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What Is a Financial Plan for a Business? - Definition & Example

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  • 0:00 What Is Financial Planning?
  • 0:25 Benefits Of Developing A Plan
  • 0:50 Example
  • 2:50 Lesson Summary
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Lesson Transcript
Instructor
Paul Mckinney

Paul has been in higher education for 17 years. He has a master's degree and is earning his PhD in Community College Leadership.

Expert Contributor
Steven Scalia

Steven completed a Graduate Degree is Chartered Accountancy at Concordia University. He has performed as Teacher's Assistant and Assistant Lecturer in University.

A financial plan for a business can help managers determine if they can achieve the organization's goals. The financial plan is one of the first things created to help managers make decisions that are in the best interest of the organization.

What Is Financial Planning

Financial planning for a business is the task of determining how the organization will afford to achieve its strategic goals. Usually, an organization creates a financial plan immediately after the vision and objectives have been determined. The financial plan describes each of the activities, resources, equipment, and materials that are needed to achieve an organization's objectives as well as the timeframe.

Benefits of a Developing a Financial Plan

Developing a financial plan is critical to the success of any organization. It validates the business plan, by confirming that the objectives set are achievable from a financial point of view. It also helps the CEO to set financial targets for the organization and reward staff for meeting objectives within the budget. The following diagram shows how the financial plan fits into the overall business plan of an organization.

Example

A financial plan can be divided into several parts. Below is an outlined example of a financial plan that can be used by an existing organization:

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Additional Activities

Financial Planning for Businesses - A Business Case:

The following business case is designed for students to apply their knowledge of financial planning in a real-life business context.

Scenario:

You're a savvy entrepreneur that wants to open an ice cream shop downtown near the college campus. However, you remember your lesson on financial planning and decide it's a good idea to project cash flows for your business before investing your time and money in the operation. Your objective is to break-even on a cash basis within 3 years of opening shop - Otherwise, the business opportunity is not worth your time.

You make the following assumptions and notes:

  • Each ice cream cone is sold for $4 and costs $1 to make in materials.
  • You plan on selling 10,000 cones in year 1, 15,000 cones in year 2, and 25,000 cones in year 3. Sales projections after year 3 are difficult to make, but you know that they will not be lower than 25,000 cones per year.
  • Your lease for the business location is $20,000 annually, and your lease for the ice cream equipment is $10,000 annually.
  • You plan on hiring part-time staff to help you during peak season. You assume that this would cost $10,000 annually for years 1 and 2 and $20,000 in year 3.
  • Your overhead, legal and accounting costs amount to $10,000 in the first year and $5,000 per year in subsequent years.

Required:

1. Build a cash flow projection for the next 3 years for your ice cream business.

2. Is the ice cream shop worth your time as an investment according to your criteria?

Solution:

1.

Year123
Cones sold10,00015,00025,000
Cash inflows
Sales (cones * $4)40,00060,000100,000
Cash outflows
Materials (cones * $1)10,00015,00025,000
Rent20,000 20,000 20,000
Equipment lease10,000 10,000 10,000
Staff10,000 10,000 20,000
Overhead10,000 5,0005,000
Total outflows60,00060,00080,000
Net cash flow(20,000)020,000

2.

Yes, it is.

  • This is because the company breaks even on a cash basis after year 2 and is profitable starting in year 3.

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