What is a Business Plan, and how does it differ from a Financial Plan? Firstly, a Financial Plan for a New Business differs from a Business Plan. They are not Synonymous!
When referring to financial planning, the first thing that comes to mind is budgeting. Financial planning can be much more when done systematically and look at a forecast period beyond 1-2 budget years. Financial plans often focus on forecasting and analysing a company’s financial future. The forecast period typically covers at least five years and many times longer time horizons. This article explores the differences and answers the question: “What is a Business Plan?”
Presenting Business Plan to Investors: Why does my Business need a Financial Plan?
Investors need a financial plan for a new business, funders and shareholders to get a clearer picture of the future financial situation of a company for a forecast period of 5 years or more. Those plans are needed by big and small businesses alike.
A financial plan for a new business (and existing ones) translates a business strategy into measurable expected results. Very often, financial plans are prepared when starting a new business. They are needed to answer important questions which will be of high relevance to the financial future of either a newly planned venture or any business:
- What will be the sources of revenue?
- What will be the expected sales volumes?
- How much production capacity will be needed by when?
- What will be the prices for products and services?
- How is the business expected to grow?
- What will be the breakdown of revenues and profits?
- Which products/services will contribute how much to the expected profits?
- What costs do we have to expect?
- What profits do we predict?
- At what prices/volumes will we reach break-even?
- How much investment will be required?
- How much funding will be required?
- Which financing sources are we going to use?
- Is a business proposition economically viable?
- How attractive is our plan to investors?
- Will our plan be acceptable to banks?
- Should we invest or not?
- What is the value of our business based on this plan?
Developing Financial plans can become very useful to understand better the financial future of a company or a project. In today’s business world, financial plans are widely used for making capital allocation decisions. They enforce management to quantify their business plans into measurable financial results so investors can understand the financial implications.
Financial plans can also be used for future reference. Years later, the business owners and management can look back, allowing them to compare how the effective results turned out vs the original expectations. Comparing previous plans to the actual result allows valuable conclusions to identify planning weaknesses when preparing a new plan.
What is a Business Plan, and How is it Different from a Financial Plan? Spot the Difference!
What is the difference between a financial plan and a business plan? You might have noticed that many times in business, the word “business plan” is used simultaneously for a financial plan. The reason is that a financial plan should be part of a business plan. The business plan describes the company’s strategy and its planned positioning in the market. It outlines what problem will be solved, the products and services to be delivered, what makes the company unique and how they will be marketed.
The business also describes how the company will operate and what team will execute the business plan. The financial plan is typically added at the end and converts the business plan into numbers and projections. This allows capital providers to understand the expected financial performance of the envisaged business proposition. Therefore, investors and banks are often more interested in the financial plan than the business plan itself. That is why a “business plan” is used as a financial plan proxy.
A Financial Plan for a New Business: Bottom-Up vs Top-Down Financial Planning
Financial plans can either be prepared using a bottom-up or a top-down approach.
- Bottom-up Planning: We talk about a bottom-up plan when forecasting the fundamental parameters of a business which, when combined, define revenues, costs, profits, and cash flows. Bottom parameters are factors that the company can directly influence. Examples are using prices, volumes, and costs per product to prepare a financial forecast. Bottom-up planning looks at the specific situation of a business and uses observable parameters from the “bottom” to prepare the forecast. Bottom-up planning is more detailed and tedious than top-down planning.
- Top-Down Planning: Opposite to analysing the parameters from the bottom, we look at them from the top. Top-down parameters typically refer to parameters that are the results of a company’s actions. e.g., like the market share. So instead of using price x volumes to forecast revenue, we use market size x market share. We use a global perspective in light of the likely results that seem obtainable. Top-down financial planning often is quicker to do. However, top-down planning fails to tell us exactly what we need to do to get the desired results, such as revenues.
The quality of a financial plan depends on which approach is being used. The bottom-up approach offers a better financial plan quality as it explicitly answers what we need to do and what parameters to influence to get the desired result. Parameters such as the market share will then be the output rather than the input of the financial plan.
A financial plan is only as good as the people who are committed to delivering this plan. Without a capable team putting into effect this plan, a financial plan is often worthless.
Preparing a financial plan requires financial expertise and industry know-how. Specialised financial consultants, financial modellers, M & M&A advisors, or investment bankers will often assist with preparing a financial plan. Important here is that the management team assumes responsibility for the plan and its execution, and the plan will not be left as a pure document prepared by consultants only.
Like the business plan, in the end, a financial plan is only as good as the people who will execute it. Moreover, your business plan (and financial plan) will be scrutinised by all stakeholders, so better you be prepared. Here are our 10 Tips for a Successful Entrepreneurial Pitch
A Financial Plan for a New Business: How much does a Financial Plan cost?
Financial planning can be cheap or expensive, depending on the desired level of detail and planning quality. What is expensive is the manual labour that has to research the assumptions and prepare the plan. But often, it’s also a question if you can afford not to plan. Prices depend on the quality of the financial model and the amount of work that went into preparing such. Why not delve deeper into this topic and read our article entitled What is a Financial Plan? 6 Extremely Important Answers.
Our team at JTB Consulting is standing by to assist you with your business and Financial Planning Needs. Presenting Business Plan to Investors – Perhaps one of the most difficult tasks you will face as a business owner.