Last updated on March 16th, 2018
A Sound financial plan is essential to determine your short-term and long-term financial goals. It also helps you in keeping your overall financial activities in check while ensuring stability and profitability.
A financial plan is a must for any organization; whether it is a new start-up or a well-established firm. The basic idea behind a financial plan is to have all the financial inflows and outflows involved in running the company listed out clearly. Just like there is planning involved in marketing a product and distributing it. Similarly, the need of having the financial plan is very necessary for organizations of all strata.
The accounting and finance logos also help in delivering out the core message of the organization. Different financial experts will have different views on what to include and what not to include in a particular financial plan. This variance is subjected to the type and size of the organization.
The below listed basic elements of Financial Plan are a must inclusion for every organization. There can be slight addition, subtraction, here and there but on the whole, these basic financial elements are recommended for every organization to have their financial plan in place.
Hare Are Key Elements Of Successful Financial Plan
01. Income Statement
This is also known as, “Profit and Loss” statement. This is the most basic and important element which is a must to be included in every financial plan. The income statement gives a clear picture of how your organization made a profit or loss in a given stipulated time. Generally, it is prepared for 3 months, so the data provides the accounting for 3 odd months. One can have an accounting and finance logo on the income statement to always keep in mind the core beliefs of the company. Various formats of Profit and Loss statement are used, but generally, they account for the following things.
- Total Revenue, i.e., revenue earned through the sale of goods and services.
- Cost of goods sold, i.e., the cost price involved in making of those goods (In service sector, listing of services can be different)
- Subtracting Total Revenue with Cost of goods(COGS) will give you the profit or Gross Margin
These three items; Revenue, COGS and Gross margin help the organization decide their course of action. They are quite essential to map.
- Then there are some fixed operational costs, like rent of the place, electricity charges and etc. These costs are fixed and will not change.
- Subtracting these costs from Gross Margin will give you the operating income.
This operating income is the income which has not been subjected to any sort of tax, or interest. This is also called profit before tax or earning before tax and interest (EBIT).
EBIT- tax & interest =Net Profit.
This gives the organization net income or net profit. The above basic analysis is very crucial in every organization, though formats can vary from one type of organization to other.
02. The Statement Of Cash Flow
This is an essential statement, often referred to as Cash Statement. No business runs without cash. This statement accounts for how much cash is flowed in, how much has gone out and how much is left at the end of the month. This statement is prepared monthly. It is very different from the income statement. It is not possible to gauge and estimate from income statement as how much cash is left at the end of the month.
The income statement might be predicting that the company had a profit, but it might be out of cash owing to various reasons. It might have to procure the payment from a client, which got delayed and other possible reasons can lead to such situation. Also, the income statement can show a loss, but the company might have a good amount of cash. This will allow the company to go on for few months and make quick adjustments here and there to generate profit cycles.Besides, the cash statement also gives a good idea to lenders and investors about the inflow and outflow of cash of the company.
The need of a cash statement can be very well understood through an example. Let me share an example.
For instance-Suppose a particular company ‘A,’ is to organize a trekking event in the month of August. It has received payments from trekkers for the event in April. If we were to go with the income statement, then, we will come to the simple conclusion that the company is in profit for the months of April, May, June, and July. The major expense will happen in the month of August, and as per income statement, it will show a loss. Therefore, it is difficult to gauge the performance of the company by totally depending upon the Income statement. This method is referred to as cash method of accounting.
There is another method which is referred to as accrual method of accounting. Considering the above example, in accrual method of accounting the revenues and expenses will be taken into account in the month of August, i.e., at the time when real revenue and expense is going to happen. This helps to gauge the performance of the company in a better way.
Depending on what suits the company, accrual method or cash method of accounting is used.
03. Updated Balance Sheet
If someone wants to know about the financial situation of the company quickly, he or she should look for the balance sheet. It gives the summarized understanding of the finances of the organization. The balance sheet consists of assets, which are; inventories, current money in the bank, money to be received and etc.
It also consists of liabilities and equities. Liabilities include; credit card bills to be paid, loan amount installment, accounts which need to be paid and etc. Equities are investor’s shares, retained earnings, stocks, etc.
The assets of the company must be equal to the sum of its liabilities and equity.
Assets = Liabilities + Equity
It is very necessary to maintain fair and up to date balance sheet. No matter what is the size of your organization, if you are into business, you ought to have a balance sheet. Moreover, the accounting and finance logos designed by Designhill as per the demand of the organization can be effectively used on Balance sheets to be always reminded of the values and beliefs of the company.
04. Forecasting Sales Is Important
The need to prepare for your upcoming sales is perhaps the talk of every business. They prepare ample plans for their short term profit and long term retaining of the customer. Forecasting sales is very important from the perspective of lenders and investors, as a good detail forecast will bring about a certain sense of certainty in the uncertain world.
Different businesses have different approaches while preparing their forecast sales. For e.g., sports equipment seller would prepare a different forecast for a Baseball, and Tennis Racquet. The anticipation of upcoming festivals or any event is also taken into account.
While making the forecast of the sales, it is also required to forecast the cost of goods sold (COGS), which will actually help the organization to forecast the Gross margin. The process of forecasting has been and will always be an ongoing process.
05. Break-Even Picture
In simple terms, Break-Even examination will allow you to have a clear picture on how much must be sold at what rate to at-least recover the cost involved in making the product or providing that particular service.
Let’s look at the example of a mobile retailer. On one mobile if the retailer is earning a margin of 20 dollars and in total, he has 10 mobiles in his shop. The cost of each mobile is assumed to be 50 dollars. Then the total expense of the retailer is 500 dollars. The rent of the shop including electricity is 60 dollars per month, and then the total expense of this particular month of the retailer is 560 dollars. The break-even analysis will tell us that the retailer will have to sell at-least 8 mobile phones to break even.
This analysis will give a clearer picture to the seller as to achieve a particular minimum target. He or she can then use his business acumen to cut other unnecessary costs, in order to earn good amount of profit.
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06. Tax Management And Planning
Many people overlook this aspect of the financial planning, perhaps because of the lack of knowledge on how to make necessary investments to minimize the cumulative effect of taxes on the organization or individual income. There are various strategies to efficiently manage your income. For example: If you hold the corporate bonds in a tax-deferred account, then it will benefit you more. The municipal bonds will yield good benefit if they are kept in the taxable account.
It is very important to keep visiting your financial plan and work tirelessly to improve it, incorporating new efficient ways to make it. It should be approached with an attitude of playing a game. More enjoyable the process becomes for a particular individual or group of individual, the more productive financial plan is made.
There is a growing demand of accounting and finance logos as financial firms and accounting companies also need to create a brand identity in the marketplace. A well-designed, professional logo design helps financial firms in establishing their credentials while conveying the message of trust to their clients. Besides, logo also helps in displaying the belief and values of the company externally and internally. To get such visually attractive and impressive financial logo, Designhill is the best place and the company has already created many successful logos for a great no. of financial firms & organizations.
Lastly, the basic idea here is not to make more and more profit on a short term basis; rather the continual good growth of the company for the long run. The tradeoff between short term planning and long term planning is a must. Different organizations will have different requirements; therefore sticking to the prescribed standard procedures is never a good idea. Taking references is always a good idea but you need to analyze what is good for your company in the given scenario and condition.