6 Key Elements of a Financial Plan – Essential Components of the Planning Process

Essential Components of a Financial Plan for Business

What are the six key components of a financial plan? Are you about preparing a business plan for your company and you don’t have any idea about key elements of what entails a financial plan? I know you won’t doubt the importance of preparing a financial plan for your business.

Good financial plans are necessary to determine the long-term and short-term goals of an organization. Also, it helps in controlling the entire financial activities while ensuring profitability and stability. There are more than two key financial considerations in preparing a financial plan.

Financial plans are necessary for every company; whether it’s an already established firm or a new startup. Financial plans are important as they have all the outflows and inflows involved in operating the organization clearly listed out.

The key elements of a financial plan listed below are necessary for all organizations, though there may be few subtractions and additions, these are the recommended elements for all organizations:

What are the components of a financial plan?

  1. Income Statement

It’s also referred to as “Statement of Profit and Loss”. It shows clearly how an organization made loss or profit within a period of time (generally within 3 months). Various Statement of Profit and Loss formats are often used, but they generally account for these:

This section of a financial plan contains the following:

  • Total revenue
  • Cost of goods that were sold (COGS)
  • Gross or Profit margin

These 3 items help an organization to decide its next line of action.

There are also operational costs which are fixed, such as electricity charges, rent, etc. Subtracting these from the Gross margin should give an operating income. This basic analysis is very vital for any organization, though there can be variation in formats.

This above basic analysis is very crucial in all organizations, though formats may vary from one kind of organization to another.

  1. The Cash Flow Statement

This is another key element of a financial plan. It’s also known as Statement of Cash. Every business operates with cash. The Cash Flow Statement shows the amount of cash that flows in, the amount of cash that goes out and what is remaining at month end.

It’s prepared monthly and it is different from an Income Statement. Gauging and estimating the remaining cash at month end isn’t possible with an Income Statement.

An Income Statement may predict that a company has a profit, while it may not have cash due to different reasons. The company may need to procure a delayed payment from its client, and other reasons can result in such circumstance.

Also, a loss can be seen in the Profit and Loss Statement, while the company has a good quantity of cash, which enables the company to keep running for some months while making quick adjustments to produce profit cycles.

  1. Updated Balance Sheets

A balance sheet shows the summarized financial situation of a company. It consists of assets such as money to be received, money in the bank, inventories, etc. Also, it consists of equities and liabilities.

Equities include stocks, retained earnings, investors’ shares, etc. Liabilities are accounts that need to be paid, loan installment amount, credit card bills which need to be paid, etc.

The liabilities and equity of a company must be equal to its assets.

Equity + Liabilities = Assets

Maintaining an up to date balance sheet is necessary for every organization, irrespective of its size

  1. Sales Forecast

Preparation for upcoming sales is the talk of all businesses. A company prepares ample plans for long-term retaining of its customers and its short-term profit. Forecasting is very crucial as it shows a sense of certainty in an uncertain world, especially for investors and lenders.

Different businesses have various approaches for preparing forecast sales. For instance, a sports kit seller may prepare different forecasts for a Tennis, and Baseball racquet. He would put into consideration the anticipation of upcoming event or festival.

While forecasting the sales, it is required to also forecast the COGS (cost of goods sold), to help the company in forecasting the Gross Margin. This is one of the key aspects of a financial planning process for a business.

  1. Break-Even Picture

This is very important when preparing a financial plan. The examination of Break-Even enables one to get a clearer picture of how much quantity must be sold and the rate to recover at least the cost of providing the service or making/buying the product.

It gives a producer or seller a clear picture of how to achieve a specific minimum target. They can use their business acumen for cutting other irrelevant costs, so as to earn a better profit.

  1. Tax Planning and Management

Most people do overlook this part of financial planning, probably because they don’t understand how to embark on important investments to reduce cumulative tax effects on or organizational or individual income.

There are several strategies for managing your income efficiently. For instance, holding the corporate bond in tax-deferred accounts is of more benefit. Keeping municipal bonds in a taxable account will yield more benefit.

Conclusion

It is necessary to keep examining your financial plan while improving it as you input more efficient strategies to make it. The financial page of your business plan is what most investors will first check out if you plan to use it for requesting for a loan. These ideas can also be used as elements of a personal financial plan.

You should approach it with a game playing attitude. The more enjoyable the process is, the more productive the financial plan becomes.

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