desired financing in business plan

• Real Estate
• Social Network

7 Reasons Why You Should Always Consider Financing In Your Business Plan – 2024 Guide

If you want to set up a business, one of the most important considerations is whether you should seek financing. However, to figure this out, it’s very important to understand first what a business plan is. After this, it easier to learn how to go about getting financing for your new business.

What Is A Business Plan?

A business plan is a document used by entrepreneurs to determine the following:

• Purpose of the business
• An overview of the products or services, target customers, and potential suppliers
• Marketing and sales direction of the company
• Financial status of the company
• Short and long-term business goals
• Projected profit and loss statement of the business

To remove any confusion regarding the course of the company, it’s ideal if the business plan is written in a commonly-accepted format. Using a widely recognized format for the business plan will help finance companies like Scottish Pacific Business Finance to clearly determine how much financing your new business will need.

What Is Financing?

Financing simply refers to an entrepreneur seeking a source of funds for their start-up company. There are lenders such as banks which are known for lending out funds so that entrepreneurs will be able to reach their target business benchmarks. An entrepreneur will usually be able to get the right amount of financing by presenting a well-written business plan to the lender.

Why Do You Need Financing?

1. Set Up Your New Business

Without financing, an entrepreneur would have a harder time reaching their business goals. While it’s possible to go without an external source of funds, it can be more difficult. Unless you have financing, the new business would have to be set up with your personal funds.

Since businesses are quite competitive nowadays, Entrepreneur.com recommends writing write a business plan so the lender can see the future prospects of your new business. The lender may then feel optimistic that you can repay them after the business has stabilized and becomes profitable.

2. Fuel Business Activities

The process of starting a business would be chaotic if you neglected to make a business plan first. With a well-written business plan, you’ll see more clearly what business activities should be prioritized.

You should know how well the business is expected to perform, since the source of financing must eventually be paid with interest. Essentially, this means that you have to be reasonably certain that you’ll reach profitability within the pre-agreed-upon time frame.

3. Identify Strengths and Weaknesses

Every business owner has to perceive accurately the strong points and weak points of their start-up. This can be seen when you write a complete and comprehensive business plan. This site recommends avoiding unclear, incorrect, or unrealistic financials when drafting your business plan.

If it’s written down, you can better see your business the way a lender perceives it. This also represents an opportunity for you to make changes in the business plan with an eye towards securing financing and reaching profitability, just as lenders do.

4. Help You Borrow a Definite Amount

Sometimes, you might need help when you’re trying to figure out how much financing you need. This is why you have to collaborate with a reputable lender to know the definite amount you need to borrow. In return, the lender will ask you for a definite interest rate on the loan amount. This way, you’re both able to reach your respective business targets, as far as financing is concerned.

5. Help Lenders Determine If You’re Trustworthy

In business, all relationships ideally should be grounded in an atmosphere of trust . The lender-borrower relationship is key to getting adequate financing for any start-up.

The lender’s objective is to figure out if you can be entrusted with a line of credit. You then have to prove that you can be counted on to repay the loan at the interest rate previously agreed upon. If the lender isn’t convinced that you’re trustworthy, the business will stay just as it is, until you can find another lender to secure financing from.

6. Project Business Growth

A business plan is meant to project the progress of the new business over a five-year period. This means that you also need to come up with contingency plans should certain anticipated events come to pass within those five years.

In a nutshell, your business plan should include a financial forecast. When the lender sees your business plan, they can point out some risky events that you may have overlooked. Your business plan will also help you identify future growth plans, should the new business do very well.

7. Project Future Business Targets

A key part of any business plan is the timeline for reaching business goals and targets. Both you and the lender have to agree when progress has been achieved. Once the business targets have been reached, you’ll then need to determine if the business needs another influx of cash. This means that you have to draft a new business plan and sit down with the lender to negotiate for a new line of financing.

This process of applying for new financing is easier if your previous business targets were reached satisfactorily, because it shows the lender that you can keep your end of the bargain. There is a level of trust that will be helpful in directing the future progress of the start-up company, should additional financing be required.

A business plan is relatively easy to make, once you’re aware of its usual components and the accepted format. With a business plan for your start-up, potential lenders can spot areas in the performance projections that may need more analysis and work. You’ll can use your business plan to see how much financing your company needs at the start.

A well-written business plan should help lenders spot businesses that are still small but have great potential to grow into profitability with sufficient financing. You can rely on your business plan to help you secure sufficient financing so that future growth will be achievable for your start-up. With enough resources from the lender, you’ll be able to reach business goals, pursue growth, and ensure profitability within the timeframe agreed upon with your lender.

Related Posts:

• 6 Common Business Plan Mistakes - 2024 Guide
• 4 Reasons Online Reviews are Important to Your Small…
• 8 Reasons Why Your Clothing Line Business Will Boom…
• A Profitable Business Can Benefit From Acquiring a…
• What Can You Accomplish with the Right Financing…
• 6 Reasons You Need To Buy Gold In This Era - 2024 Guide
• 5 Reasons Why Ethereum is a Better Bet Than Bitcoin…
• 4 Reasons Why You Need Expert Help With Your SEO…
• 7 Reasons to Outsource SEO to an Agency - 2024 Guide
• What is a Qualified Health Plan? - 2024 Guide

RELATED ARTICLES MORE FROM AUTHOR

How To Save Money When Just Starting Your Restaurant Business – 2024 Guide

Why the Virtual Assistant Industry in The Philippines Is Thriving: An In-Depth Look

InstaSuccess Blueprint: Mastering the Art of Instagram Marketing for Business Growth

Unveiling the Affiliate Marketing Holy Grail: Choosing the Right Software Made...

Sony Net Worth 2024 – History and Today

Ultra High Net Worth Characteristics And Role In Economies – 2024...

Investing Roulette: Exploring High Risk-High Reward Investments

Coca-Cola Net Worth 2024 – History and Today

• Business 1687
• Financials 545
• Technology 473
• Real Estate 148
• Marketing 115
• Healthcare 113

Terms and Conditions - Privacy Policy

Home   About   Resources   Investors   Businesses   Members   Admin

Business Plan Guide

Introduction

1. THE INDUSTRY, THE COMPANY AND ITS PRODUCTS

THE INDUSTRY THE COMPANY THE PRODUCTS OR SERVICES

2. MARKET RESEARCH AND ANALYSIS

A. Customers B. Market Size and Trends C. Competition D. Estimated Market Share and SalesE. Ongoing Market Evaluation

3. MARKETING PLAN A. Overall Marketing Strategy B. Pricing C. Sales Tactics D. Service and Warranty Policies E. Advertising and Promotion

4. DESIGN AND DEVELOPMENT PLANS A. Development Status and Tasks B. Difficulties and Risks C. Product Improvement and New Products D. Costs

5. MANUFACTURING AND OPERATIONS PLAN A. Geographic Location B. Facilities and Improvements C. Strategy and Plans D. Labor Force

6. MANAGEMENT TEAM A. Organization B. Key Management Personnel C. Management Compensation and Ownership D. Board of Directors E. Management Assistance and Training Needs F. Supporting Professional Services

7. OVERALL SCHEDULE

8. critical risks and problems.

9. COMMUNITY BENEFITS A. Economic Development B. Human Development C. Community Development

THE FINANCIAL PLAN

A. Profit and Loss Forecast B. Pro Forma Cash Flows Analysis C. Pro Forma Balance Sheets D. Breakeven Chart E. Cost Control

PRO FORMA INCOME STATEMENTS PRO FORMA CASH FLOWS STATEMENTS PRO FORMA BALANCE SHEETS BREAKEVEN CHART

11. PROPOSED COMPANY OFFERING A. Desired Financing B. Securities Offering C. Capitalization D. Use of Funds

1. THE INDUSTRY. THE COMPANY AND ITS PRODUCTS

The purpose of this section is to give the investor some context in which to fit all that you are about to say concerning your product and its market. This section should clearly present the business that you are in, the product you will offer, the nature of your industry and the opportunities available to market your product.

The Industry

Present the current status and prospects for the industry in which the proposed business will operate. Discuss any new products or developments, new markets and customers. new requirements, new companies, and any other national or economic trends and factors that could affect the venture's business positively or negatively. Identify the source of all information used to describe industry trends.

The Company

Describe briefly what business area your company is in, or intends to enter; what products or services it will offer; and who are or will be its principal customers.

As background give the date your venture was incorporated and describe the identifi­cation and development of its products and the involvement of the company's principals in that development.

If your company has been in business for several years and is seeking expansion financing, review its history and cite its prior sales and profit performance. It' your company has had set-backs or losses in prior years, discuss these and emphasi'/.e what has and will be done to prevent a recurrence of these difficulties and to improve your company's performance.

The Products or Services

The potential investor will be vitally interested in exactly what you are going to sell, what kind of product protection you have, and the opportunities and possible drawbacks to your product or service.

A. Description: Describe in detail the products or services to be sold. Discuss the application of your product or service. Describe the primary end-use as well as any significant secondary applications. Emphasize any unique features of your product or service, and highlight any differences between what is currently on the market and what you will offer that will account for your market penetration.

Define the present state of development of the product or service. For products, provide a summary of the functional specifications. Include photographs when available.

B. Proprietary Position: Describe any patents, trade secrets or other proprietary features. Discuss any head start that you might have that would enable you to achieve a favored or entrenched position in your industry.

C. Potential: Describe any features of your product or service that give It an adv-ama^e over the competition. Discuss any opportunities for the expansion of the product, line or the development of related products or services. Emphasize your opportunities and ex­plain how you will take advantage of them.

Discuss any product disadvantage or the possibilities of rapid obsolescence because of technological or styling changes, or marketing fads»

The purpose of this section of the plan is to present enough facts to convince the investor that your venture's product or service has a substantial market in a growing industry and can achieve sales despite the competition. The discussion and the guide­lines given below should help you do this.

This section of the plan is one of the most difficult to prepare and also one of the most important. Almost all subsequent sections of the business plan depend on the sales estimates that are developed in this section. The sales levels you project based on the market research and analysis directly influence the size of the manufacturing operation, the marketing plan, and the amount of debt and equity capital you will require. Yet most entrepreneurs seem to have great difficulty preparing and. presenting market research and analyses that will convince potential investors that the venture's sales estimates are sound and attainable.

Because of the importance of market analysis and the dependence of other parts of the plan on the sales projections, we generally advise entrepreneurs to prepare this section of the business plan before they do any other. We also advise entrepreneurs to take enough time to do this section very well and to check alternate sources of market data for key numbers such as "market size" and "market growth rates".

A. Customers: Discuss who the customers are for the anticipated application of the product or service. Classify potential customers into relatively homogeneous groups (major market segment) having common, identifiable characteristics. For example, an automotive part might be sold to automotive manufacturers or to parts distributors supplying the replacement market.

Who and where are the major purchasers for the product or service in each market segment? What is the basis for their purchase decisions: price, quality, service, per­sonal contacts, political pressures or some combination of these factors?

List any potential customers who have expressed an interest in the product or service and indicate why. List any potential customers who have shown no interest in the pro­posed product or service and explain why this is so. Explain what you will do to overcome negative customer reaction. If you have an existing business, list your current principal customers and discuss the trend in your sales to them

B. Market Size and Trends: What is the total size of the current market for the product or service offered? This market size should be determined from available market data sources and from a knowledge of the purchases of competing products by potential customers in each major market segment. Discussions with potential distributors, dealers, sales representatives and customers can be particularly useful in establishing the market size and trends. Describe the size of the total market in both units and dollars. If you intend to sell regionally, show the regional market size. Indicate the sources of data and methods used to establish current market size. Also state the credentials of people doing market research.

Describe the potential annual growth of the total market for your product or' service for each major customer group. Total market projections should be made for at least three future years. Discuss the major factors affecting market growth (industry trends, socio-economic trends, government policy, population shifts). Also review previous

trends in the market. Any differences between past and projected annual growth rates should be explained. Indicate the sources of all data and methods used to make projections.

C. Competition: Make a realistic assessment of the strengths and weaknesses of competitive products and services and name the companies that supply them. State the data sources used to determine which products are competitive and the strengths of the competition.

Compare competing products or services on the basis of price, performance, service, warranties and other pertinent features. A table can be an effective way of presenting these data. Present a short discussion of the current advantages and disadvantages of competing products and services and say why they are not meeting customer needs. Indicate any knowledge of competitors' actions that could lead you to new or improved products and an advantageous position.

Review the strengths and weaknesses of the competing companies. Determine and discuss each competitor's share of the market, sales, distribution and production capabilities. Also review the profitability of the competition and their profit trend. Who is the pricing leader; quality leader? Discuss why any companies have entered or dropped out of the market in recent years.

Discuss your three or four key competitors and why the customer buys from them. From what you know about their operations, explain why you think you can capture a share of their business. Discuss what makes you think it will be easy or difficult to compete with them.

D. Estimated Market Share and Sales: Summarize what it is about your product or service that will make it saleable in the face of current and potential competition.

Identify any major customers who are willing to make purchase commitments. Indicate the extent of those commitments and why they were made. Discuss which customers could be major purchasers in future years and why.

Based upon your assessment of the advantages of your product or service; the market size and trends; customers; the competition and their products, and the sales trends in prior years; estimate your share of the market, and your sales in units and dollars for each of the next three years. The growth of the company's sales and its estimated market share should be related to the growth of its industry, the customers and the strengths and weaknesses of competitors. This data can be presented in a table, as shown below.

The assumptions used to estimate market share and sales should be clearly stated. If yours is an existing business indicate the total market, and your market share and sales for two prior years.

E. Ongoing Market Evaluation: Explain how you will evaluate your target markets on a continuing basis to assess customer needs; to guide product improvement and new product programs; to plan for expansions of your production facility; and to guide product/service pricing.

3. MARKETING PLAN

The marketing plan describes how the sales projections will be attained. It should detail the overall marketing strategy, sales and service policies, pricing, distribution and advertising strategies that will be used to achieve the estimated market share and sales pr 'ections. It should describe specifically what is to be done, how it will be done. and who will do it.

A. Overall Marketing Strategy: Describe the general marketing philosophy and strategy of the company. This should be derived partly from the market research and evaluation. It should include a discussion of: What kinds of customer groups will be targeted for initial intensive selling effort? What customer groups for later selling efforts? How will specific potential customers in these groups be identified and how will they be contacted? What features of the product or service -- e. g. , quality, price, delivery, warranty -- will be emphasized to generate sales? Are there any innovative or unusual marketing concepts that will enhance customer acceptance -- e. g. , leasing where only sales were previously attempted?

Indicate whether the product or service will be introduced initially, nationally or on a regional level. If on a regional level, explain why and indicate if and when you plan to extend sales to other sections of the country. Discuss any seasonal trends and what can be done to promote sales out of season.

Describe any plans to obtain government contracts to support product development costs and overhead.

B. Pricing: Many entrepreneurs have told us that they have a superior product thai they plan to sell for a lower price than their competitors' product. This makes a bad impression for two reasons. First, if their product is as good as they say it la, they must think they are very poor sales people to have to offer it at a lower price than the competition. Second, costs tend to be underestimated. If you start out with low costs and prices, there is little room to maneuver; and price hikes will be tougher to imple­ment than price cuts.

The pricing policy is one of the more important decisions you will have to make. The "price must be right" to penetrate the market, maintain a market position and produce profits. Devote ample time to considering a number of pricing strategies and convincingly present the one you select.

Discuss the prices to be charged for your products or services and compare your pricing policy with those of your major competitors. Discuss the gross profit marcin between manufacturing and ultimate sales costs. Indicate whether this margin is lar^c enough to allow you a profit and also allow for distribution and sales; warranty; service;

amortization of development and equipment costs; and price competition.

Explain how the price you set will enable you to:

• Get the product or service accepted

• Maintain and profitably increase your market share in the face of competition

• Produce profits.

Justify any price increases over competitive items on the basis ol' newness, quality, warranty, and service.

If your product is to be priced lower than your competition's, explain how you will do this and maintain profitability -- e. g., greater effectiveness in manufacturing and distributing the product, lower labor costs, lower overhead, or lower material costs.

Discuss the relationship of price, market share and profits. For example, a higher price may reduce volume but result in a higher gross profit. Describe any discount allowance for prompt payment of volume purchases.

C. Sales Tactics: Describe the methods that will be used to make sales and distribute the product or service. Will the company use its own sales force; sales representatives;

distributors? Can you use manufacturers' sales organizations already selling related products? Describe both the initial plans and longer range plans for a sales force. Discuss the margins to be given to retailers, wholesalers, and salesmen and compare them to those given by your competition.

If distributors or sales representatives are to be used, describe how they have been selected, when they will start to represent you and the areas they will cover. Show a table that indicates the build-up of dealers and representatives by month and the expected sales to be made by each dealer. Describe any special policies regarding discounts, exclusive distribution rights, etc.

If a direct sales force is to be used, indicate how it will be structured and at what rate it will be built up. If it is to replace a dealer or representative organization, indi­cate when and how. Show the sales expected per salesperson per year, what commission incentive and/or salary they are slated to receive, and compare these figures to the average for your industry.

Present as an exhibit a selling schedule and a sales budget that includes all market­ing, promotion and service costs. This sales expense exhibit should also indicate when sales will commence and the lapse between a sale and a delivery.

D. Service and Warranty Policies: If your company will offer a product that will require service and warranties, indicate the importance of these to the customers' purchasing decision and discuss your method of handling service problems. Describe the kind and term of any warranties to be offered, whether service will be handled by a company service organization, agencies, dealers and distributors, or factory return. Indicate the proposed charge for service calls and whether service will be a profitable or breakeven operation. Compare your service and warranty policies and practices to those of your principal competitors.

E. Advertising and Promotion: Describe the approaches the company will use to bring its product to the attention of prospective purchasers. For OEM and industrial products indicate the plans for trade show participation, trade magazine advertisements, direct mailings, the preparation of product sheets and promotional literature, ^rid the use of advertising agencies. For consumer products indicate what kind of adv': rtising and pro­motional campaign is contemplated to introduce the product and what kind of sales aids will be provided to dealers. The schedule and cost of promotion and advertising should be presented. If advertising will be a significant part of company expenses, an exhibit showing how and when these costs will be incurred should be included.

4. DESIGN AND DEVELOPMENT PLANS

If the product, process or service of the proposed venture requires any design and development before it is ready to be placed on the market, the nature and extent of this work should be fully discussed. The investor will want to know the extent and nature of any desigi and development and the costs and time required to achieve a marketable product. Such design and development might be the engineering work necessary to con­vert a laboratory prototype to a finished product; or the design of special tooling; or the work of an industrial designer to make a product more attractive and saleable; or the identification and organization of manpower, equipment and special techniques to imple­ment a service business -- e.g., the equipment, new computer software and skills required for computerized credit checking.

A. Development Status and Tasks: Describe the current status of the product or service and explain what remains to be done to make it marketable. Describe briefly the competence or expertise that your company has or will acquire to complete this develop­ment. Indicate the type and extent of technical assistance that will be required, state who will supervise this activity within your organization and his experience in related development work.

B. Difficulties and Risks: Identify any major anticipated design and development problems and approaches to their solution. Discuss their possible effect on the schedule, cost of design and development, and time of market introduction.

C. Product Improvement and New Products: In addition to describing the development of the initial products, discuss any on-going design and development work that is planned to keep your product or service competitive and to develop new related products that can be sold to the same group of customers.

D. Costs: Present and discuss a design and development budget. The costs should include labor, materials, consulting fees, etc. Design and development costs are often underestimated. This can seriously impact cash flow projections. Accordingly, consider and perhaps show a 10%-20% cost contingency. These cost data will become an integral part of the financial plan.

5. MANUFACTURING AND OPERATIONS PLAN

The manufacturing and operations plan should describe the kind of facilities, plant location, space requirements, capital equipment and labor force (part- and full-time) that are required to provide the company's product or service. For a manufacturing business, discuss your policies regarding inventory control, purchasing, production control, and "make or buy decisions" (i. e., which parts of the product will be purchased and which operations will be performed by your work force). A service business may require particular attention and focus on an appropriate location, an ability to minimize overhead, lease the required equipment, and obtain competitive productivity from a highly skilled or a trained labor force.

The discussion guidelines given below are general enough to cover both product and service businesses. Only those that are relevant to your venture -- be it product or service -- should be addressed in the business plan.

A. Geographic Location: Describe the planned location of the business and discuss any advantages or disadvantages of the site in terms of wage rates, labor unions, labor availability, closeness to customers or suppliers, access to transportation, state and local taxes and laws, utilities and zoning. For a service business, proximity to customers is generally a "must".

B. Facilities and Improvements: If yours is an existing business, describe the facili­ties currently used to conduct the company's business. This should include plant and office space; storage and land areas; machinery, special tooling and other capital equip­ment.

If your venture is a start-up, describe how and when the necessary facilities to start production will be acquired. Discuss whether equipment and space will be leased or acquired (new or used) and indicate the costs and timing of such actions. Indicate how much of the proposed financing will be devoted to plant and equipment. (These cost data will become part of the financial plan. )

Discuss how and when plant space and equipment will be expanded to the capacities required for future sales projections. Discuss any plans to improve or add to existing plant space or move the facility. Explain future equipment needs and indicate the timing and cost of such acquisitions. A three year planning period should be used for these projections.

C. Strategy and Plans: Describe the manufacturing processes involved in your product's production and any decisions with respect to subcontracting component parts rather than manufacturing in-house. The "make or buy" strategy adopted should consider inventory financing, available labor skills and other non-technical questions as well as purely production, cost, and capability issues. Justify your proposed "make or buy" policy. Discuss any surveys you have completed of potential subcontractors and suppliers, and who these are likely to be.

Present a production plan that shows cost-volume information at various sales levels of operation with breakdowns of applicable material, labor, purchased components and factory overhead. Discuss the inventory required at various sales levels. These data will be incorporated into cash flow projections. Explain how any seasonal production loads will be handled without severe dislocation; -- e.g., by building inventory or using part-time help in peak periods.

Briefly, describe your approach to quality control, production control, inventory control. Explain what quality control and inspection procedures the company will use to minimize service problems and associated customer dissatisfaction.

Discuss how you will organize and operate your purchasing function to ensure that adequate materials are on hand for production, the best price has been obtained, and that raw materials and in-process inventory, and hence, working capital have been minimized.

D. Labor Force: Exclusive of management functions (discussed later), does the local labor force have the necessary skills in sufficient quantity and quality (lack of absenteeism, productivity), to manufacture the products or supply the services of your company. If the skills of the labor force are inadequate to the needs of the company, describe the kinds of training that you will use to upgrade their skills. Discuss whether the business can provide training and still offer a competitive product both in the short-term (first year) and longer-term (2-5 years).

6. MANAGEMENT TEAM

The management team is the key to turning a good idea into a successful business. Investors look for a committed management team with a balance of technical, managerial and business skills, and experience in doing what is proposed.

Accordingly, this section of the business plan will be of primary interest to potential investors and will significantly influence their investment decisions. It should include a description of the key management personnel and their primary duties; the organizational structure; and the board of directors.

A. Organization: In a table, present the key management roles in the company and the individual who will fill each position.

Discuss any current or past situations where the key management people have worked together that indicate how their skills complement each other and result in an effective management team. If any key individuals will not be on hand at the start of the venture, indicate when they will join the company.

In a new business, it may not be possible to fill each executive role with a full-time person without excessively burdening the overhead of the venture. One solution is to use part-time specialists or consultants to perform some functions. If this is your plan, discuss it and indicate who will be used and when they will be replaced by a full-time staff member.

If the company is established and of sufficient size, an organization chart can be appended as an exhibit.

B. Key Management Personnel: Describe the exact duties and responsibilities of each of the key members of the management team. Include a brief (three or four sentence) statement of the career highlights of each individual that focuses on accomplishments that demonstrate his or her ability to perform the assigned role.

Complete resumes for each key management member should be included here or as an exhibit to the business plan. These resumes should stress training, experience and accomplishments of each person in performing functions similar to that person's role in the venture. Accomplishments should be discussed in such concrete terms as profit and sales improvement; labor management; manufacturing or technical achievements; and ability to meet budgets and schedules. Where possible it should be noted who can attest to accomplishments and what recognition or rewards were received -- e.g., pay increases, promotions, etc.

C. Management Compensation and Ownership: The likelihood of obtaining financing for a start-up is small when the founding management team is not prepared to accept initial modest salaries. If the founders demand substantial salaries in excess of what they received at their prior employment, the potential investor will conclude that their psychological commitment to the venture is a good deal less than it should be.

State the salary that is to be paid to each key person and compare it to the salary received at his/her last independent job. Set forth the stock ownership planned for the key personnel, the amount of their equity investment (if any), and any performance-dependent stock option or bonus plans that are contemplated.

D. Board of Directors: Discuss the company's philosophy as to the size and composi­tion of the board. Identify any proposed board members and include a one or two sentence statement of the member's background that shows how he or she can benefit the company.

E. Management Assistance and Training Needs; Describe, candidly, the strengths and weaknesses of your management team and Board of Directors. Discuss the kind, extent and timing of any management training that will be required to overcome the weaknesses and obtain effective venture operation. Also discuss the need for technical and management assistance during the first three years of your venture. Be as specific as you can as to the kind, extent and cost of such assistance and how it will be obtained.

F. Supporting Professional Services: State the legal (including patent), accounting, advertising and banking organizations that you have selected for your venture. Capable, reputable and well known supporting service organizations can not only provide signifi­cant direct, professional assistance, but can also add to the credibility of your venture. In addition, properly selected professional organizations can help you establish good contacts in the business community, identify potential investors and help you secure financing.

A schedule that shows the timing and interrelationship of the major events necessary to launch the venture and realize its objectives is an essential part of a business plan. In addition to being a planning aid and showing deadlines critical to a venture's success, a well-prepared schedule can be an extremely effective sales tool in raising money from potential investors. A well-prepared and realistic schedule demonstrates the ability of the management team to plan for venture growth in a way that recognizes obstacles and minimizes risk.

Prepare, as a part of this section, a month-by-month schedule that shows the timing of activities such as product development, market planning, sales programs, and pro­duction and operations. Sufficient detail should be included to show the timing of the primary tasks required to accomplish an activity.

Show on the schedule the deadlines or milestones critical to the venture's success. This should include events such as:

• Incorporation of the venture (for a new business)

• Completion of design and development

• Completion of prototypes (a key date; its achievement is a tangible measure of the company's ability to perform)

• When sales representatives are obtained

• Displays at trade shows

• When distributors and dealers are signed up

• Order of materials in production quantities

• Start of production or operation (another key date because it is related to the production of income)

• Receipt of first orders

• First sales and deliveries (a date of maximum interest because it relates directly to the company's credibility and need for capital)

• Payment of first accounts receivable (cash in)

The schedule should also show the following and their relation to the development of the business:

• Number of management personnel

• Number of production and operations personnel

• Additions to plant or equipment

The development of a business has risks and problems, and the business plan invar­iably contains some implicit assumptions about them. The discovery of any unstated negative factors by potential investors can undermine the credibility of the venture and endanger its financing.

On the other hand, identifying and discussing the risks in your venture demonstrates your skills as a manager and increases your credibility with a venture capital investor. Taking the initiative to identify and discuss risks helps you demonstrate to the investor that you have thought about them. and can handle them. Risks then tend not to loom as large black clouds in the investor's thinking about your venture.

Accordingly, identify and discuss the major problems and risks that you think you will have to deal with to develop the venture. This should include a description of the risks relating to your industry, your company and its personnel, your product's market appeal and the timing and financing of your start-up. Among the risks that might require discussion are:

• Price cutting by competitors

• Any potentially unfavorable industry-wide trends

• Design or manufacturing costs in excess of estimates

• Sales projections not achieved

• Product development schedule not met

• Difficulties or long lead times encountered in the procurement of parts or raw materials

• Difficulties encountered in obtaining bank credit lines because of tight money

• Larger than expected innovation and development costs to stay competitive

• Availability of trained labor

This list is not meant to be complete but only indicative of the kinds of risks and assumptions that might be discussed.

Indicate which of your assumptions or potential problems are most critical to the success of the venture. Describe your plans for minimizing the impact of unfavorable developments in each risk area on the success of your venture.

Discuss in a general way the activities most likely to cause a schedule slippage, and what steps you would take to correct such slippages. Discuss the impact of schedule slippages on the venture's operation, especially its potential viability and capital needs. Keep in mind that the time to do things tends to be underestimated -- even more than financing requirements. So be realistic about your schedule.

9. COMMUNITY BENEFITS

The proposed venture should be an instrument of community and human development as well as economic development, and it should be responsive to the expressed desires of the community.

Describe and discuss the potential economic and non-economic benefits to members of the community that could result from your venture.

Among the potential benefits that may merit discussion are:

Economic Development

• number of jobs generated in each of the first three years of the venture

• number and kind of new employment opportunities for previously unemployed or underemployed individuals

• number of skilled and higher paying jobs

• ownership and control of venture assets by community residents

• purchase of goods and services from local suppliers

Human Development

• new technical skills development and associated career opportunities for commu­nity residents

• management development and training

• employment of unique skills within the community that are now unused

Community Development

• development of community's physical assets

• improved perception of CDC responsiveness and their role in the community

• provision of needed, but unsupplied, services or products to the community

• improvements in the living environment

• community support, participation and pride in the venture

• development of community-owned economic structure and decreased absentee business ownership

Describe any compromises or time lags in venture profilability thut may result t'rom trying to achieve some or all of the kinds of benefits cited above. Any riuch coii-tprornideri or lags in profitability should be justified in the context of all the benefits achieved and the role of the venture in a total, planned program of economic, human and community development.

10. THE FINANCIAL PLAN

The financial plan is basic to the evaluation of an investment opportunity and should represent the entrepreneur's best estimates of future operations. Its purpose is to indicate the venture's potential and the timetable for financial viability. It can also serve as an operating plan for financial management of the venture.

In developing the financial plan, three basic forecasts must be prepared:

a. Profit and Loss Forecasts for three years

b. Cash Flows Projections for three years

c. Pro Forma Balance Sheets at start-up, semi-annually in the first year and at the end of each of the first three years of operation

In the case of an existing venture seeking expansion capital, balance sheets and in­come statements for the current and two prior years should be presented in addition to these financial projections.

Sample forms for preparing financial projections have been provided as Exhibits 1-3 ^ . It is recommended that the venture's financial and marketing personnel prepare them, with assistance from an accountant if required. In addition to these three basic financial exhibits, a break even chart (Exhibit 4) should be presented that shows the level of sales required to cover all operating costs.

After you have completed the preparation of the financial exhibits, briefly highlight in writing the important conclusions that can be drawn. This might include the maximum cash requirement, the amount to be supplied by equity and debt; the level of profits as a percent of sales; how fast any debts are repaid; etc.

A. Profit and Loss Forecast (Exhibit 1)

The preparation of pro forma income statements is the profit planning part of financial management. Crucial to the earnings forecasts --as well as other projections -is the sales forecast. You have already developed sales forecasts while completing your Market Research and Analysis section. The sales data projected should be used here.

Once the sales forecasts are in hand, production costs (or operations costs for a service business) should be budgeted. The level of production or operation that is required to meet the sales forecasts and also to fulfill inventory requirements must be determined. The material, labor, service and manufacturing overhead requirements must be developed and translated into costdata. A separation of the fixed and variable elements of these costs is desirable, and the effect of sales volume on inventory, equip­ment acquisitions and manufacturing costs should be taken into account.

Sales expense should include the costs of selling the distribution, storage, discounts, advertising and promotion. General and administrative expense should include manage­ment salaries, secretarial costs, and legal and accounting expenses. Manufacturing or operations overhead includes rent, utilities, fringe benefits, telephone, etc.

Robert Morris Associates (The National Association of Bank Loan Officers and Credit

Men) also publishes forms for preparing financial projections as well as instructions for preparing supporting worksheets for Accounts Payable Disbursements, Accounts Receiv­ables Collections, Material Flow and Purchases, etc. These instructions and forms are:

Charles G. Zimmerman, "Projection of Financial Statements -- And the Preparatory Use of Work Sheet Schedules for Budgets" and RMA Form C-117, "Projection of Financial Statements", (Philadelphia. Pennsylvania: Robert Morris Associates, 1961).

Earnings projections should be prepared monthly in the first year of operation and quarterly for the second and third years.

If these earnings projections are to be useful they must represent management's realistic, best estimates of probable operating results. Sales or operating cost projections that are either too conservative or too optimistic have little value as aids to policy formu­lation and decision-making.

Discussion of Assumptions: Because of the importance of profit and loss projections as an indication of the potential financial feasibility of a new venture to potential investors, it is extremely important that any assumptions made in its preparation be fully explained and documented. Such assumptions could include the amount allowed for bad debts and discounts, and any assumptions made with respect to sales expenses or general and administrative costs which are fixed percentages of costs or sales.

Risks and Sensitivity: Once the income statements have been prepared, draw on Section 8 of these guidelines to highlight any major risks that could prevent the venture's sales and profit goals from being attained, and the sensitivity of profits to these risks.

This discussion should reflect the entrepreneur's thinking about the risks that might be encountered in the firm itself, the industry, and the environment. This could include such things as the effect of a 20% reduction in sales projections, or the impact over time of- a learning curve on the level of productivity.

B, Pro Forma Cash Flows Analysis (Exhibit 2)

For a new venture the cash flows forecast can be more important than the forecasts of profits because it details the amount and timing of expected cash inflows and outflows. Usually the level of profits, particularly during the start-up years of a venture, will not be sufficient to finance operating asset needs. Moreover, cash inflows do not match the outflows on a short-term basis. The cash flows forecast will indicate these conditions and allow management to plan cash needs.

Given a level of projected sales and capital expenditures over a specific period, the cash forecast will highlight the need for and timing of additional financing and indicate peak requirements for working capital. Management must decide how this additional financing is to be obtained, on what terms, and how it is to be repaid. Part of the needed financing will be supplied by the equity financing (that is sought by this business plan) part by bank loans for one to five years, and the balance by short-term lines of credit from banks. This information becomes part of the final cash flows forecast.

If the venture is in a seasonal or cyclical industry, or is in an industry in which suppliers require a new firm to pay cash, or if an inventory build-up occurs before the product can be sold and produce revenues, the cash flows forecast is crucial to the con­tinuing solvency of the business. A detailed cash flows forecast which is understood and used by management can help them direct their attention to operating problems without distractions caused by periodic cash crises that should have been anticipated. Cash flows projections should be made for each month of the first year of operation and quarterly for the second and third years.

Discussion of Assumptions: This should include assumptions made about the timing of collections receivables, . trade discounts given, terms of payments to vendors, planned salary and wage increases, anticipated increases in any operating expenses, seasonality of the business as it affects inventory requirements, inventory turnovers per year, and capital equipment purchases. Thinking about such assumptions when planning your venture is useful for identifying issues which may later require attention if they are not to become significant problems.

Cash Flow Sensitivity: Once the cash flow has been completed, discuss the impact on cash needs that possible changes in some of the crucial assumptions would have; e. g. . slower receivables collection or sales below forecasts. This will enable you to test the sensitivity of the cash budget based on differing assumptions about business factors, and to view several possible outcomes. Investors are vitally interested in this because it helps them estimate the possibility that you will need more cash sooner than planned.

C. Pro Forma Balance Sheets (Exhibit 3)

The balance sheets detail the assets required to support the projected level of operations and show how these assets are to be financed (liabilities and equity). Investors and bankers look at the projected balance sheets to determine if debt to equity ratios, working capital, current ratios, inventory turnover, etc. , are within the acceptable limits required to justify future financings projected for the venture.

Pro forma balance sheets should be prepared at start-up, semi-annually for the first year, and at the end of each of the first three years of operation.

D. Breakeven Chart (Exhibit 4)

A breakeven chart shows the level of sales (and hence, production) needed to cover all your costs. This includes those costs that vary with the production level (manufacturing labor, material, sales costs) and those that do not change with produc­tion (rent, interest charges, executive salaries, etc. ). The sales level that exactly equals all costs is the breakeven level for your venture.

It is very useful for the investor and the management to know what the breakeven point is and whether it will be easy or difficult to attain. It is very desirable Cor your projected sales to be sufficiently larger than the breakeven sales so that small changes in your performance do not produce losses. You should prepare a breakeven chart and discuss how your breakeven point might be lowered in case you start to fall short of your sales projections. You should also discuss the effect on your breakeven point of lower production capacity requirements.

E. Cost Control

Your ability to meet your income and cash flows projections will depend on your ability to monitor and control costs. For this reason many investors like to know what type of accounting and cost control system you have or will use in your business. Accord­ingly, the financial plan should include a brief description of how you will obtain and report costs, who will be responsible for controlling various cost elements, how often he or she will obtain cost data, and how you will take action on budget overruns.

11. PROPOSED COMPANY OFFERING

The purpose of this section of the plan is to indicate the amount of money that is being sought, the nature and amount of the securities offered to the investor, and a brief description of the uses that will be made of the capital raised. The discussion and guide­lines given below should help you do this.

You should realize that the financing terms you propose here are the first step in a negotiation process with a venture capital investor who is interested in your "deal". It is very possible that when you close your financing, you will be selling a different kind of security (e.g., convertible debt instead of common stock) for a different price than you originally proposed.

A. Desired Financing: Summarize from your cash flows projections how much money is required over the next three years to carry out the development and expansion of your business as described. Indicate how much of the capital requirement will be obtc-ined by this offering and how much will be obtained from term loans, lines of credit or other sources,

B. Securities Offering: Describe the kind (common stock, convertible debenture, etc. ), unit price, and total amount of securities to be sold in this offering. For securities other than common stock (e. g. . debt with warrants, debt plus stock) indicate interest, maturity, and conversion conditions. Also show the percentage of the company that the investors of this offering will hold after it is completed, or after exercise of any stock conversion or purchase rights in the case of convertible debentures or warrants.

If the securities are being sold as a "private placement" (that is, exempt from SEC registration), you should include the following statement in this part of the plan:

"The shares being sold pursuant to this offering are restricted securities and may not be resold readily. The prospective investor should recognize that such securities might be restricted as to resale for an indefinite period of time. Each purchaser will be required to execute a Non-Distribution Agreement satisfactory in form to corporate counsel."

C. Capitalization: Present in tabular form the current and proposed (post-offering) number of outstanding shares of common stock. Indicate any shares offered by key management people and show the number of shares that they will hold after completion of the proposed financing.

Indicate how many shares of your company's common stock will remain authorized but unissued after the offering and how many of these will be reserved for stock options for future key employees,

D. Use of Funds: Investors like to know how their money is going to be spent. Provide a description of how the capital raised will be used. Summarize as specifically as possible, what amount will be used for such things as product design and development;

capital equipment; marketing; and general working capital needs.

PRO FORMA INCOME STATEMENTS

Less: Discounts

Less: Bad Debt Provision

Less: Materials Used

Direct Labor

Manufacturing Overhead

Other Manufacturing Expense (Leased Equipment)

Total Cost of Goods Sold

Gross Profit (or Loss)

Less: Sales Expense

Engineering Expense

General and Administrative Expense(3)

Operating Profit (or Loss)

Less: Other Expense (e.g., interest. depreciation)

Profit (Loss) Before Taxes

Income Tax Provision

Profit (Loss) After Taxes

PRO FORMA CASH FLOWS

Cash Balance: Opening Add: Cash Receipts

Collection of Accounts Receivable

Miscellaneous Receipts

Bank Loan Proceeds

Sale of Stock Total Receipts Less: Disbursements

Trade Payables

Leased Equipment

Sales Expense

Warranty Expense

General and Administrative Expense

Fixed.Asset Additions

Loan Interest @ ?%

Loan Repayments

Other Payments

Total Disbursements

Caish Increase (Decrease)

Cash balance: Closing

PRO FORMA BALANCE SHEET

ASSETS Current

Marketable Securities

Accounts Receivable

Inventories

Raw Materials and Supplies Work in Process Finished Goods Total Inventory

Prepaid Items Total Current Assets Plant and Equipment

Less: Accumulated Depreciation

Nel Plant and Equipment

Deferred Charges

Other Assets (Identify)

TOTAL ASSETS

LIABILITIES AND STOCKHOLDERS' EQUITY

Notes Payable to Banks

Accounts Payable

Federal and State Taxes

TOTAL CURRENT LIABILITIES

Long Term Notes

Other Liabilities

Common Stock Capital

Retaincd Earnings

TOTAL LIABILITIES AND EQUITY

Breakeven Chart

Top of page.

• Financial management

Financing plan: the complete Guide

The financial plan is an integral part of financial forecasting when starting a company – but it’s also much more. This accounting document is an excellent analytical support tool to help you first determine if your project is viable and then plan your finances throughout the life cycle of your business. How do you come up with this financial document and what data do you put in there? What is its role in your business plan as a whole? And how do you analyse it? The answers to all of these questions can be found in this article.

👉How to build a cash flow budget ?

What is a financial plan?

The financial plan is a financial document (a table) that shows your requirements and resources.

Requirements : these are aspects that a company needs to fund when starting up. Investments at the start-up stage are varied – for an online seller they may include a website, whereas for a shoe manufacturer they may include some machinery.

Resources : these are the means available to the company and can come from a variety of different sources, such as subsidies or grants, interest-free loans, other borrowings and so on.

Why should you draw up a financial plan?

The financial plan is first and foremost aimed directly at financiers. It is an accounting document that provides reassures to them by:

• Proving to them that your project is funded effectively and in a stable manner
• Allowing them to see and gauge the risks being taken by the project sponsor
• Giving them a comprehensive overview of the financing situation

Drawing up a financial plan also helps to answer practical – if not essential – questions, such as:

• Is this the right time to start my business ? If the plan reveals any financial instability, this is a warning sign of hypothetical bankruptcy
• Does the business model need to be revised ? If the finances highlight that there are risks or fragility, this is an indication that you should reduce your long-term requirements. This could mean renting equipment rather than purchasing it or thinking about obtaining additional funding

When looking at financing and establishing a project, whether it’s a start-up, a recovery or a development, there are two types of financial plan to consider: an initial financial plan and a long-term financial plan.

Initial financial plan

As the name suggests, an initial financial plan is used at the start of a project. In this scenario, the aim is to make an inventory of the long-term requirements that are imperative for starting up and all of the long-term resources used to finance these requirements.

You need to do two things to create your initial financial plan:

• First, calculate your project’s long-term requirements
• Then, allocate the resources necessary to subsidise these requirements

This type of financial plan helps you to ensure that the long-term requirements that are essential to launching the project can be funded from the financial resources committed.

Long-term forecast financial plan

This table is based on the initial financial plan and aggregates the new data relating to the development and growth of your business across a number of predefined years (a period of three years is the most common).

The following new data is added:

• Long-term financial resources : we will look at potential self-financing capabilities, possible reduction in working capital requirement (WCR) and contributions from capital stock or borrowed funds
• Long-term requirements : repayment of borrowed funds, increase in WCR, dividends and new or recent investments

With a long-term financial plan, you can ensure that your company’s financial structure is strengthened and will be successful for the period under review.

In contrast, if the situation is in decline, then you will need to rethink how your company will operate and consider what actions to take to prevent it from facing medium- or long-term financial difficulties.

The difference between the financial plan and the cash flow plan

The cash flow plan is one of the four main financial business plan tables, which are:

• An initial financial plan
• A forecast income statement
• A cash flow plan
• A three-year forecast

A cash flow plan is a table showing all planned cash inflows and cash outflows month by month during your company’s first year of operation.

The table of the financial plan, on the other hand, contains two columns: one that identifies your investment requirements, such as the WCR, and another that shows your financial resources (e.g. loans and personal savings).

The difference between your requirements and your resources indicates either a cash surplus or a shortfall.

Example of a financial plan

To help you get your financial plan right, here is a template table that you can use to get started.

The above example of an initial financial plan shows that the financial resources exceed the total requirements to be financed. In this situation, the company enjoys some flexibility to compensate for the incalculable aspects of its project.

Frame of reference for the initial financial plan and useful tips

When you first draw up an initial financial plan, you should aim to obtain sufficient financial resources to at least balance your plan, i.e. so that the total requirements are equal to the total resources.

Adding a cash flow row provides a useful indicator as it gives you an idea of how much leeway you have in case you need to deal with any unexpected eventualities.

When putting your project financing in place, you should also consider the difference between financing from your own funds (capital contributions, contributions from partners) and from borrowed funds. It is usually recommended that at least 30% of your project’s activities be funded using your own funds.

How do you draw up a financial plan?

1. budget your start-up costs.

• You will incur a number of costs before your business even starts operating and these current expenses can include:
• Carrying out a market study

Putting together a financial plan with help from a chartered accountant

• All transport costs incurred when meeting with your partners, e.g. clients, suppliers etc.
• C__ommunication and marketing__ expenses, e.g. creating a website
• Filing a trademark or patent , acquiring licenses etc.
• Registration fees , solicitor/notary fees etc.

2. Identify and evaluate all investments

To do this, you have to list all of your direct and indirect costs.

Direct costs : these include remuneration for in-house staff (and remuneration for external staff, if you use consultants or contractors) and the costs of purchasing and/or renting equipment (rooms and computers, but also project-related supplies).

Indirect costs : these are all of your operating expenses, such as for heating and communications, and management costs, such as salaries for inter-departmental supporting functions (marketing, accounting, administrative)

3. Calculate your working capital requirement

A key component of the financial plan, the working capital requirement (WCR) must be estimated when you start operating.

The initial WCR is calculated as follows:

4. Determine contributions

The intention here is to gather information on all of your internal financing solutions; there are three types:

Cash contributions : these are contributions from partners or shareholders in your company. In return, these contributors receive equity from the company. These contributions are incredibly useful when starting up a project as these funds benefit your company and are not intended to be repaid

Contributions in kind : these refer to all non-financial contributions and can include material assets such as computers, cars and property. Your company benefits from material assets as it enables you to commence operations without spending any money

Partner current account contributions : this solution gives partners and shareholders another way of contributing liquidity to your company . More specifically, this option is a loan granted by a partner to your company to finance its business

5. Look into all the financing options available to your company

Assessing your external financing requirements is another important step in putting together a financial plan.

When a new entrepreneur has exhausted their personal financing solutions, they can turn to a financial institution for a bank loan. You can also make use of national or local institutional aid facilities – they can even open up avenues for tax exemptions and tax credit. Alternatively, you can also reach out to investment professionals, such as business angels, or explore crowdfunding solutions.

6. Balance your financial plan and analyse its coherence

In terms of the overall quantity of resources, the balance of your initial financial plan will be either negative, balanced out or positive.

• Negative financial plan balance : this indicates that the total requirements are greater than the total resources. In this case, new funding must be sought
• Balanced financial plan : the total requirements are equal to the total resources. All the requirements needed to start your business are covered but you don’t have a safety net
• Positive financial plan balance : the total requirements are less than the total resources. All of the requirements needed to kick off your project are covered and you also have some room for manoeuvre

Define financial plan requirements

The requirements set out in your financial plan are broken down into several categories.

Establishment costs

These costs correspond to cash outflows relating to the creation of your company, such as fees for formalities (e.g. registration, advertising), solicitors’ fees for drafting legal statutes, Companies House registration fees, tax or accounting advice costs and so on. Establishment costs are shown in the assets section of your balance sheet, under intangible assets.

Intangible assets, tangible assets and financial assets

These relate to all permanent acquisitions that make up your company’s assets . An acquisition is considered to be an asset if its unit price exceeds €500 (excluding tax).

• Intangible assets : these are all non-physical assets that are used solely for your company’s purposes over the long term (e.g. brand, patent, license, software, client database etc.)
• Tangible assets : these relate to physical assets that will be used over several accounting years. Some of the most frequent examples are land, computer equipment, furniture, machinery, vans and so on. These assets are used for your company’s activities (e.g. production, rental to third parties, supply of goods and services)
• Financial assets : in accounting, these are long-term assets of a financial nature that your company possesses. These frequently include equity shares, financial claims, loans granted to third parties and even safekeeping accounts and bonds

Working capital requirement (WCR)

This refers to an amount of money that is financed to ensure that your company can operate under favourable conditions. WCR needs to be estimated when you launch your business. In fact, you will know your company’s short-term financing requirements (stocks, VAT etc.) from the very beginning.

Start-up cash flow

As the name suggests, the start-up cash flow covers the first expenses that your company is exposed to – even before it receives any income.

So, how do you calculate your initial cash flow requirement?

To calculate your initial cash flow requirement, you need to anticipate certain events that may affect your cash flow in the months following the launch of your business. A cash flow plan is one of the most effective ways of doing this. This table will allow you not only to monitor but to anticipate all cash inflows and outflows. This financial table will provide you with a concrete monthly cash balance . If this balance is negative, this indicates that the initial cash flow estimate is insufficient and fragile. In this way, it’s used as a tool for forecasting financial risks.

You have several options for funding your start-up cash flow:

Personal contributions

• Cash flow financing
• Other funding options

Define financial plan resources

In order to be able to meet all of your initial requirements and your working capital requirement, you have to set out your financial resources.

These assets are made up entirely from contributions made by the founder of the company and their potential partners. These contributions can be obtained in different ways, such as crowdfunding or personal bank loans. When starting a business, the business generated is often not sufficient to create the cash flow needed to finance the operating cycle. All of these resources take care of this.

This refers to the different types of loan taken out by your company. Most of the time, they are requested from banks or credit institutions and can include business start-up loans or interest-free loans. All of these elements must be included in your financial plan.

Self-financing capacity

Self-financing capacity is an important indicator within your financial plan that must be calculated and included regardless of the size of your project and whether or not your company is applying for a loan. In concrete terms, self-financing capacity refers to the resources that are freed up by your company and are potentially cashable. These resources come from operational activities. Essentially, they are used to pay the shareholders, pay suppliers, pay taxes and, most importantly, to make ongoing investments.

Focus on the three-year financial plan

The three-year financial plan is an accounting table that is made up of two main parts, just like the initial financial plan:

• Resources (projected income)
• Requirements (how this income is used)

The purpose of the plan is to identify whether the company has a financing shortfall or a financing excess over the next three years. Gathering this information is particularly useful because when it highlights a need for financing, you know that you need to seek new financing from investors or banks. If you have a surplus, you can decide to make new investments to support your growth.

As discussed previously, the initial financial plan is a basic tool. Beyond that, all events relating to the years being budgeted must be included.

The key elements to include are :

• New investments made
• New capital contributions or partner current account contributions
• Borrowed funds
• Dividend distributions
• Variance in the working capital requirement
• Capacity for or lack of self-financing

The financial ratios of the financial plan

In accounting, ratios allow you to gain an overall picture of your company’s financial health. There are a number of ratios and we have listed a few below:

Debt capacity

When you are managing a business start-up or business development project, there is one parameter to take into account – your debt capacity. It’s impossible to borrow all of the financing you require, so you have to estimate your borrowing capacity. When you borrow, the bank usually funds up to 70% of your project budget, with the remaining 30% coming from personal contributions.

Repayment capacity

This indicator tells you how many years it will take to repay your loans. Repayment capacity is calculated as follows:

You need to know that your company’s capacity for repaying your liabilities is not the only variable that the bank will be scrutinising. Other parameters, such as the net debt ratio or gearing ratio, are analysed too. The debt ratio measures the level of a company’s debt in relation to its own capital. Credit institutions pay considerable attention to this ratio as it indicates your repayment capacity. In other words, it measures your credit rating.

The debt ratio is calculated as follows:

Analyse your financial plan

The aim of this comparative review is to ensure that the initial requirements related to the launch of your activity have been covered and that your structure remains stable and healthy across all of the budgeted years.

Don’t forget that for your company’s financing to be sustainable and viable, the sum of the requirements must be equal to or less than the sum of the resources.

Ideally, the total amount of resources should be higher, as this leaves room for manoeuvre in the event of unforeseen circumstances.

When requirements are too high When requirements are high and threaten to upset the balance, the first thing you need to do is consider other sources of external financing. If this happens, be careful not to destabilise personal contributions and borrowed funds. Doing this will actually impact your repayment capacity.

Essentially, you should use this financial table for forecasting purposes, incorporating variances in the working capital requirement and dividends over several accounting years. In doing so, your initial financial plan will grow into a fully-fledged forecast.

The financial plan is useful in many ways: it assesses your project budget, it helps you to identify financial partners and it helps you know if bank financing is an option. It is undoubtedly a vital tool from the moment it is first created and can be used by any company, whether it’s a very small business (VSB) , small and medium-sized enterprise (SME) or large company .

Do you need to better anticipate your cash flow? Agicap makes it easy for you to manage your company’s cash flow. Give it a go!

Subscribe to our newsletter

You may also like.

201 Borough High Street London SE1 1JA

• Manage your cash flow
• Cash flow monitoring
• Cash flow forecast
• Consolidation
• Custom dashboards
• Debt management
• Late payment reminders
• Supplier Invoice Management
• Terms of Use
• General Terms of Service
• Privacy Policy
• Legal Notice
• We're hiring

Navigating Financing for Your Business Plan

Related blogs.

• Unlocking the Potential of Business Advisory Services
• Exploring the Benefits and Challenges of Becoming an Early Adopter of Mobile Technologies
• Negotiating the Benefits of a Supply Agreement
• Writing a Business Plan for a Real Estate Company
• Tips on how to write a persuasive business plan

Introduction

Financing is the process of obtaining needed funds to run, grow, or expand a business. A business plan is a roadmap of the goals and objectives of the business complete with strategies and action plans to achieve the desired results. When starting a new business or expanding an existing one, understanding the financing requirements of a business plan is essential. This blog post will discuss the importance of financing and the role it plays in achieving the goals of a business plan.

Sources of Financing

When it comes to financing your business plan, you have options. Before you start looking for capital and investors, it's important to know what sources of funds may be available. In this post, we'll discuss the two primary sources of financing: bank loans and investment.

For most small businesses, the first place to look for financing is a commercial bank. Banks often offer financing to businesses that can provide a detailed business plan and evidence of the ability to repay the loan. Interest rates for bank loans are typically lower than private loans, so it is important to understand the terms of the loan and to weigh the cost of borrowing against what you can presently and reasonably generate in revenue.

Another source of financing is investment. This typically involves a search for private individual or institutional investors, or venture capital firms, who are willing to purchase an ownership stake in the business. Here, a well-crafted and comprehensive business plan is essential. The plan will need to clearly explain the potential return on investment, covering topics such as the product, market, business model and initial costs. Find an investor who can help in areas like mentoring and advice is also incredibly important.

Choosing the right financing source for your business should involve a detailed assessment of the available options. Researching the various sources of funds is the key to ensuring you have the resources to effectively launch and grow your business plan.

Knowing What You Need

Developing a well-rounded business plan is essential to securing financing for your company. An important first step is to consider the various components that make up your plan, and match those needs to what type of financing you can acquire. By understanding your goals and the types of financing available, you can strategically choose funding sources that will best support your business growth.

Considerations

When developing a business plan, you must be sure to consider what long-term financial needs you’ll have and the best sources to meet them. This can include working capital, capital for expansion and equipment, or for entering new markets. Most important is having a plan for repaying what you borrow and understanding the costs associated with the type of financing you choose and the potential risks of each option.

You want to consider what you can use as collateral. There are various types of collateral sources, such as real estate and equipment, and depending on the type of project you plan to fund, the right collateral might be critical in securing your loan. Talk to your lender and financial advisor to understand what assets you can use, and how these assets can help shape your financial position.

Collaborators

You want to work with qualified professionals who can understand and evaluate your plan to find the best possible financing source. Typically, this includes a financial advisor and a lawyer. Depending on where you live and the type of financing you are pursuing, you may also need to work with local government offices or a bank.

Look for collaborators who can provide you with in-depth information about your chosen finance option. They can help you create an individualized plan that meets your needs and fits with your business model. A good financial advisor will also be able to help you develop a budget and ensure that you are taking the necessary steps to make sure you can meet your payments.

By thoroughly understanding the financing requirements for your business plan, you can make sure that you have a secure financial foundation and position your company for success. Work closely with your financial advisors and research the different sources of financing to find the best option for your business.

When your business expands, you may be looking for additional credit to facilitate growth. Before a lender will approve any type of loan, they usually ask for some form of collateral to guarantee repayment of the loan. Collateral can be used to secure a range of different types of credit, including unsecured business lines of credit, small business loans, and government-funded programs. Knowing which type of collateral best meets the financing requirements of your business plan is essential.

Understanding Your Options

There are two different types of collateral that a business may use to secure a loan: physical assets and personal assets. Physical assets include inventories, tangible goods, land, and buildings. Personal assets include retirement plans, insurance policies, savings accounts, and investments. Depending on the lender, a combination of assets may be necessary to secure a loan. It is essential to understand which assets will be accepted by the lender to ensure you are able to secure the credit you need.

Making a Decision

When selecting collateral to secure a loan, consider the least expensive option that will provide the most protection to the lender. While using physical assets may be more attractive to a lender, personal assets may provide lower interest rates and longer repayment periods. Consider the advantages and disadvantages of each option, as well as the current value of your assets, before making a decision. Additionally, consider the potential implications of using certain assets as collateral, such as the potential tax implications.

When it comes to financing an expanding business, understanding the collateral requirements of your business plan is essential. It is important to weigh the options and decide which is the best choice for your business. Understanding how to use collateral to secure a loan can be the difference between success and failure for your business.

Regulatory Issues

When creating a business plan, understanding the regulations and compliance requirements of the jurisdiction you will be operating in is essential. Knowing the rules in the areas of business tax and licensing can help to ensure no surprises when it comes to complying with the regulations. Additionally, understanding the systems and processes that exist to promote compliance with the regulations can be helpful in ensuring a successful business.

Rules and Requirements

It is important to be aware of any state or local laws that may have an impact on the business. Depending on the type of business being created, some areas may require specialized licenses or other paperwork to be completed. Depending on the locale, some rules may be specific to certain industries, such as requiring local businesses to obtain a trading license or business permit.

In addition to more common regulations such as taxation, it is important to understand any specific laws that apply to the operation of your business, such as data protection and privacy regulations. It is also wise to be aware of any industry specific regulations, such as rules pertaining to the handling of hazardous materials.

Defining a Timeline

Having a timeline for compliance helps to ensure everything is taken care of in a timely manner. This timeline should include steps such as obtaining the required licenses, paying taxes, and filing the necessary paperwork. In some cases, it may also be beneficial to have a timeline of when the paperwork needs to be reviewed and updated, as regulations and taxation may change over the course of running your business.

When defining a timeline for regulatory compliance, it is worth bearing in mind any deadlines that dictate when certain regulations must be met. Having a good understanding of these deadlines helps to ensure that any potential penalties for non-compliance are avoided.

Financing Alternatives

Many businesses rely on the capital provided by external financing options to fund their operations and investments. Business owners must understand the different financing alternatives available to them in order to use the most appropriate financing method in their business plans. The following are two popular financing alternatives that business owners should consider:

Factoring is a form of debt financing in which a company sells its accounts receivables to a third-party lender. The lender pays a certain percentage of the amount due, usually between 70% and 90%. The company then receives the remaining balance when the invoice is paid in full by the customer. This can provide a business with much needed cash to finance its operations. However, factoring can be expensive and it is important that the borrower has a good understanding of the terms of the agreement with the lender.

A/R Financing

A/R Financing is a form of debt financing in which a company borrows money against its accounts receivables. This type of financing is similar to factoring but is generally cheaper and has a much shorter repayment period. It is also less expensive than traditional loan products such as bank loans. This can be a great way to finance the operations of a business without taking on a large amount of debt. However, it is important to understand the terms and conditions of the agreement before taking on A/R financing.

Understanding the different financing requirements of a business plan and researching the best types of financing can be a critical part of any successful venture. By understanding the different financing alternatives, business owners can ensure that they are making the most informed decisions in order to secure the necessary funds for their operations and investments.

Finding the right financing for your business plan can be a daunting process and understanding the available options and tools can be time consuming. Having the right structures in place is an important part of ensuring success in your business venture. It is important to take the time to build relationships with lenders and create detailed financial projections to ensure that you have the resources in place to succeed.

Preparing for success

For success in your business plan, you need to plan ahead and be proactive in how you secure financing for your venture. Research potential lenders and what loan types best fit your business needs. Knowing the terms and conditions of the loan or line of credit and working with a CPA or financial advisor is critical in understanding what loan to pursue. It is also important to build relationships with lenders and anticipate potential pitfalls in loan applications.

Financial Advice for Your Business Plan

To successfully secure financing for your business plan, you must make sure your plan is error free. Present a detailed and accurate financial statement, budget estimates and metrics, and cash flows. Estimate realistic revenue goals and cash needed to reach those goals. Create a solid business pitch to pitch to potential lenders and be aware of the formal requirements of loan applications.

• Research potential lenders
• Understand the terms and conditions of the loan
• Build relationships with lenders
• Anticipate potential pitfalls in loan applications
• Present a detailed and accurate financial statement
• Estimate realistic revenue goals
• Create a solid business pitch
• Be aware of the formal requirements of loan applications

By understanding the financing requirements of your business plan, you can ensure that your business venture is equipped with the resources it needs to succeed. Take the time to research lenders and loans, create detailed financial projections, and build relationships with potential lenders in order to make the best decisions for your business.

Fundrising Ready

MAC & PC Compatible

Immediate Download

Related Articles

The surprising truth about profitability in the appliance store industry: a deep dive into the numbers, why investing in an alcohol treatment center is more profitable than you think, counting the profits: a closer look at the profitability of accounting agencies, the art of boosting profits in your a la carte restaurant: a comprehensive guide, airbnb: unpacking the profitability of one of the world's most successful companies., the untold story of how car washes are making a fortune: discover the profit potential today, pedaling to profit: unveiling the lucrative world of bicycle couriers, thirsty for success discover the untapped profit potential of running a beer bar, the beauty within profits: discovering the lucrative world of beauty salons, unlocking the profit potential: how to make your beach hotel more profitable, leave a comment.

Your email address will not be published. Required fields are marked *

Please note, comments must be approved before they are published

Call Us (877) 968-7147

Most popular blog categories

• Payroll Tips
• Accounting Tips
• Accountant Professional Tips

How to Craft the Financial Section of Business Plan (Hint: It’s All About the Numbers)

Writing a small business plan takes time and effort … especially when you have to dive into the numbers for the financial section. But, working on the financial section of business plan could lead to a big payoff for your business.

Read on to learn what is the financial section of a business plan, why it matters, and how to write one for your company.  

What is the financial section of business plan?

Generally, the financial section is one of the last sections in a business plan. It describes a business’s historical financial state (if applicable) and future financial projections. Businesses include supporting documents such as budgets and financial statements, as well as funding requests in this section of the plan.  

The financial part of the business plan introduces numbers. It comes after the executive summary, company description , market analysis, organization structure, product information, and marketing and sales strategies.

Businesses that are trying to get financing from lenders or investors use the financial section to make their case. This section also acts as a financial roadmap so you can budget for your business’s future income and expenses. 

Why it matters 

The financial section of the business plan is critical for moving beyond wordy aspirations and into hard data and the wonderful world of numbers. 

Through the financial section, you can:

• Forecast your business’s future finances
• Budget for expenses (e.g., startup costs)
• Get financing from lenders or investors
• Grow your business

• Growth : 64% of businesses with a business plan were able to grow their business, compared to 43% of businesses without a business plan.
• Financing : 36% of businesses with a business plan secured a loan, compared to 18% of businesses without a plan.

So, if you want to possibly double your chances of securing a business loan, consider putting in a little time and effort into your business plan’s financial section. 

Writing your financial section

To write the financial section, you first need to gather some information. Keep in mind that the information you gather depends on whether you have historical financial information or if you’re a brand-new startup. 

Your financial section should detail:

• Business expenses 

Financial projections

Financial statements, break-even point, funding requests, exit strategy, business expenses.

Whether you’ve been in business for one day or 10 years, you have expenses. These expenses might simply be startup costs for new businesses or fixed and variable costs for veteran businesses. 

Take a look at some common business expenses you may need to include in the financial section of business plan:

• Licenses and permits
• Cost of goods sold 
• Rent or mortgage payments
• Payroll costs (e.g., salaries and taxes)
• Utilities 
• Equipment 
• Supplies 
• Advertising 

Write down each type of expense and amount you currently have as well as expenses you predict you’ll have. Use a consistent time period (e.g., monthly costs). 

Indicate which expenses are fixed (unchanging month-to-month) and which are variable (subject to changes). 

How much do you anticipate earning from sales each month? 

If you operate an existing business, you can look at previous monthly revenue to make an educated estimate. Take factors into consideration, like seasonality and economic ups and downs, when basing projections on previous cash flow.

Coming up with your financial projections may be a bit trickier if you are a startup. After all, you have nothing to go off of. Come up with a reasonable monthly goal based on things like your industry, competitors, and the market. Hint : Look at your market analysis section of the business plan for guidance. 

A financial statement details your business’s finances. The three main types of financial statements are income statements, cash flow statements, and balance sheets.

Income statements summarize your business’s income and expenses during a period of time (e.g., a month). This document shows whether your business had a net profit or loss during that time period. 

Cash flow statements break down your business’s incoming and outgoing money. This document details whether your company has enough cash on hand to cover expenses.

The balance sheet summarizes your business’s assets, liabilities, and equity. Balance sheets help with debt management and business growth decisions. 

If you run a startup, you can create “pro forma financial statements,” which are statements based on projections.

If you’ve been in business for a bit, you should have financial statements in your records. You can include these in your business plan. And, include forecasted financial statements. 

You’re just in luck. Check out our FREE guide, Use Financial Statements to Assess the Health of Your Business , to learn more about the different types of financial statements for your business.

Potential investors want to know when your business will reach its break-even point. The break-even point is when your business’s sales equal its expenses. 

Estimate when your company will reach its break-even point and detail it in the financial section of business plan.

If you’re looking for financing, detail your funding request here. Include how much you are looking for, list ideal terms (e.g., 10-year loan or 15% equity), and how long your request will cover. 

Remember to discuss why you are requesting money and what you plan on using the money for (e.g., equipment). 

Back up your funding request by emphasizing your financial projections. 

Last but not least, your financial section should also discuss your business’s exit strategy. An exit strategy is a plan that outlines what you’ll do if you need to sell or close your business, retire, etc. 

Investors and lenders want to know how their investment or loan is protected if your business doesn’t make it. The exit strategy does just that. It explains how your business will make ends meet even if it doesn’t make it. 

When you’re working on the financial section of business plan, take advantage of your accounting records to make things easier on yourself. For organized books, try Patriot’s online accounting software . Get your free trial now!

Stay up to date on the latest accounting tips and training

You may also be interested in:

Need help with accounting? Easy peasy.

Business owners love Patriot’s accounting software.

But don’t just take our word…

Explore the Demo! Start My Free Trial

Relax—run payroll in just 3 easy steps!

Get up and running with free payroll setup, and enjoy free expert support. Try our payroll software in a free, no-obligation 30-day trial.

Relax—pay employees in just 3 steps with Patriot Payroll!

Business owners love Patriot’s award-winning payroll software.

Watch Video Demo!

Watch Video Demo

• Sample Plans
• WHY UPMETRICS?

Upmetrics AI Assistant: Simplifying Business Planning through AI-Powered Insights. Learn How

• 400+ Sample Business Plans

Customers Success Stories

Business Plan Course

Strategic Canvas Templates

E-books, Guides & More

Business consultants

Entrepreneurs and Small Business

Accelerators and Incubators

Educators & Business Schools

Students & Scholars

AI Business Plan Generator

Financial Forecasting

AI Assistance

Ai pitch deck generator

Stratrgic Planning

See How Upmetrics Works  →

Small Business Tools

Entrepreneurs & Small Business

Accelerators & Incubators

Business Consultants & Advisors

Strategic Planning

How to Prepare a Financial Plan for Startup Business (w/ example)

Free Financial Statements Template

Ajay Jagtap

• December 7, 2023

13 Min Read

If someone were to ask you about your business financials, could you give them a detailed answer?

Let’s say they ask—how do you allocate your operating expenses? What is your cash flow situation like? What is your exit strategy? And a series of similar other questions.

Instead of mumbling what to answer or shooting in the dark, as a founder, you must prepare yourself to answer this line of questioning—and creating a financial plan for your startup is the best way to do it.

A business plan’s financial plan section is no easy task—we get that.

But, you know what—this in-depth guide and financial plan example can make forecasting as simple as counting on your fingertips.

Ready to get started? Let’s begin by discussing startup financial planning.

What is Startup Financial Planning?

Startup financial planning, in simple terms, is a process of planning the financial aspects of a new business. It’s an integral part of a business plan and comprises its three major components: balance sheet, income statement, and cash-flow statement.

Apart from these statements, your financial section may also include revenue and sales forecasts, assets & liabilities, break-even analysis , and more. Your first financial plan may not be very detailed, but you can tweak and update it as your company grows.

Key Takeaways

• Realistic assumptions, thorough research, and a clear understanding of the market are the key to reliable financial projections.
• Cash flow projection, balance sheet, and income statement are three major components of a financial plan.
• Preparing a financial plan is easier and faster when you use a financial planning tool.
• Exploring “what-if” scenarios is an ideal method to understand the potential risks and opportunities involved in the business operations.

Why is Financial Planning Important to Your Startup?

Poor financial planning is one of the biggest reasons why most startups fail. In fact, a recent CNBC study reported that running out of cash was the reason behind 44% of startup failures in 2022.

A well-prepared financial plan provides a clear financial direction for your business, helps you set realistic financial objectives, create accurate forecasts, and shows your business is committed to its financial objectives.

It’s a key element of your business plan for winning potential investors. In fact, YC considered recent financial statements and projections to be critical elements of their Series A due diligence checklist .

Your financial plan demonstrates how your business manages expenses and generates revenue and helps them understand where your business stands today and in 5 years.

Makes sense why financial planning is important to your startup, doesn’t it? Let’s cut to the chase and discuss the key components of a startup’s financial plan.

Say goodbye to old-school excel sheets & templates

Make accurate financial plan faster with AI

Plans starting from $7/month

Key Components of a Startup Financial Plan

Whether creating a financial plan from scratch for a business venture or just modifying it for an existing one, here are the key components to consider including in your startup’s financial planning process.

Income Statement

An Income statement , also known as a profit-and-loss statement(P&L), shows your company’s income and expenditures. It also demonstrates how your business experienced any profit or loss over a given time.

Consider it as a snapshot of your business that shows the feasibility of your business idea. An income statement can be generated considering three scenarios: worst, expected, and best.

Your income or P&L statement must list the following:

• Cost of goods or cost of sale
• Gross margin
• Operating expenses
• Revenue streams
• EBITDA (Earnings before interest, tax, depreciation , & amortization )

Established businesses can prepare annual income statements, whereas new businesses and startups should consider preparing monthly statements.

Cash flow Statement

A cash flow statement is one of the most critical financial statements for startups that summarize your business’s cash in-and-out flows over a given time.

This section provides details on the cash position of your business and its ability to meet monetary commitments on a timely basis.

Your cash flow projection consists of the following three components:

✅ Cash revenue projection: Here, you must enter each month’s estimated or expected sales figures.

✅ Cash disbursements: List expenditures that you expect to pay in cash for each month over one year.

✅ Cash flow reconciliation: Cash flow reconciliation is a process used to ensure the accuracy of cash flow projections. The adjusted amount is the cash flow balance carried over to the next month.

Furthermore, a company’s cash flow projections can be crucial while assessing liquidity, its ability to generate positive cash flows and pay off debts, and invest in growth initiatives.

Balance Sheet

Your balance sheet is a financial statement that reports your company’s assets, liabilities, and shareholder equity at a given time.

Consider it as a snapshot of what your business owns and owes, as well as the amount invested by the shareholders.

This statement consists of three parts: assets , liabilities, and the balance calculated by the difference between the first two. The final numbers on this sheet reflect the business owner’s equity or value.

Balance sheets follow the following accounting equation with assets on one side and liabilities plus Owner’s equity on the other:

Here is what’s the core purpose of having a balance-sheet:

• Indicates the capital need of the business
• It helps to identify the allocation of resources
• It calculates the requirement of seed money you put up, and
• How much finance is required?

Since it helps investors understand the condition of your business on a given date, it’s a financial statement you can’t miss out on.

Break-even Analysis

Break-even analysis is a startup or small business accounting practice used to determine when a company, product, or service will become profitable.

For instance, a break-even analysis could help you understand how many candles you need to sell to cover your warehousing and manufacturing costs and start making profits.

Remember, anything you sell beyond the break-even point will result in profit.

You must be aware of your fixed and variable costs to accurately determine your startup’s break-even point.

• Fixed costs: fixed expenses that stay the same no matter what.
• Variable costs: expenses that fluctuate over time depending on production or sales.

A break-even point helps you smartly price your goods or services, cover fixed costs, catch missing expenses, and set sales targets while helping investors gain confidence in your business. No brainer—why it’s a key component of your startup’s financial plan.

Having covered all the key elements of a financial plan, let’s discuss how you can create a financial plan for your startup.

How to Create a Financial Section of a Startup Business Plan?

1. determine your financial needs.

You can’t start financial planning without understanding your financial requirements, can you? Get your notepad or simply open a notion doc; it’s time for some critical thinking.

Start by assessing your current situation by—calculating your income, expenses , assets, and liabilities, what the startup costs are, how much you have against them, and how much financing you need.

Assessing your current financial situation and health will help determine how much capital you need for your startup and help plan fundraising activities and outreach.

Furthermore, determining financial needs helps prioritize operational activities and expenses, effectively allocate resources, and increase the viability and sustainability of a business in the long run.

Having learned to determine financial needs, let’s head straight to setting financial goals.

2. Define Your Financial Goals

Setting realistic financial goals is fundamental in preparing an effective financial plan. So, it would help to outline your long-term strategies and goals at the beginning of your financial planning process.

Let’s understand it this way—if you are a SaaS startup pursuing VC financing rounds, you may ask investors about what matters to them the most and prepare your financial plan accordingly.

However, a coffee shop owner seeking a business loan may need to create a plan that appeals to banks, not investors. At the same time, an internal financial plan designed to offer financial direction and resource allocation may not be the same as previous examples, seeing its different use case.

Feeling overwhelmed? Just define your financial goals—you’ll be fine.

You can start by identifying your business KPIs (key performance indicators); it would be an ideal starting point.

3. Choose the Right Financial Planning Tool

Let’s face it—preparing a financial plan using Excel is no joke. One would only use this method if they had all the time in the world.

Having the right financial planning software will simplify and speed up the process and guide you through creating accurate financial forecasts.

Many financial planning software and tools claim to be the ideal solution, but it’s you who will identify and choose a tool that is best for your financial planning needs.

Create a Financial Plan with Upmetrics in no time

Enter your Financial Assumptions, and we’ll calculate your monthly/quarterly and yearly financial projections.

Start Forecasting

4. Make Assumptions Before Projecting Financials

Once you have a financial planning tool, you can move forward to the next step— making financial assumptions for your plan based on your company’s current performance and past financial records.

You’re just making predictions about your company’s financial future, so there’s no need to overthink or complicate the process.

You can gather your business’ historical financial data, market trends, and other relevant documents to help create a base for accurate financial projections.

After you have developed rough assumptions and a good understanding of your business finances, you can move forward to the next step—projecting financials.

5. Prepare Realistic Financial Projections

It’s a no-brainer—financial forecasting is the most critical yet challenging aspect of financial planning. However, it’s effortless if you’re using a financial planning software.

Upmetrics’ forecasting feature can help you project financials for up to 7 years. However, new startups usually consider planning for the next five years. Although it can be contradictory considering your financial goals and investor specifications.

Following are the two key aspects of your financial projections:

Revenue Projections

In simple terms, revenue projections help investors determine how much revenue your business plans to generate in years to come.

It generally involves conducting market research, determining pricing strategy , and cash flow analysis—which we’ve already discussed in the previous steps.

The following are the key components of an accurate revenue projection report:

• Market analysis
• Sales forecast
• Pricing strategy
• Growth assumptions
• Seasonal variations

This is a critical section for pre-revenue startups, so ensure your projections accurately align with your startup’s financial model and revenue goals.

Expense Projections

Both revenue and expense projections are correlated to each other. As revenue forecasts projected revenue assumptions, expense projections will estimate expenses associated with operating your business.

Accurately estimating your expenses will help in effective cash flow analysis and proper resource allocation.

These are the most common costs to consider while projecting expenses:

• Fixed costs
• Variable costs
• Employee costs or payroll expenses
• Operational expenses
• Marketing and advertising expenses
• Emergency fund

Remember, realistic assumptions, thorough research, and a clear understanding of your market are the key to reliable financial projections.

6. Consider “What if” Scenarios

After you project your financials, it’s time to test your assumptions with what-if analysis, also known as sensitivity analysis.

Using what-if analysis with different scenarios while projecting your financials will increase transparency and help investors better understand your startup’s future with its best, expected, and worst-case scenarios.

Exploring “what-if” scenarios is the best way to better understand the potential risks and opportunities involved in business operations. This proactive exercise will help you make strategic decisions and necessary adjustments to your financial plan.

7. Build a Visual Report

If you’ve closely followed the steps leading to this, you know how to research for financial projections, create a financial plan, and test assumptions using “what-if” scenarios.

Now, we’ll prepare visual reports to present your numbers in a visually appealing and easily digestible format.

Don’t worry—it’s no extra effort. You’ve already made a visual report while creating your financial plan and forecasting financials.

Check the dashboard to see the visual presentation of your projections and reports, and use the necessary financial data, diagrams, and graphs in the final draft of your financial plan.

Here’s what Upmetrics’ dashboard looks like:

8. Monitor and Adjust Your Financial Plan

Even though it’s not a primary step in creating a good financial plan, it’s quite essential to regularly monitor and adjust your financial plan to ensure the assumptions you made are still relevant, and you are heading in the right direction.

There are multiple ways to monitor your financial plan.

For instance, you can compare your assumptions with actual results to ensure accurate projections based on metrics like new customers acquired and acquisition costs, net profit, and gross margin.

Consider making necessary adjustments if your assumptions are not resonating with actual numbers.

Also, keep an eye on whether the changes you’ve identified are having the desired effect by monitoring their implementation.

And that was the last step in our financial planning guide. However, it’s not the end. Have a look at this financial plan example.

Startup Financial Plan Example

Having learned about financial planning, let’s quickly discuss a coffee shop startup financial plan example prepared using Upmetrics.

Important Assumptions

• The sales forecast is conservative and assumes a 5% increase in Year 2 and a 10% in Year 3.
• The analysis accounts for economic seasonality – wherein some months revenues peak (such as holidays ) and wanes in slower months.
• The analysis assumes the owner will not withdraw any salary till the 3rd year; at any time it is assumed that the owner’s withdrawal is available at his discretion.
• Sales are cash basis – nonaccrual accounting
• Moderate ramp- up in staff over the 5 years forecast
• Barista salary in the forecast is $36,000 in 2023.
• In general, most cafes have an 85% gross profit margin
• In general, most cafes have a 3% net profit margin

Projected Balance Sheet

Projected Cash-Flow Statement

Projected Profit & Loss Statement

Break Even Analysis

Start Preparing Your Financial Plan

We covered everything about financial planning in this guide, didn’t we? Although it doesn’t fulfill our objective to the fullest—we want you to finish your financial plan.

Sounds like a tough job? We have an easy way out for you—Upmetrics’ financial forecasting feature. Simply enter your financial assumptions, and let it do the rest.

So what are you waiting for? Try Upmetrics and create your financial plan in a snap.

Build your Business Plan Faster

with step-by-step Guidance & AI Assistance.

Frequently Asked Questions

How often should i update my financial projections.

Well, there is no particular rule about it. However, reviewing and updating your financial plan once a year is considered an ideal practice as it ensures that the financial aspirations you started and the projections you made are still relevant.

How do I estimate startup costs accurately?

You can estimate your startup costs by identifying and factoring various one-time, recurring, and hidden expenses. However, using a financial forecasting tool like Upmetrics will ensure accurate costs while speeding up the process.

What financial ratios should startups pay attention to?

Here’s a list of financial ratios every startup owner should keep an eye on:

• Net profit margin
• Current ratio
• Quick ratio
• Working capital
• Return on equity
• Debt-to-equity ratio
• Return on assets
• Debt-to-asset ratio

What are the 3 different scenarios in scenario analysis?

As discussed earlier, Scenario analysis is the process of ascertaining and analyzing possible events that can occur in the future. Startups or businesses often consider analyzing these three scenarios:

• base-case (expected) scenario
• Worst-case scenario
• best case scenario.

About the Author

Ajay is a SaaS writer and personal finance blogger who has been active in the space for over three years, writing about startups, business planning, budgeting, credit cards, and other topics related to personal finance. If not writing, he’s probably having a power nap. Read more

Related Articles

How to Write a Business Plan Complete Guide

How to Calculate Business Startup Costs

How to Prepare a Financial Plan for Small Business?

Reach your goals with accurate planning.

No Risk – Cancel at Any Time – 15 Day Money Back Guarantee

Popular Templates

What is Financial planning in a business plan

If one is new to the field of business and entrepreneurship, then Finance is unquestionably the vital section of the business plan. Even if your ideas and innovations are important what matters the most at the end of the day is the marketing strategies and how much your vision can help in making an earning. Hence it is vital to explain your start-up with good figures which are done with the help of accurate numbers included in the business plans and briefing about it in such a way that genuinely makes your business more attractive and profitable to the investors.

What is a business plan? 

In simple words, it is a guide for the company to achieve its goal. It is a written document that describes in detail how a business, especially a start-up , what are its objectives or how it is about to achieve its goal. This can be considered as a roadmap to success with detailed plans and budgets saying how they will be achieved. It lays a road map from marketing, financial and operating point of view as well.

Business plans are documents which are vital papers used to attract investors even before the company has shown a proven record. They do this by giving a vision to the investor and trying to convince them that their business idea is worth investing for.  From that, there comes a firm assurance and hence the business idea is sound and has every chance of success. For any newcomer, preparing a business plan is an important first step. It is this rigid milestone that will help the entry towards the path of success.

When you are about to begin a new venture, a business plan gives you a clear idea which in turn can determine whether your business idea is viable or not; that is, there is no point in business if there aren’t any chances of earning. A business plan is also a good way for companies to maintain a regular track.

We can also describe the business plan as a living document that you can use to prove two sources as it shows that one’s dreams are no longer just a dream but can be made into a viable reality. In the majority of cases, the main barrier in commencing a business is the fact that they don’t have enough money to be in the business or to start the business they wish to begin. In the case of start-ups, a ready business plan is essential to show potential investors how the proposed business can bring profit.

What is Financial Plan ?

In the world of start-ups, the importance of perfect business planning is beyond explanation. Plan length of business is different for different businesses. As mentioned no two businesses have the same sort of plans but they all have the same elements from which financial planning can be considered as a vital key in the making of a business plan.

A company financial plan is a document containing the current money situation and long-term goals of an individual as well as the strategies for achieving the goals. A financial plan can be done independently or with the help of a specialist who is a certified financial planner where he will have a deep evaluation of the person’s current financial state and, future goals and expectations.

It gives you a clear picture of current finances and how it can be utilized to achieve your goals. This is also a process which will reduce the amount of stress about money and help you to set a long-term goal. It is very important as it shows how to make use of your assets in an orderly manner.

The main purpose of financial planning is that it helps you to make strong business decisions about what are the resources that the company requires and what are the strategies that the company needs to be successful. It helps to obtain necessary financing, thus helping it grow.

Financial Planning can be explained with six steps:-

1. Setting up of Financial Goals:-

 The secret of a successful business is setting up proper financial goals.

2. Track your Money:-

Since the financial plan is a guide for good business flow,  having an accurate idea about your savings or pay-downs is helpful to develop medium and long term plans.

3. Emergency expenses:-

Collecting cash for emergency expenses is the bedrock of the financial plan. 

4. Investing your savings:-

 Investing isn’t always meant for the rich alone. Building credit is another way to shock proof of your budget.

  5. Have a check of high-interest debt:-

Sometimes it happens that the interest rates most of the time, we end up repaying 2 or 3 times what we have actually borrowed. Paying down the ‘toxic’ high-interest debt like title loans, rent-to-own payment, credit card balances etc. are the crucial steps in any financial plan.

6. Setting up of a moat:-

It is essential to build a moat to protect you and your family from financial setbacks.  Financial moats can be improved by:-

• Retirement accounts should be increased
• Padding your emergency fund until you earn a constant profit.
• By using insurance so that a sudden illness or accident can alter you thus, ensuring financial stability.

Financial planning is at the heart of all successful business ventures. As mentioned earlier, it consists of details of statement and financial projections, forming the overall core of your business plan. Financial planning is supposed to be completed within a year and revised monthly for better results. In addition to impressing  your investors that you are serious and knowledgeable with the business the financial  planning allows them to evaluate :

•The short and long term prospects 

• Profit potential 

•Your company’s  weakness as well as strengths

•Opportunities and challenges 

•What type of financing  can make your business successful  

For a strong financial plan,  there should be careful calculations and reliable numbers. If you are starting a new business then your financial plan should consist of:- 

• Start-up costs

•Cash flow projection 

•Projected Balance sheet 

•Balance and income statement (if it isn’t a new business)

•Break-even analysis

Start-up Costs

If you are about to start a business, first you are supposed to determine start-up costs. They are the first time expenditures that you have to spend before opening your business. It includes all costs such as furniture, supplies, equipment, renovations, license permits and incorporation fees; if necessary.

Cash flow projections  

All the business activities, large or small depends on cash. Cash flow projections show the expected amount of money that you can earn in a business along with what will be spent on expenses It is the cash that you expect from sales.

Projection of cash flow projections

The first is to calculate how much revenue you expect to generate from the sales every month. For that:

• consider the best and worst.
• reach to the clients who can  repay loan on a regular-schedule basis 
• set a credit policy .
• which bills should be delayed and what to be paid. The projections must be completed on an ongoing basis.

Income statements 

It shows your actual business expenses and revenues, the difference between the net profit over some time it sometimes often referred to as profit and loss statement or an operating statement.

From a regular check-in, the projected income statement (at least every three months) can help you identify an emerging problem in your business.

Balance Sheets

It is a snapshot record which contains all the details of what your business assets (owns) are or on as well as its liabilities (owes). Assets can be money, property,  vehicle, inventory etc. The projected balance sheet is what predicts the net worth of your business over a specific period in future. It should be from at least one year to three years into the future

Break-even Analysis

It is a useful tool which calculates at what point your company will be able to make a profit . This is where the total costs equal total revenues. It is based on three factors:- Selling price, fixed cost and variable cost.

  Methods Of Financing for Businesses

After you have completed financial statement, projections and calculations, you will have a clear idea on how to finance your business.

The two main financings are:- 

• Equity Financing

The financing in which you and your partner put the money or raise from the investor’s for the business.

Equity financing is not a debt or loan, but the investors just share the profits or losses.

2. Debt  Financing 

With your equity capital, you are now in a position to approach lenders for a business loan.  It is the money you borrow for business. Unlike equity financing, it should be repaid with interest over a specific period. The lenders won’t be getting the profit however, they must be repaid-with interest no matter whether the business is in profit or loss. The potential lenders include banks, credit unions , private investors, trust companies etc.

In the end, financial planning is a crucial step in mapping out a company’s financial future. In that sense, it is financial planning which gives clarity to your business plan and thus to one’s life!

A detailed guide to writing a successful business pitch

How to create a balance sheet in excel, leave a reply cancel reply.

Your email address will not be published. Required fields are marked *

Save my name, email, and website in this browser for the next time I comment.

• Resource Center
• Terms of Service
• Privacy Policy
• Brightflow AI
• 440 N. Barranca Ave., Suite 6084
• Covina, California 91723
• [email protected]

Copyright © 2023 Brightflow AI.

• We’re Hiring

Secure Login

How to Set Up and Organize Your Business Finances

3 min. read

Updated January 5, 2024

Getting your business finances right is crucial for starting a business . Even more so if you want to see your business grow.

Don’t let that scare you. Even if this is your first time dabbling in financial planning, you can break the work into seven manageable steps.

By working through this guide, you can outline startup costs, understand the basics of financial planning, and prepare for accurate and efficient financial management.

How to manage and organize your business finances

Financial management is an ongoing process for business owners. These are the steps you should take to get started.

1. Understand your startup costs

What will it cost to start your business? Check out common examples and resources to help you calculate, manage, and minimize your starting expenses.

Dig Deeper: Small business startup costs explained

2. Create a financial forecast

Sales, expenses, personnel, and cash flow—learn how to track these critical financial components and make forecasting a regular part of business operations.

Dig Deeper: How to write a financial plan with forecasts

3. Open a business bank account

A business bank account is more than the place where you store cash. The bank is your partner regarding funding, and you want to be sure you choose the right one.

*Tip:  Before you can open a business bank account and set up payroll—you need to apply for an Employer Identification Number (EIN). Check out our guide to learn how to apply .

Dig Deeper: How to open a business bank account

Brought to you by

Create a professional business plan

Using ai and step-by-step instructions.

Secure funding

Validate ideas

Build a strategy

4. Separate business and personal finances

Make your business finances clean and straightforward by separating them from your personal funds early on.

Dig Deeper: How to separate your small business and personal finances

5. Set up accounting and payroll

Start tracking your expenses, prepare to take on employees, and stay on top of your tax obligations by understanding the basics of accounting and payroll processes.

Dig Deeper: Accounting and payroll basics

6. Get funding for your business

Prepare to attract and get outside funding—even if you don’t need it immediately.

Dig Deeper: 5 steps to get funding for your business

7. Know when to pay yourself

Paying yourself may be the last thing on your mind, but don’t leave yourself out of the equation. Follow these seven steps to determine when to give yourself a salary.

Dig Deeper: When is the right time to pay yourself a salary?

Why is it important to manage your finances as a business owner?

Setting up your business finances is more than a startup step. It leads to several long-term benefits:

Informed decisions

A clear understanding of financial health allows you to make decisions based on concrete data. Whether investing in new equipment or launching a marketing campaign—having a clear financial picture reduces risks associated with decisions.

Maintain profitability

Regular financial oversight helps you identify areas of growth and waste. You can maximize returns by focusing on profitable activities and reducing unnecessary expenses.

Avoid financial and legal issues

Proper financial management ensures that all obligations, especially tax-related ones, are met on time. This helps you avoid penalties while remaining compliant with local, state, and federal regulations.

Build trust

Transparent and effective financial management fosters trust among investors, employees, and customers. When stakeholders are confident in a business’s financial stability, it can lead to increased investments, employee loyalty, and customer retention.

Support long-term growth

A solid financial foundation allows you to invest in business growth regularly. Growth could include expanding product lines, entering new markets, or hiring additional staff.

• Prepare to do business

Getting your finances in order is the last planning step you need to take. 

You now understand your costs. You have expectations for the future, a relationship with a bank, and have started setting up accounting processes. And whether you need it now or later, you are better prepared to seek additional funding.

You’re ready to take action and prepare your business to launch. With your plans in place, it’s time to select your business location , build your team , and spread the word about your business .

Clarify your ideas and understand how to start your business with LivePlan

Kody Wirth is a content writer and SEO specialist for Palo Alto Software—the creator's of Bplans and LivePlan. He has 3+ years experience covering small business topics and runs a part-time content writing service in his spare time.

Table of Contents

• Organize and manage business finances
• Why you need to manage your finances

Related Articles

10 Min. Read

Questions to reveal customer pain points

8 Min. Read

How to move on if your business idea fails

5 Min. Read

How to work with freelancers

Try this work-from-home checklist

The Bplans Newsletter

The Bplans Weekly

Subscribe now for weekly advice and free downloadable resources to help start and grow your business.

We care about your privacy. See our privacy policy .

The quickest way to turn a business idea into a business plan

Fill-in-the-blanks and automatic financials make it easy.

No thanks, I prefer writing 40-page documents.

Discover the world’s #1 plan building software

• en - english
• es - español
• > Business Credit
• > Article

The 20 Best Business Financing Options

Business financing is the lifeblood that fuels growth and innovation in the corporate landscape.

20 Best Small Business Financing Options

Traditional options, self-funding.

#DidYouKnow It's also called bootstrapping.

• You retain complete decision-making authority.
• You avoid getting small business loans which come with interest payments.
• Shows commitment, potentially attracting future investors.
• Personal savings at stake.
• Restricted funds may slow business expansion.
• High personal financial and emotional investment.
• Cash flow loans
• Short-Term Loans
• Long-Term Loans
• Personal Loans for Business Use
• Startup Loans
• They can be pivotal in scaling operations, hiring staff, purchasing equipment, or working capital needs .
• Loans offer predictable monthly payments, allowing businesses to plan and manage their cash flow.
• They often have lower interest rates than other financing forms.
• collateral requirements
• stringent eligibility criteria
• potential prepayment penalties.

Business Credit Cards

• Credit cards simplify expense tracking and accounting processes, aiding in better financial management
• They often come with rewards programs and perks, such as cashback or travel rewards
• They have higher interest rates than other financing options
• If not managed responsibly, they can lead to accumulated debt and increased financial strain

Business Lines Of Credit

• they provide quick access to funds
• lines of credit are convenient for businesses requiring immediate capital.
• they can help build business credit and establish relationships with lenders
• higher interest rates than term loans
• potential annual fees
• the risk of overspending and accumulating excessive debt if not managed responsibly
• competitive interest rates
• flexibile use-of-funds
• SBA loans can help businesses build credit history
• they help you establish relationships with lenders
• the application process for SBA loans can be complex and time-consuming
• they require extensive documentation
• you need to meet very specific and stringent eligibility criteria

Angel Investors

• need a smaller amount of capital
• are in the initial stages of their business where they might not yet attract larger investors
• The capital and knowledge can be invaluable for early-stage businesses.
• Terms with angel investors are often more flexible compared to traditional loans or venture capital.
• They generally provide smaller amounts of capital, which may not be enough.
• Getting angel investors means giving up a portion of ownership and sometimes control.

Venture Capital

• They typically invest larger sums, suitable for significant scaling and growth.
• Venture capitalists bring industry expertise, strategic guidance, and a vast network of connections.
• It enhance a company’s market credibility and attract further investment.
• Venture capitalists require a significant equity stake and often a role in business decisions. This can lead to a loss of control for the original owners.
• Venture capitalists expect high returns on their investments. This puts pressure on the business to perform and grow rapidly.
• The process is often lengthy and complex, involving rigorous due diligence and negotiations.

Specialized Options

Equipment financing.

• lower interest rates
• longer repayment periods

Real Estate Financing

• retail stores
• restaurants
• manufacturing facilities

Invoice Factoring

#DidYouKnow It's also called accounts receivable financing.

• delivery services
• transportation companies
• sales teams that travel frequently

Alternative Options

Subordinated debt, merchant cash advances, peer-to-peer lending, crowdfunding.

• early access to the product
• special acknowledgments
• unique experiences related to the business

Family And Friends

• informal and flexible arrangements
• lower costs and interest rates
• an easier approval process
• emotional support and guidance from people who know and believe in your abilities

Vendor Financing

Retirement accounts.

• considerable risks
• potential long-term consequences
• carefully assess the impact on your retirement savings
• consult with a financial advisor to understand the full implications.

Small Business Administration Investment Programs

• Small Business Investment Companies. SBICs are private investment funds licensed by the SBA. They provide equity capital, long-term loans, and expert management. They don't have rigidity of traditional loan structures.
• Small Business Innovation Research. The SBIR program encourages businesses to engage in Federal Research/Research and Development. It also acts as a catalyst for technological innovation and entrepreneurship.

Business Grants

• government entities
• foundations
• corporations to support specific industries, sectors, or causes
• non-repayable funding without creating debt
• they enhance the credibility of a business and may provide access to valuable networks and resources
• there are usually strict eligibility criteria
• there are only limited funds available
• applying requires careful research and thorough preparation

What Is Business Financing?

• financial institutions
• personal savings

Debt Financing

Equity financing, mezzanine financing, the cost of small business financing.

• Type of Loan. Different financing options, like bank loans or online lending, come with varying interest rates.
• Creditworthiness. A higher business and personal credit score can lead to lower interest rates.
• Collateral. Loans secured with assets typically have lower rates than unsecured loans.
• Market Conditions. Economic trends can affect interest rates. They may rise in a booming economy and fall during economic slumps.
• Loan Term. Longer loan terms often have higher interest rates due to increased risk.
• Business Financials. Strong revenue, profits, and cash flow can help secure lower rates.
• Bank Small-Business Loan: 5.89% to 12.23%
• Online Term Loan: 6% to 99%
• SBA Loan: 11.5% and 15%
• Business Line of Credit: 10% to 99%
• Equipment Financing: 4% to 45%
• Invoice Factoring or Financing: 1.15% to 4.50% per 30 days
• Merchant Cash Advance: 13.00% to 350.00% per year
• ownership dilution
• profit sharing
• potential loss of control
• legal and administrative expenses

Where To Find Financing For Small Businesses

• good credit scores
• a solid financial history

Credit Unions

Online lenders.

• business performance

SBA Lenders

• partnering lenders
• community development organizations
• micro-lending institutions

How To Qualify For Small Business Financing

• Credit Score. A strong personal and/or business credit score is crucial for favorable terms.
• Business Financials. Lenders review financial statements to assess your business's health.
• Business Plan. A well-structured plan outlines your business's purpose and vision.
• Collateral. Some loans may require assets as security.
• Industry Experience. Demonstrating expertise can boost credibility.
• Cash Flow. Positive cash flow is vital for repayment assurance.
• Personal Guarantees. Owners may need to personally guarantee loans.
• Legal Requirements. Meet industry-specific permits and licenses.
• Down Payment. Some loans require a down payment or equity injection.
• Good Character. Lenders assess reputation and past financial history.
• Growth Potential. Equity investors look for businesses with high growth potential.
• Vision. A clear vision and strategy for business growth are crucial.
• Industry Expertise. Demonstrating knowledge of your industry enhances your appeal.
• Pitch. An effective pitch or presentation is essential to attract investors.
• Team. The strength and expertise of your team can influence investors.
• Equity Stake. Prepare to offer ownership stakes in your business.
• Exit Strategy. Investors often seek an exit plan to realize returns on their investment.
• Market Opportunity. Show investors the market opportunity your business addresses.
• Maintain a strong credit profile.  Paying bills on time and reducing debt.
• Prepare a comprehensive business plan. Showcases your goals, market analysis, financial projections, and repayment strategy.
• Gather financial documentation. Include balance sheets, income statements, and tax returns.
• Be prepared to provide collateral or personal guarantees if required. Show a positive cash flow and industry experience to build lender confidence.
• Research and compare lenders.  Consider finding professional assistance to navigate the process effectively.
• Complete an application accurately. Ensure you apply with a lender that fits your needs and whose requirements you meet.

How To Decide How Much Financing You Need

Assess your financial needs, define the purpose, conduct a cost analysis, consider your repayment ability, small business loans that fit your needs.

• thoroughly understand the different types of business financing
• assess your business's needs
• make an informed decision

At Camino Financial, our small business loans with fixed monthly payments and interest rates.

Related Articles

Best Personal Loans With ITIN Number: Top 5 Options Of 2024

There are many ways to get funding. One is a personal loan with ITIN. These are loans for individuals... Read More

Business financing is the lifeblood that fuels growth and innovation in the corporate landscape. Whether you’re a new or... Read More

Commercial Mortgage: Everything You Need To Know

Commercial mortgages help entrepreneurs and investors get, develop, or refinance non-residential properties. These loans enable them to turn their... Read More

A Guide to First-Time Business Loans: Getting Started

Securing your first-time business loan is significant when undertaking an entrepreneurial venture. We design this guide to help you... Read More

Understanding Interest-Free Loans: A Comprehensive Guide

Interest-free loans do not charge interest on the borrowed amount; however, it’s important to note that although they don’t incur... Read More

Are No Doc Business Loans Right For Your Business? Everything You Need To Decide

No-doc business loans have become a popular way to secure funding since they are an alternative borrowing option. For... Read More

Prequalify in 5 minutes

Select your desired loan type.

• Business Credit
• Business Finance
• Entrepeneurship
• Business Managment

Latest Articles

The Best Money Saving Apps: 2024 Guide

Money-saving apps make managing your finances more effective and easy. They help you budget, save, and invest with just... Read More

What Is Financial Literacy? A Comprehensive Guide to The ABCs of Money

Financial literacy is a beacon of empowerment amidst economic uncertainty. This concept helps us understand the nuances of finances... Read More

The 3 Credit Bureaus: Their Reports And Credit Scores

Credit bureaus are responsible for managing the credit history of individuals and companies. This score is an important part... Read More

When Were Credit Scores Invented? A Journey Through Financial History

Credit scores affect the financial health of both people and companies. Contrary to common belief, they are not a... Read More

Compound Interest: A Guide to Long-Term Financial Growth

Did you know that compound interest can greatly affect a person’s long-term financial health for the better? This article... Read More

Everything you need to know about DSCR: the debt service coverage ratio

The Debt-Service Coverage Ratio (DSCR) is a crucial indicator of financial health and stability. Understanding it can illuminate the... Read More

• Search Search Please fill out this field.

What Is Financing?

Understanding financing, types of financing, special considerations, example of financing.

• Frequently Asked Questions (FAQs)

The Bottom Line

• Personal Finance

Financing: What It Means and Why It Matters

Adam Hayes, Ph.D., CFA, is a financial writer with 15+ years Wall Street experience as a derivatives trader. Besides his extensive derivative trading expertise, Adam is an expert in economics and behavioral finance. Adam received his master's in economics from The New School for Social Research and his Ph.D. from the University of Wisconsin-Madison in sociology. He is a CFA charterholder as well as holding FINRA Series 7, 55 & 63 licenses. He currently researches and teaches economic sociology and the social studies of finance at the Hebrew University in Jerusalem.

Investopedia / Theresa Chiechi

Financing is the process of providing funds for business activities , making purchases, or investing. Financial institutions , such as banks, are in the business of providing capital to businesses, consumers, and investors to help them achieve their goals. The use of financing is vital in any economic system, as it allows companies to purchase products out of their immediate reach.

Put differently, financing is a way to leverage the time value of money (TVM) to put future expected money flows to use for projects started today. Financing also takes advantage of the fact that some individuals in an economy will have a surplus of money that they wish to put to work to generate returns, while others demand money to undertake investment (also with the hope of generating returns), creating a market for money.

Key Takeaways

• Financing is the process of funding business activities, making purchases, or investments.
• There are two types of financing: equity financing and debt financing.
• The main advantage of equity financing is that there is no obligation to repay the money acquired through it. Equity financing places no additional financial burden on the company, though the downside is quite large.
• Debt financing tends to be cheaper and comes with tax breaks. However, large debt burdens can lead to default and credit risk.
• The weighted average cost of capital (WACC) gives a clear picture of a firm's total cost of financing.

There are two main types of financing available for companies: debt financing and equity financing . Debt is a loan that must be paid back often with interest, but it is typically cheaper than raising capital because of tax deduction considerations. Equity does not need to be paid back, but it relinquishes ownership stakes to the shareholder. Both debt and equity have their advantages and disadvantages .

Most companies use a combination of both debt and equity to finance operations.

Equity Financing

" Equity " is another word for ownership in a company. For example, the owner of a grocery store chain needs to grow operations. Instead of debt, the owner would like to sell a 10% stake in the company for $100,000, valuing the firm at $1 million. Companies like to sell equity because the investor bears all the risk; if the business fails, the investor gets nothing.

At the same time, giving up equity is giving up some control. Equity investors want to have a say in how the company is operated, especially in difficult times, and are often entitled to votes based on the number of shares held. So, in exchange for ownership, an investor gives their money to a company and receives some claim on future earnings.

Some investors are happy with growth in the form of share price appreciation ; they want the share price to go up. Other investors are looking for principal protection and income in the form of regular dividends .

Advantages of Equity Financing

Funding your business through investors has several advantages, including the following:

• The biggest advantage is that you do not have to pay back the money. If your business enters  bankruptcy , your investor or investors are not  creditors . They are part-owners in your company, and because of that, their money is lost along with your company.
• You do not have to make monthly payments, so there is often more cash on hand for operating expenses.
• Investors understand that it takes time to build a business. You will get the money you need without the pressure of having to see your product or business thriving within a short amount of time.

Disadvantages of Equity Financing

Similarly, there are a number of disadvantages that come with equity financing, including the following:

• How do you feel about having a new partner? When you raise equity financing, it involves giving up ownership of a portion of your company. The riskier the investment, the more of a stake the investor will want. You might have to give up 50% or more of your company, and unless you later construct a deal to buy the investor's stake, that partner will take 50% of your profits indefinitely.
• You will also have to consult with your investors before making decisions. Your company is no longer solely yours, and if the investor has more than 50% of your company, you have a boss to whom you have to answer.

Debt Financing

Most people are familiar with debt as a form of financing because they have car loans or mortgages. Debt is also a common form of financing for new businesses. Debt financing must be repaid, and lenders want to be paid a rate of interest in exchange for the use of their money.

Some lenders require collateral . For example, assume the owner of the grocery store also decides that they need a new truck and must take out a loan for $40,000. The truck can serve as collateral against the loan, and the grocery store owner agrees to pay 8% interest to the lender until the loan is paid off in five years.

Debt is easier to obtain for small amounts of cash needed for specific assets, especially if the asset can be used as collateral . While debt must be paid back even in difficult times, the company retains ownership and control over business operations.

Advantages of Debt Financing

There are several advantages to financing your business through debt:

• The lending institution has no control over how you run your company, and it has no ownership.
• Once you pay back the loan, your relationship with the lender ends. That is especially important as your business becomes more valuable.
• The interest you pay on debt financing is  tax deductible  as a business expense.
• The monthly payment, as well as the breakdown of the payments, is a known expense that can be accurately included in your forecasting models.

Disadvantages of Debt Financing

Debt financing for your business does come with some downsides:

• Adding a debt payment to your monthly expenses assumes that you will always have the capital inflow to meet all business expenses, including the debt payment. For small or early-stage companies, that is often far from certain.
• Small business lending can be slowed substantially during recessions. In tougher times for the economy, it's more difficult to receive debt financing unless you are overwhelmingly qualified.

The weighted average cost of capital (WACC) is the average of the costs of all types of financing, each of which is weighted by its proportionate use in a given situation. By taking a weighted average in this way, one can determine how much interest a company owes for each dollar it finances. Firms will decide the appropriate mix of debt and equity financing by optimizing the WACC of each type of capital while taking into account the risk of default or bankruptcy on one side and the amount of ownership owners are willing to give up on the other.

Because interest on the debt is typically tax deductible, and because the interest rates associated with debt is typically cheaper than the rate of return expected for equity, debt is usually preferred. However, as more debt is accumulated, the credit risk associated with that debt also increases and so equity must be added to the mix. Investors also often demand equity stakes in order to capture future profitability and growth that debt instruments do not provide.

WACC is computed by the formula:

WACC = ( E V × R e ) + ( D V × R d × ( 1 − T c ) ) where: E = Market value of the firm’s equity D = Market value of the firm’s debt V = E + D R e = Cost of equity R d = Cost of debt T c = Corporate tax rate \begin{aligned}&\text{WACC} = \left ( \frac{ E }{ V} \times Re \right ) + \left ( \frac{ D }{ V} \times Rd \times ( 1 - Tc ) \right ) \\&\textbf{where:} \\&E = \text{Market value of the firm's equity} \\&D = \text{Market value of the firm's debt} \\&V = E + D \\&Re = \text{Cost of equity} \\&Rd = \text{Cost of debt} \\&Tc = \text{Corporate tax rate} \\\end{aligned} ​ WACC = ( V E ​ × R e ) + ( V D ​ × R d × ( 1 − T c ) ) where: E = Market value of the firm’s equity D = Market value of the firm’s debt V = E + D R e = Cost of equity R d = Cost of debt T c = Corporate tax rate ​

Provided a company is expected to perform well, you can usually obtain debt financing at a lower effective cost. For example, if you run a small business and need $40,000 of financing, you can either take out a $40,000 bank loan at a 10% interest rate, or you can sell a 25% stake in your business to your neighbor for $40,000.

Suppose your business earns a $20,000 profit during the next year. If you took the bank loan, your interest expense (cost of debt financing) would be $4,000, leaving you with $16,000 in profit.

Conversely, had you used equity financing, you would have zero debt (and as a result, no interest expense), but would keep only 75% of your profit (the other 25% being owned by your neighbor). Therefore, your personal profit would only be $15,000, or (75% x $20,000).

Is Equity Financing Riskier Than Debt Financing?

Equity financing comes with a risk premium because if a company goes bankrupt, creditors are repaid in full before equity shareholders receive anything.

Why Would a Company Want Equity Financing?

Raising capital through selling equity shares means that the company hands over some of its ownership to those investors. Equity financing is also typically more expensive than debt. However, with equity there is no debt that needs to be repaid and the firm does not need to allocate cash to making regular interest payments. This can give new companies extra freedom to operate and expand.

Why Would a Company Want Debt Financing?

With debt, either via loan or a bond, the company has to make interest payments to creditors and ultimately return the balance of the loan. However, the company does not give up any ownership control to those lenders. Moreover, debt financing is often cheaper (due to a lower interest rate) since the creditors can claim the firm's assets if it defaults. Interest payments of debts are also often tax-deductible for the company.

Many businesses eventually need greater spending power in order to grow, and financing is the most common method of attaining it. There are pros and cons to both debt and equity financing, and each company should carefully weigh the costs of each before making a decision.

The Hartford. " Advantages vs. Disadvantages of Equity Financing ."

American Express. " What Is Debt Financing? Is It Right For My Business? "

Internal Revenue Service. " Publication 535 (2022), Business Expenses ."

Harvard Business School. " Cost of Capital: What It Is And How To Calculate It ."

• Terms of Service
• Editorial Policy
• Privacy Policy
• Your Privacy Choices

A guide to writing a winning business plan

Proposed Company Offering – Desired Financing

•  How much money do you need over the next three years to carry out your business plans?
•  How much of this money do you need right now?
•  How much capital will come from this offering, and how much will you get via term loans and lines of credit?

Desired Financing: Business Plan Milestone IV—Finances

Desired Financing:  Business Plan Milestone IV—Finances

Draft the following sections of your Business Plan:

• Financial Plan
• Desired Financing

Explain what resources must be in place before your business opportunity can start and whether bootstrap financing is sufficient to get the business going.

Evaluate your alternatives for financing your business opportunity.

This would be in reference to the previous assignment or question done.

Bailey’s Catering is the new business

…………………….Answer preview………………………

The aim of this section is to make visible the financial aspect of the enterprise and to make it possible to identify finance sources while seeing to it that every coin is properly spent such that all the needed resources are available at the implementation stage……………………..

Yourhomeworksolutions is a one-stop shop for all your homework needs. You can purchase already completed solutions to be used as samples and you can order assignments to be done afresh by our competent writers.

QUICK LINKS

Browse essays

Place order

Terms Of Service

admin@yourhomeworksolutions

+1 437 5396910

How does this work

Please fill the form correctly

receive 15% off

For expository writing, our writers investigate a given idea, evaluate its various evidence, set forth interesting arguments by expounding on the idea, and that too concisely and clearly. Our online essay writing service has the eligibility to write marvelous expository essays for you.

Finished Papers

We select our writers from various domains of academics and constantly focus on enhancing their skills for our writing essay services. All of them have had expertise in this academic world for more than 5 years now and hold significantly higher degrees of education. Once the writers get your topic in hand, only after thorough research on the topic, they move towards the direction to write it. They take up information from credible sources and assure you that no plagiarism could be found in your writing from our writing service website.

Customer Reviews

Some FAQs related to our essay writer service

We've detected unusual activity from your computer network

To continue, please click the box below to let us know you're not a robot.

Why did this happen?

Please make sure your browser supports JavaScript and cookies and that you are not blocking them from loading. For more information you can review our Terms of Service and Cookie Policy .

For inquiries related to this message please contact our support team and provide the reference ID below.

You might not want to think about estate planning, but as a financial planner, I know it's essential for small-business owners

Paid non-client promotion: Affiliate links for the products on this page are from partners that compensate us (see our advertiser disclosure with our list of partners for more details). However, our opinions are our own. See how we rate investing products to write unbiased product reviews.

• Estate planning may not be a topic you want to think about, but it's essential for small-business owners.
• Besides a will, you may also benefit from setting up a revocable living trust.
• Be sure to update things like beneficiary designations if you have a major life event.

Estate planning is a very sensitive, emotional topic, but as a financial planner, I believe it's essential to discuss. Estate planning should be a top priority — especially for Black business owners seeking to build generational wealth and preserve their legacies. Your business, likely your most valuable asset, deserves careful consideration within your estate plan to ensure a smooth transition of ownership and management in the event of incapacity or death.

As a business owner, there are more complexities and nuances to consider as it relates to estate planning. Therefore, it is critical to work with a qualified estate planning attorney who can help you create an estate plan that protects you, your business, and your heirs. As you navigate the estate planning process, consider these important items tailored to small business owners.

1. Last will and testament

One of the fundamental pieces to an effective estate plan is the last will and testament. This legal document is inexpensive and simple to set up.

This document serves as your voice beyond the grave, providing instructions to the state probate court regarding the distribution of your assets and the care of your dependents upon your passing. Without a will, your assets will be distributed according to state inheritance laws, which may not align with your wishes. In addition to personal assets, you may include business assets in your will.

A will may be amended during your lifetime and should be reviewed periodically, especially after major life events.

One thing to note is that a will does not avoid the probate process. While it provides guidance for asset distribution, your estate will still go through probate.

2. Revocable living trust

Establishing a revocable living trust is more complex and expensive than a will. Nevertheless, the advantages a living trust offers, especially for business owners, make it very attractive.

As a business owner, it is likely that most of your assets are tied to your business. A revocable living trust provides you with more control over these assets. Through a trust, you can appoint a trustee and provide them with specific instructions on how and when you want your business assets distributed. Moreover, you retain the flexibility and control to transfer assets into the trust and modify its terms during your lifetime.

One significant advantage of a trust is the protection it affords your assets from the probate process. By bypassing probate court proceedings, your estate information remains private, and your heirs save considerable time and money.

It is always a great idea to regularly update the assets in your living trust, as your business assets will change as your business grows over time.

3. Financial power of attorney

In most cases, as a small business owner, you are your business. If you become incapacitated, you want to ensure that you have someone you trust to handle your financial affairs. It is essential that you do not delay this task, as you must be legally competent to assign this role to someone. A financial power of attorney is a legal document that authorizes your selected agent to act on your behalf regarding certain financial matters of your choosing. Some of these matters may include:

• Paying your business bills
• Making business bank deposits and withdrawals
• Collecting and managing your self-employed retirement benefits
• Filing your business and personal taxes

There are different types of financial power of attorney that will determine how much power your agent holds and when their responsibilities take effect.

4. Succession plan

It is one thing to decide on how you want your business interests and assets to be distributed to your heirs. However, it is also critical to have an exit strategy for what happens to your business if you die or are incapacitated. Who do you want to run your business in your absence? Or do you want someone to be in charge of selling your business for a fair price?

Without an effective succession plan, your heirs may be forced to undersell your business, undermining all your hard work. An established succession plan will provide guidance on how to manage, sell, or pass on your business to new owners.

When developing your business succession plan, it is critical to work with a team of attorneys and CPAs. Not working with experienced professionals could create a significant tax bill for your heirs, eating into their inheritance.

Life happens, so make sure that you start working on your succession plan now.

5. Digital estate planning document

A common blind spot in estate planning is the digital asset space. So much of our lives are digital, but we often do not consider what happens to our digital assets if we were no longer here to manage them. As a small-business owner, it is critical to create a plan for your digital assets after you are gone to prevent any financial and sentimental harm.

The first step is to create a list of all the digital assets that you own. Some examples include email accounts, social media accounts, bank accounts, credit card accounts, and cellphones.

Digital estate planning will make it easier for your heirs to access your digital assets as needed. For example, there may be unpaid business invoices or bills that need to be taken care of.

I recommend that you consult with an attorney, as laws and regulations surrounding data and digital assets are constantly evolving.

6. Reviewing beneficiary designations

Most assets should be included in a will or trust to ensure these assets are distributed the way you want. An exception to this is any account where you are allowed to designate a beneficiary.

Example accounts include retirement plans , investment accounts, bank accounts , health savings accounts, UGMA or UTMA custodial accounts , and life insurance policies. These accounts will bypass probate and go directly to the beneficiaries listed on the account.

Typically, you are allowed to designate a primary and secondary beneficiary. In addition, you are allowed to make changes to these designations at any point. It is a good idea to reevaluate your designations after major life events.

7. Life insurance for estate liquidity

As mentioned above, life insurance proceeds avoid probate because of the beneficiary designations listed within the accounts.

Life insurance is designed to fill in financial gaps for your heirs. This is especially important for a business owner. There may be unpaid debts, payroll, or operating costs that need to be paid. Life insurance proceeds will help ease the pain of your heirs while they devote their time to sorting out other details.

• Main content

• International edition
• Australia edition
• Europe edition

HSBC and NatWest accused of financing North Sea oil extraction despite pledge

Campaigners call on banks to cease funding Ithaca, which is playing a key role in Rosebank oilfield plan

Two major UK high street banks have been accused of continuing to finance fossil fuel expansion in the North Sea despite signing a pledge to align their activities with the net zero climate goal.

HSBC and NatWest have provided tens of millions in finance to Ithaca Energy, a British oil and gas company that is playing a key role in plans to exploit the controversial Rosebank oilfield north-west of the Shetland Islands. Another high street bank, Lloyds, also provided finance but has since sold down the debt.

A group of more than 80 organisations including Global Witness, Greenpeace and the Rainforest Action Network have written to the banks’ chief executives calling on them to cease funding Ithaca and to end their relationship with the company.

The UK government approved the exploitation of Rosebank in September last year. The UK’s largest untapped field, it is estimated to contain the equivalent of 500m barrels of oil which, if burned in its entirety, would produce 200m tonnes of CO 2 .

Ithaca Energy, which already has stakes in six of the 10 largest producing fields in the North Sea, is investing billions in Rosebank’s development in the hopes of beginning production in 2026, according to oil industry press reports. Activists describe it as a “pure play” fossil fuel company, with no publicly stated plans to diversify into green energy production.

HSBC, Lloyds and NatWest are members of the Net Zero Banking Alliance , which requires them to align the greenhouse gas emissions arising from their lending and investment portfolios to net zero by 2050 or sooner, and all have publicly pledged to stop directly financing new oil and gas projects.

But according to the Banking on Climate Chaos 2023 report, relating to finance between 2016 and 2022, Lloyds provided $78m (£61m), HSBC provided $60m (£47.0m) and NatWest provided $78m (£61m) to Ithaca.

It is understood Lloyds has since sold down its debt facilities with the company and has no outstanding lending with Ithaca.

The letter, sent on Wednesday, calls on the three banks, and nine others identified as financing Ithaca, to press the company to end its development of Rosebank, and if it does not, to refuse any further financing for it. It also calls on them to adopt a formal policy requiring clients to have a transition plan aligned with the Paris climate accords.

“Any future financing, including advisory services, to Ithaca Energy would expose your bank to significant risks if the company moves forward with the Rosebank field and other expansion projects,” the letter says. “These include risks to the bank’s reputation, possible legal and regulatory claims, as well as potential impact on investor expectations.”

Lauren MacDonald, of the Stop Rosebank campaign, said: “Rosebank is the poster child for North Sea oil and gas expansion, so why are these banks – some of whom say they no longer support new fossil fuel projects – providing billions to its minority owner, who has no plans to dial down oil and gas drilling?

after newsletter promotion

“If the project goes ahead, it will emit more CO 2 emissions than the 28 lowest-income countries produce in a year combined, while Ithaca rakes in hundreds of millions.

“If these banks are serious about their climate pledges and tackling the climate crisis, they must stop this blatant greenwashing and cease financing Ithaca until it pulls the plug on Rosebank.”

The Guardian contacted HSBC, Lloyds and NatWest for comment.

• Fossil fuels
• NatWest Group
• Oil and gas companies
• Climate crisis

Most viewed

Western banks warn of risks in EU plan to grab Russian assets, sources say

• Banks fear confiscation may expose them to litigation
• Indemnities may be tough to design, not protect banks
• Kremlin says proposals would undermine international law

'CLAWBACK'

Get a look at the day ahead in U.S. and global markets with the Morning Bid U.S. newsletter. Sign up here.

Additional reporting by Gleb Stolyarov and Kirstin Ridley in London; Editing by Elisa Martinuzzi and Alexander Smith

Our Standards: The Thomson Reuters Trust Principles. , opens new tab

Thomson Reuters

Chief companies correspondent for Russia, Alexander covers Russia’s economy, markets and the country's financial, retail and technology sectors, with a particular focus on the Western corporate exodus from Russia and the domestic players eyeing opportunities as the dust settles. Before joining Reuters, Alexander worked on Sky Sports News' coverage of the 2016 Olympics in Brazil and the 2018 World Cup in Russia.

India's Maruti Suzuki recalls over 16,000 cars

Maruti Suzuki India on Friday recalled over 16,000 units of its two top selling car models due to a defect in its fuel pump motor.

• Share full article

Advertisement

Supported by

Biden Approves $5.8 Billion in Additional Student Debt Cancellation

The incremental relief brings the canceled total to $143.6 billion for nearly four million Americans.

By Tara Siegel Bernard

The Biden administration continued its effort to extend student debt relief on Thursday, erasing an additional $5.8 billion in federal loans for nearly 78,000 borrowers, including teachers, firefighters and others who largely work in the public sector.

To date, the administration has canceled $143.6 billion in loans for nearly four million borrowers through various actions, fixes and federal relief programs. That’s the largest amount of student debt eliminated since the government began backing loans more than six decades ago, but it’s still far less than President Biden’s initial proposal, which would have canceled up to $400 billion in debt for 43 million borrowers but was blocked by the Supreme Court.

The latest debt erasures apply to government and nonprofit employees in the Public Service Loan Forgiveness program, which can eliminate their balance after 120 payments. The P.S.L.F. program, which was plagued with administrative and other problems, has improved in recent years after the administration made a series of fixes .

“For too long, our nation’s teachers, nurses, social workers, firefighters and other public servants faced logistical troubles and trap doors when they tried to access the debt relief they were entitled to under the law,” Education Secretary Miguel Cardona said.

Since those October 2021, more than 871,000 public service and nonprofit workers have received debt cancellation totaling $62.5 billion; before that, just 7,000 had reached forgiveness since the program was created more than 15 years ago.

Starting next week, borrowers who are set to receive the latest round of debt cancellation through the P.S.L.F. program will receive an email notification from Mr. Biden — a reminder of his administration’s work just eight months before the presidential election.

An additional 380,000 federal borrowers in the P.S.L.F program who are on track to have their loans forgiven in less than two years will receive emails from the president notifying them that they will be eligible for debt cancellation if they continue their public service work within that period.

Many of these borrowers have been helped by programs that tried to address past errors that may have failed to credit individuals for payments. As a result, many borrowers received account adjustments, or additional credits, pushing them closer to the repayment finish line.

Millions of borrowers with certain types of loans are still eligible for some of those adjustments, but they will need to apply to consolidate those loans by April 30 to qualify.

“There are a lot of people who need to consolidate by this deadline to benefit and potentially access life-changing student loan relief,” said Abby Shafroth, co-director of advocacy at the National Consumer Law Center. They include borrowers with privately held loans in the Federal Family and Education Loan , Perkins Loan and Health Education Assistance Loan programs, she added. (People with direct loans or loans held by the Education Department don’t need to do anything to have their payment counts adjusted; it happens automatically.)

Besides P.S.L.F., the administration has extended relief through a variety of other federal relief programs: About 935,500 borrowers were approved for $45.6 billion in debt cancellation through income-driven repayment plans, which base monthly payments on a borrower’s earnings and household size. After a set period of repayment, usually 20 years, any remaining debt is erased.

Another 1.3 million people had $22.5 billion wiped out through the federal borrower defense program, which provides relief to those defrauded by their schools.

The administration’s latest round of completed debt relief comes on the heels of its bungled rollout of the new Free Application for Federal Student Aid, or FAFSA, which was supposed to simplify the process. Instead, technical and other problems have created delays, leaving colleges without student financial information that they need to make aid offers. Students have been left in limbo, unable to make decisions on where they’ll attend college.

Tara Siegel Bernard writes about personal finance, from saving for college to paying for retirement and everything in between. More about Tara Siegel Bernard