How to write a financial plan

Once you've completed your business plan, it's a good idea to think about whether your idea is financially viable in the long term. A comprehensive financial plan can help you figure out if your business idea will pay the bills, make a profit and satisfy your financial goals. You can get started on creating yours by following the steps below.

1. Calculate set-up costs

Research and list all the items you need to start your business to get a good idea of upfront costs and whether you'll need to borrow funds. Here are some examples of costs that typically come up at the start:

Capital costs

Assets you need to buy to run the business, such as:

  • Lease or purchase of land or property
  • Equipment or machinery fit-out
  • Office equipment and furniture
  • Registrations (e.g. reserving your company name) and licences (e.g. licence to sell or supply alcohol) to operate

Working capital

The level of funds you need to cover your expenses until your business is generating enough cash to pay for them, such as:

  • Rent of land or property
  • Materials or resources
  • Utilities - power, internet, water
  • Interest or repayments on money borrowed

2. Forecast profit and loss

Estimate your sales and expenses on a monthly, quarterly or yearly basis to gauge whether you can expect to make a profit or loss for each of these periods. This will help you develop sales targets, pricing and likely profit margins. You can base your numbers on the performance of similar businesses in your industry by using industry benchmarks, market research and industry analysis.

Xero has a range of resources to support you. Check out their sales forecasting methods or their budgeting guidance for small business.

3. Work out your cashflow projections

A business that makes a profit can still run out of cash. You may, for example, make a lot of sales the first month but only receive payment for these sales a month later. Completing cashflow projections can help you recognise whether you'll have enough cash to run your business or if you'll need additional funds.

Some useful tips to keep in mind include:

  • Project your cashflow at least 12 months ahead to capture any seasonality
  • Be realistic - some customers may be slower to pay
  • Take actions to manage your cashflow if you find a cash shortfall

4. Forecast balance sheet

List all your expected assets and liabilities after your first 12 months to create a financial snapshot of your business. This is a good way to evaluate the financial health of your business idea - you can use your balance sheet numbers to work out if you'll have enough resources after a year to run your day-to-day operations.

Your balance sheet should include these three sections:

  • Assets
    This is what your business owns - examples include cash, inventory and buildings
  • Liabilities
    What your business owes - examples include accounts payable and loans
  • Owner's equity
    This is the portion of the assets that belong to the business owner. To calculate this, total all your assets and then subtract your total liabilities

5. Find your break-even point

Completing a break-even analysis shows you the number of sales needed to cover costs - anything above this number can be counted as a profit. The break-even point can be useful for analysing the sales, costs and pricing numbers used in your earlier forecasts and judging whether your business idea is feasible. For example, if your break-even point is years away, you may want to revisit your numbers to see if there are any opportunities to make your business more profitable.

Things to consider are:

  • Estimating realistic sales. For example, if you're a service business you may want to base figures on 60-70% utilisation rather than assuming all your time can be charged
  • Testing different scenarios - you can easily do this by changing your prices, costs and sales
  • Documenting the reasons behind your numbers provides credibility to your forecasts - lenders may also request this when you need to borrow

6. Look for professional help

For extra guidance, an accountant can help you assess your prospective financial position and ensure you've thought through all potential income and expenses. You don't have to go it alone - there are plenty of places to turn for guidance. If you're looking for how to source advice or support for your start-up, visit business.govt.nz for information on business advisors, business groups, networks and mentors who may be able to help.

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