraordinary items and changes in the accounting principles. Unusual items should be found as an expense on your income (profit and loss) statement.
You can calculate an average for unusual item expenses and use this as the unusual item expense to project into the future, or you can set unusual item expenses to 0, assuming you will incur no unusual costs for the future time periods under consideration.
Your tax expenses can be found as an expense on your income (profit and loss) statement. Consult this statement to obtain a value for your tax expenses.
Tax rate is the percentage at which a corporation is taxed.
You need to make sure you communicate your assumptions made.
This is a stop task, you cannot move forward in this template until your assumptions are clearly defined as such.
These assumptions made are basic assumptions to show you the process. Please note you can add your own methods to this template using our edit template feature for the specific assumptions you will make for your business.
Accounts receivable depends on how much you are selling and is therefore dependent on revenue.
You can obtain account receivable values from the balance sheet. You will also require revenue values which you can obtain from the income statement.
The final task under this heading ‘State assumptions using your balance sheet’ is a stop task, you cannot move forward in this template until your assumptions are clearly defined as such.
Accounts receivable is defined as the money owed to a company by its debtors.
Inventory is presented as a percentage of the cost of goods sold.
Your inventory values can be obtained from your balance sheet. Your cost of goods sold values can be obtained from the income statement.
Current assets depend on how much you are selling and is therefore dependent on revenue.
You can obtain current assets values from the balance sheet. You will also require revenue values which you can obtain from the income statement.
Accounts payable is dependent on the cost of goods sold.
You can obtain account payable values from the balance sheet. You will also require cost of goods sold values which you can obtain from the income statement.
Revenue ultimately drives every assumption so far considered.
Capital expenditures drive revenue forward.
The final task under this heading ‘State assumptions using your cash flow’ is a stop task, you cannot move forward in this template until your assumptions are clearly defined as such.
You must ensure capital expenditure values are negative, as they cost money in the cash flow statement.
Capital expenditure is defined as the money spent by a business or an organization on acquiring fixed assets.
If you have a growth rate, and thus capital growth rate of 5% each year, but depreciation and amortization of 10% each year, your capital growth rate would have to be 15% each year to have an annual growth rate of 5%.
The above is a very basic way of forecasting your capital expenditure. If you are building a more complex model, consider alternative ways to forecast capital expenditure.
You can locate the net debt insurance/repurchase on the cash flow statement.
See Process Street’s Cash Flow Report.
Consult the cash flow statement for all past time periods under consideration, and check off the tasks below.
For simplicity, assume your equity insurance remains the same so set your forecast values to zero.
When producing a model, it is better to begin simple and to then build up the complexity with time as you receive more and more information.
For simplicity, assume your dividends remain the same so set your forecast values to zero.
We have already obtained forecasts for revenue and cost of goods sold.
We can now use our assumptions made to make predictions for the remaining financial parameters on the income statement.
Firstly we can use our projected value for revenue and cost of goods sold to obtain gross profit projections for future years.
Your forecast SGA values were calculated as a percentage of revenue.
You can use your projected revenue values to project SGA costs.
Carry out the below steps to forecast the SGA costs.
You have forecast deprecation and amortization costs as a percentage of net PPE.
You can use your projected net PPE values to forecast depreciation and amortization.
Carry out the below steps to forecast the accounts payable.
You estimated a forecast your debt insurance/repurchase values from the average historical debt insurance/repurchase values.
You can use your debt insurance/repurchase values to forecast long term debt.
To forecast net interest expenses you use the ‘depreciation and amortization as a percentage of net PPE’ values previously calculated and the long term debt values obtained from the balance sheet.
Operating income is defined as the profit realized from a business’s operations.
We previously assumed unusual item expenses would be equal to zero.
Using our previously calculated operating income, we can calculate the forecasted earnings before taxes.
You can then use your earnings before taxes value, and your previously calculated tax rate, to calculate your tax expenses.
We have forecast the earnings before taxes and the tax expenses, which means we can now forecast the net income.
You have assumed an X% growth in net PPE, we need to find how much capital expenditure is needed.
PPE cost differs from net PPE cost. PPE cost is the cost of Property and Equipment with depreciation accounted for.
Your forecast accounts receivable values were calculated as a percentage of revenue.
You can use your projected revenue values to project accounts receivable.
Carry out the below steps to forecast the accounts receivable.
Your forecast other current asset values were calculated as a percentage of revenue.
You can use your projected revenue values to project current assets.
Carry out the below steps to forecast the current assets.
Your forecast inventory values were calculated as a percentage of the cost of goods sold.
You can use your projected the cost of goods sold values to project inventory.
Carry out the below steps to forecast the inventory.
Your forecast accounts payable values were calculated as a percentage of the cost of goods sold.
You can use your projected the cost of goods sold values to project accounts payable.
Carry out the below steps to forecast the accounts payable.
You have now finished a forecast income statement, which is one piece of the puzzle completed.
The next stage in this financial planning process is to complete a forecast of the cash flow statement.
In the cash flow statement, we are looking at the change in receivables.
If the receivable value decreases then it is a source of cash, and if the receivable value increases then it is a use of cash.
You can use your forecasted accounts receivables from the balance sheet to forecast the receivables in the cash flow statement.
You need to consider the receivable values in the balance sheet from the current time period being considered and the former time period.
Despite the fact receivables are an asset to the business, you do not want a high receivable value as this indicates there is money owed to your business.
If the inventory goes up then this is a use of cash.
You can use your forecasted inventory values from the balance sheet to forecast the inventory in the cash flow statement.
You need to consider the inventory values in the balance sheet from the current time period being considered and the former time period.
You can use your forecasted account payable values from the balance sheet to forecast the inventory in the cash flow statement.
You need to consider the payable values in the balance sheet from the current time period being considered and the former time period.
Other items such as ‘other cash flow operations‘ or ‘other financing activity’ are assumed to remain at zero for simplicity.
Sum the following forecasts for each time period under consideration to forecast the cash from operations.
To forecast the cash from investing, you need to account for the previously forecasted capital expenditure.
To find the forecast cash from financing value, sum the following forecast values:
To calculate the forecasted pre-forward transactions change in cash, calculate the sum of the following:
Repeat the above calculation for each time period being considered.
For simplicity, assume this is zero.
A forward transaction is a purchase or a sale of a good or service at a certain price for the delivery on a future date.
Because we assumed the forward transaction adjustments were equal to zero, the net change in cash is equal to the pre-forward transactions change in cash already forecasted.
No change is assumed for simplicity.
Use the actual ‘other current liability’ value from the most recent time period as a forecast for all future time periods under consideration.
Use your already forecasted accounts payables values and the forecasted other liabilities values to calculate the forecasted total current liabilities.
Assume other long term liabilities stay the same for simplicity.
Use the actual ‘long term liabilities’ value from the most recent time period as a forecast for all future time periods under consideration.
Use your already forecasted long term debt values and the forecasted other long-term liabilities values to calculate the forecasted total current liabilities.
Assume other long term assets stay the same for simplicity.
Use the actual ‘other long terms assets’ value from the most recent time period as a forecast for all future time periods under consideration.
To forecast the cash flow for all future time periods under consideration in the balance sheet, you need to use the net change in cash obtained from the cash flow statement and the most recent actual cash value.
To find the forecast for the total current assets, sum the following forecast values:
Repeat for each future time period under consideration.
To find the forecast for the total assets, sum the following forecast values:
Repeat for each future time period under consideration.
This value is highly unlikely to change.
Use the actual ‘stock per capita’ value from the most recent time period as a forecast for all future time periods under consideration.
To calculate the retained earnings, use the net income which can be obtained from the income statement.
No change is assumed for simplicity.
Use the actual ‘minority interest’ value from the most recent time period as a forecast for all future time periods under consideration.
To calculate a forecast for total equity, find the sum of the below values.
Repeat for each future time period under consideration.
To calculate a forecast for total liability and equity, find the sum of the below values.
Repeat for each future time period under consideration.
The sum of your companies assets, liabilities and equity should always balance to zero. If your balance sheet is not balanced, then you need to check your data.
Make sure all calculations you have made are correct.
Your sale forecasts should be consistent with the sales used in your profit and loss statement. 70% of businesses fail because they are too optimistic about the sales achievable.
You have created forecasts of key parameters in your financial statements which can act as a first draft model to refine as you obtain more and more data. This next stage of the financial planning process is to refine your model to make it more accurate in predicting your financial future.
By consulting your historical data, you now have estimates for the following performance measures:
1) Net income
2) Revenue
These are key indicators defining the success of your business and are impacted by sales of your service or product.
You can now take the time to carefully consider your sale forecasts to refine these indicators for the better prediction of your businesses future financial situation.
Before building an in-depth sales forecast, ask yourself the below key questions.
The next steps of the financial plan template will explore these questions in more detail.
Sale forecasts are projections or forecasts of what you think you will sell in a given period. A year to three years is the common time period considered when undertaking sale forecasts.
You will need to define the specific market segment your product or service delivers to. This step of the sales forecast process is to guide you through to process of defining your market segment.
Without properly defining the broad playing field in which you operate, you risk undervaluing your actual market share.
The next stage of defining your market segment is to consider the below particular characteristics.
What is the market you are operational in like? Is the market growing with a steady increase, or is the market relatively new, openly volatile an full of unpredictability?
Are there certain times of the year where you will sell more than other times? For example, seasonal changes in weather, holidays.
How do your prices compare to your competitors? Are you undercutting your competitor prices and the average market price, or are you substantially higher? How your prices compare to the market average will impact the volume and the value of your product or service.
Are there upcoming changes that could impact your business? Technological advances, changes in government legislation and environmental changes are examples of factors to consider. For example, the design of electric cars to mitigate against air pollution will impact the automotive industry.
See Process Street‘s Environmental Accounting Internal Audit
When forecasting the values for your financial statements, you need to play around with your model to obtain different possible output scenarios.
You have produced a simple basic starting model that can now be refined with more in-depth assumptions.
The three most popular sale forecast techniques to be considered have been outlined below
Exponential smoothing is a statistical technique, that can detect significant changes in your historical data, and ignore fluctuations that are irrelevant to your purpose. The technique gives older data progressively less weight and newer data progressively more weight.
You can use the exponential smoothing method to forecast the key parameters in your financial statements. You can compare the outputs from this model to your previous assumed parameters to refine your values.
Trend analysis is a technique that attempts to predict the future based on the recently observed data. It is assumed that a similar trend from past data will continue into the future. For example, are theretrending fluctuations in your data you have not yet considered?
You can use the trend analysis method to forecast the key parameters in your financial statements. You can compare the outputs from this model to your previous assumed parameters to refine your values.
This is an easy to understand technique used to extrapolate data from a dynamic set period of time. This method has been used in the previous steps to forecast some of your financial statement parameters. Some more information about this technique is provided in the video below.
Qualitative sale forecasts are subjective forecasts that rely more on the opinion of market experts or surveys.
These are the best ways to conduct your sales forecasts, especially if you have little historical data.
This involved employing an unbiased team of market experts to conduct a sale forecast for the time period under consideration.
You can ask corporation partners and customers to obtain their opinion in regards to your product or service and their expectations. This will give you a rough idea of what to expect in terms of the market growth in your industry.
Asking your sales team as a method works best if you have a large ticket value for a small number of customers. You can ask your sales team, who are in regular contact with your customers. Your sales team can give you the information in regards to the customer accounts, how frequently they purchase and their budget size.
Consider the below questions to ask your sales team:
With the information obtained from this financial planning process, you have a good overview of key trends in your business and estimate future trends based on your assumptions made.
This information is important for the production of a financial plan. The next stage in this process is to produce this financial plan.
See Process Street‘s Financial Plan Template.
Using Process Street‘s Financial Plan Template, you will test and review your forecasts and carry out key financial measures to eventually identify current and future warning signs and areas for improvements. Identification of such is key for you to implement required action to ensure business success.