Financial Planning: Capital and Financing – Becoming Self-Employed Part 18
How long does a financial plan actually have to be? As a rule, banks and investors expect you to provide financial planning for the next 3 years. In individual cases, however, founders also plan for 5 years. However, as already mentioned, the rule is financial planning for 3 years.
Financial planning: Foresighted to 3 years
Here, third parties can realistically understand which costs and revenues are planned by you as managing director in the first year, in the second year and in the third year. An assessment that goes even further would not be realistic in most cases, since the parameters are difficult to predict for such a long time. Therefore, banks and investors usually expect a 3-year plan from you.
Financial plan, that sounds for many first of all to something very difficult. But a financial plan is not that complex. In principle, it says how much you pay for your rent, personnel and equipment and how much you earn by selling it?
rent, personnel, goods, etc.
It’s basically a simple calculation you make for 36 months. You start with an amount for each item (rent, staff, goods, etc.) and then rise month by month (away from seasonal fluctuations). As revenues rise, so do expenses, e.g. more square metres for the warehouse, more personnel for processing orders or more material and goods that need to be financed in advance.
From the financial plan a third person can understand now relatively fast your thoughts about sales and cost planning. This gives a potential financier or investor a quick and, above all, clear impression of the valuation.
Business Idea, Validation, Financial Planning
You’ve heard and learned a lot! You can see how many parameters are involved in setting up a company. Of course, at the beginning it is important that you pursue your goal without getting bogged down in details. As described above, the challenges will not be different, but greater. At some point you will have to deal with rental contracts or think about co-founders and investors, which will inevitably lead you to articles of association. Once the contracts have been signed, no further changes are possible. We continue with the office furnishings and, of course, details such as the quality of the technical equipment. From the modern and powerful notebook for the employee to the current smartphone model and the matching, low-cost mobile phone contract behind it. Beverage deliveries, HDMI monitor cable, cleaning service, tax consultant.
Caution is better than hindsight
All are relevant items that you need to consider in your financial planning. Financial planning is a roughly structured overview that documents the monthly progress of the largest expenditures and revenues. As the founder, you estimate the potential for the next three to five years. Accordingly, you must of course also consider the increase in turnover and the opposite increase in expenditure. The more products you sell, the more staff, space and pre-financing you will need.
However, seasonal fluctuations are also visible in the financial plan. For example, if you are in the heating, sanitary and solar sectors, you have order peaks at certain cycles. Of course everyone wants to have his heating repaired shortly before the onset of winter. The same goes for the solar system, just before summer arrives. Accordingly, short-term order peaks arise, which must not only be covered by personnel, but also by preliminary investments, e.g. in material or cars for delivery and distribution of the teams on the individual construction sites. Not only our own staff, but also freelancers and temporary workers are involved when it comes to realising projects that exceed our own capacities. Accordingly, capital reserves must be available shortly before the order is placed.
Your financial planning is made exactly for such cases. Here you can, as well as potential financiers, e.g. banks or investors, from private individuals to business angels to venture capital, get an overview of what financial resources you need to spend and have ready.
How honest must a financial plan be?
I myself started completely without an investor and have always been the sole owner of my companies to this day – that’s why I didn’t need financial planning in the detailed sense until now. From my circle of acquaintances, however, I know that most figures in financial plans tend to be beautifully calculated. The costs are low, the profits extremely high. Everyone estimates their profit at 2.3 million euros in the second or third year. Realistically one is happy (then) about 20.000 €.
Reminder, 90% of companies fail in the first five years. As a rule, of course, we only hear from successful companies. The ones who really managed to climb to 2.3 million in annual sales. Sure, it helps in the search for investors, because not everyone who has capital available is also clever. Many who have inherited their capital are not the brightest pears entrepreneurially. Accordingly, you can rely on great pitches in which someone tells you how many millions you will earn together. In small talk you talk about irrelevant things, not about business. Of course you can use this circumstance. The secret: Family business with a long tradition. There are often people on the executive floor who sit here because of happiness, not because of work or performance. Accordingly, of course, they don’t check numbers so accurately and like to be blinded by big speeches. A fact that one can of course also use for oneself as an entrepreneur, especially at the beginning. You have to knock on a lot of doors but at some point the first one or two people will be there to listen.
These are the basic thoughts on business idea and feasibility.
Guideline: Setting up your own business & business plan
You want to start your own business as a real estate agent or with another business idea? We support you with tips on your business plan and concept. Whether self-employed full-time or part-time self-employed: If you want to set up your own company, you have to think about a lot, in advance and in the operative business. From the right idea to health insurance – what needs to be considered if you want to become self-employed?
There is no training or further education for entrepreneurs. Managing director is you or not. Your own ambition is always important, because this is the only way to improve, every day.
The topics at a glance: