Financial Plan

You will need to elaborate forecasts of your financial situation and needs.

Note 7 Financial forecasts for your business plan

The most important for starting up and growing your institution is to raise sufficient revenue to support your expenses. Be aware of foundation support by donors - it is great and often necessary to get additional funds for initial expenses (e.g. office equipment, furniture, building up a library, etc.) BUT your institution will need to survive in the coming months and years without these means!

Cash-flow forecasts

The cash-flow is calculated in adding all cash (money) inflow and deducting all cash (money) outflow of a respective period in time. The cash-budget is the sum of total cash reserves minus/plus cash-flow of a the respective period. The cash-budget thus summarises the total money available to your institution for payment of bills and salaries in the respective period. It indicates if you will need additional cash in order to pay for the invoices and expenses of your institution or if you will have enough in the respective period.

You will have to consider that selling a product or service does not automatically mean that the money is immediately available to you (cash-inflow). The client will first have to physically transfer the money to your bank account or your cash safe. This transfer often takes more than 4 weeks from issuance of the invoice.

When starting up your institution you will normally have to spend money before you will receive any from your sources of income. You will need to have some starting capital (private funds of foundation team, foundation funds from donors, etc.) in order to pay the first bills. In financial terms, your cash-flow will be negative and your starting cash reserves will be reduced.

Therefore, you need to plan how much of this starting capital you will need and how much cash you will have to receive from your clients and members in a certain period of time in order to pay all the bills accrued by then. Selling alone will not be enough, your clients will have to pay the money to you before you can count it as cash-inflow.

Basically you will need to answer the following questions:

·       How much cash/money will our institution need in year x (quarterly)?
(Differentiate start-up investments and ongoing cash need for your regular activities!)

·       How much revenue will you need to generate in year x (quarterly) in order to pay your bills and have enough cash to sustain your operations?

·       What are the basic assumptions for your forecasts? E.g., quarterly estimation of revenue and expenses, payment terms to customers, payment terms with our suppliers, time need from donor acceptance till money is transferred, etc.

Your first cash-flow forecast will be the basis for your financial management in later phases of your existence. Take enough time to go through this planning effort! In case your cash-flow seems to be negative you will need to broaden your income sources or review if all of your planned expenses are really necessary. In this regard you should also check the payment terms of your suppliers and those you plan to grant to your clients. Try to issue invoices immediately after they become effective. In the beginning you might also ask your clients to make an advance payment in order to cover for any expenses necessary to render a service like for example professional training.

Establish your forecast with the help of a template cash-budget.

(Copyright UNESCO, The Community Tele Center Cookbook for Africa)

Budget

The budget forecasts your income and expenses in a certain period of time.

In the first year of your existence you will need to separate

·    Start-up expenses: furniture, registration fee, lawyer fee, utility deposits, market survey, etc.

·    Fixed expenses: electricity, rent, administrative staff, etc.

·    Programme expenses: directly linked to your activities, e.g., trainer fees, venue rental, etc.

The separation between expenses only linked to your activities and general expenses is very important. It allows you to calculate how much expenses are involved by your activities and how much by your pure “existence”. The expenses for your pure “existence” should be kept as low as possible and need to be covered either by additional income from your activities or by separate funds (private savings, donations, member fees, etc.).

At year end the actual income and expenses are summarised in the income statement of your accounting system. This is how you will calculate your profit or remaining “contribution”. The income and expense statement also indicates the actual structure of your expenses and income (e.g. % of staff expenses in relation to total expenses, % of training income in relation to total income, etc.).

In the financial management section you will learn about the importance to compare planned budget with actual income statement and analysis of the variations.

Note 8 Differences between cash-flow forecast and budget

Establish your income and expense forecast with the help of a template business plan budget

Balance sheet projections

The balance sheet summarises the value of your assets and liabilities and capital at a given point in time. The balance sheet therefore indicates how the funds of the institution have been invested. In your business plan you will forecast how the existing and expected funds will be invested in your institution.

Depending on your country's accounting standards the balance sheet will look differently, but it will be based on the same principles:

-      current assets are short term “liquid” assets that means they can be transferred into cash immediately or within less than one month (outstanding client accounts, bank accounts, stock/inventory)

-      fixed assets are capital goods and intangible assets (furniture, equipment, houses, apartments, licenses or patents, etc.)

-      current debt to be payable within one year (outstanding supplier accounts, short term bank credits, etc.)

-      long-term debt (long term bank credits, mortgages, etc.)

-      capital or equity (contributions from members and donors, incorporated profits and reserves)