FINANCIAL MODELING

Financial Modeling for New Business

Financial Modeling for New Business

Introduction

A business plan is a comprehensive, written description of the business of an enterprise. It is a detailed report on a company's products or services, production techniques, markets and clients, marketing strategy, human resources, organization, requirements in respect of infrastructure and supplies, financing requirements, and sources and uses of funds. The business plan describes the past and present status of a business, but its main purpose is to present the future of an enterprise. It is normally updated annually and looks ahead for a period of usually three to five years, depending on the type of business and the kind of entity. It is a crucial element in any application for funding, whether to a venture capital organization or any other investment or lending source. Therefore, it should be complete, sincere, factual, well structured and reader-friendly(Sapp, 1998).

Why a business plan?

There are many important reasons for drawing up a business plan. Some of the most significant are the following:

Getting an integrated view of your business

By preparing your business plan, you get an integrated view of all issues regarding your business. For example, it helps you to identify better your target clients, outline your market segment, shape your pricing strategy and define the competitive conditions under which you must operate in order to succeed. Business planning ensures that all these considerations are consistent and properly harmonized. Also, the business plan process often leads to the discovery of a competitive advantage or new opportunities as well as deficiencies in the plan. Committing your plans to paper, ensures that your overall ability to manage the business will improve. You will be able to concentrate your efforts on any deviations from the plan before conditions become critical. You will also have time to look ahead and avoid problems before they arise(Soffer, 2005).

Planning period

One of your first questions would probably be when starting the planning work: “For what period of time should the business plan be prepared?” There is no straight answer to this question. There are entities planning for only one year, but there are also entities planning for 10 years or more. However, statistics show that most entities tend to produce business plans projecting from three to five years. The optimum planning period depends on the type of business and kind of company. Some important criteria and considerations in deciding about the timespan to be planned for are set out below.

Break-even point

If you are starting a new business or planning a major expansion of your existing business, you expect probably to have a net loss for the first one or two years. In such a case, your business plan should go beyond the break-even point and also cover at least two profit-making years. This means that your business plan should cover a total of four years. It is psychologically important that your lender or investor sees at least two consecutive years of profit at the end of which dividends can possibly be ...