The Importance of a Financing Plan in Business: A Comprehensive Guide

The Importance of a Financing Plan in Business

What is the financing plan? How do you develop a business plan to finance your project?

This article explains the importance of a financing plan when setting up a business. The financing plan is a financial document that lists the company’s needs and resources, allowing financiers to verify that the project is being funded efficiently and in a balanced manner. The article provides guidance on how to develop a financing plan, with a focus on determining sustainable needs and resources, calculating working capital requirements, and creating a temporary financing plan over several years. A 3-year financing plan is recommended to ensure that the financial structure of the company is strengthened and sustainable over the foreseeable period considered. The article also discusses the benefits of a financing plan, such as using it as a strong argument with potential investors or letting the accountant make adjustments.

A financing plan is an integral part of the financial projections when setting up a company. This accounting document is an excellent support for analyzing to determine if your project is viable and then planning financing for the life of your business. How is this financial table built and with what data? What is its role in your business plan? In the end, how do we analyze it? All answers are in this article.

What is the financing plan?

A financing plan is a financial document in the form of a table that lists your needs and resources.

  • Needs: Represents what the company must finance at start-up. Investments vary during the launch, it could be a website for an e-dealer or machines for a shoe manufacturing company…
  • Resources: are the means available to the firm that can come from different actors: subsidies, honor loans,

Why should you develop a financing plan?

The financing plan is dealt with directly and with priority for the financiers, and this accounting document allows them to be assured of the following points:

  • Checking whether the project is being funded efficiently and in a balanced manner
  • Monitor and measure the risk taken by the project leader
  • You have a global vision for finance

In addition, studying this financing plan also makes it possible to answer practical, if not fundamental, questions such as:

Is this the right time to start my business?

If the plan reveals funding instability, this is a sign that should warn of hypothetical bankruptcy.

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Should the business model be revised?

If finance highlights risk or fragility, it alerts you to the need to reduce sustainable needs. This can mean leasing equipment rather than an outright acquisition, or considering new cash.

In the context of project financing and incorporation, whether it is project creation, acquisition or development, there are two types of financing plans: initial and over several years.

Initial financing plan

As its name suggests, the initial funding plan is for starting a project. In this case, it is about taking an inventory of the sustainable needs necessary for the startup and all the sustainable resources used to fund it.

To implement the initial financing plan, two actions are necessary:

  • Calculating sustainable needs related to the project;
  • Attach resources to support these needs.

This type of financing plan makes it possible to verify that the sustainable needs necessary to start the project have the ability to be funded by committed financial resources.

A temporary financing plan over several years

This table starts from the initial financing plan and includes new data regarding the development and growth of the activity over the predetermined years. The most common practice is a term of 3 years.

The new data is:

  • In terms of sustainable financial resources: we will find potential self-financing potential, potential reduction in working capital requirement rate, and contributions to own funds or to borrowed funds.
  • In terms of sustainable needs: repayment of borrowed funds, increase in working capital, dividends, as well as recent or new investments.

Thanks to the financing plan over several years, you have the possibility to ensure that the financial structure of your company is strengthened and sustainable over the foreseeable period considered.

On the contrary, if the situation is deteriorating, it is necessary to rethink the process and consider taking measures to prevent the company from facing financial complications in the medium or long term.

The objective of the financing plan is for a period of 3 years

A 3-year financing plan will allow you to verify that your company has sufficient financial resources to cover its current and future needs. It also highlights the development of foreign investments (eg loans or subsidies). So it is an essential element for the sustainability of your business.

It’s also a strong argument with potential investors. Thus, if you apply for a professional loan, your bank can use this document to assess your debtability (the share of the amount borrowed in relation to your personal contributions) and your ability to repay.

Finally, you have the advantage of letting your accountant make adjustments. The latter can, for example, add a cash line to anticipate unexpected expenses.

How do you create a financing plan?

1. Determine your sustainable needs

It is a matter of deciding what you need to start the business, what are your initial investments.

Determine your long-term fixed assets, that is, assets that you must own for at least 12 months (the duration of an accounting year). So it should not be confused with fees and charges that are made in the short term.

Obviously, the nature of these different needs varies greatly from company to company. A financing plan for a restaurant will not be the same as a mortgage plan, for example.

To understand this, here are some examples of fixed assets to consider:

Tangible Fixed Assets:

Machines,

computer equipment,

vehicles,

constructions

furniture,

land, etc. ;

Intangible assets:

software,

the site,

trademark registrations,

advertising and marketing,

customer files,

business funds,

rental rights,

duty-free entry fee,

licenses

Research and development costs, etc. ;

fixed financial assets,

Warranties

Security deposits, etc.

Then report this information in your table by indicating the amounts including VAT, or excluding VAT provided a clause related to VAT is added.

Be careful, and never underestimate your needs, at the risk of not assessing the resources needed as accurately as possible.

2. Calculate your working capital requirements

Working capital results from the timing of cash flows related to payments and receipts. Example: A company purchases inventory of products from its suppliers, before collecting payments due for the purchase of those same products by its customers.

As part of the financing plan, calculating the working capital requirements (or BFR) makes it possible to expect to fill this gap. The following calculation is generally applied:

Initial Equity + Operating Expenses Payable Upfront + VAT Credit

 In the initial financing plan, specify the total working capital requirements. On the other hand, for financing plans over several years, populate them as they differ from previous periods.

3. Identify all of your resources

The financing plan also includes the sustainable resources and amounts available to you.

Here are the different types of resources that are most popular:

  • Private Funds:
  • cash contributions
  • in-kind contributions,
  • take bank loans,
  • Contributions to partners’ current accounts,
  • Bonuses and grants.

 Include in your financing plan only those resources that you have for sure. For example, if you didn’t get confirmation of the grant agreement, don’t mention it.

4. What about the financing plan over several years?

The multi-year financing plan is based on the initial financing plan. Then complete the new items that appeared during each accounting year. For example:

On the resource side:

  • new loans
  • new rewards or subsidies,
  • new capital contributions,
  • decrease in working capital,
  • The ability to self-finance.

Self-financing capacity, also called CAF, is the difference between disposable products and disposable expenditures.

On the needs side:

  • New investments are planned to ensure the sustainability of the company,
  • Repayment of loans or current accounts of partners,
  • Dividend
  • Increase in working capital requirements.

5. Analyze your financing plan

Once you have finished your table, it is advisable to do an analysis to check if you will not be in danger of diving.

Some points needing your attention:

  • Is your cash balance positive? Otherwise, it means the balance has not been reached, you are already exposed.
  • Do you see an excess of resources over needs? This surplus often turns out to be necessary to build up cash flow to cover unexpected expenses.
  • What is the ratio between the resources provided by your own funds and those provided by various loans? In fact, the financial risk incurred is lower if your equity is greater than the loans.

Armed with these various outcomes, you will then be able to plan for adjustments, such as reducing your needs (of course, within reason with regard to achieving your business goals).

6. Interpret your financing plan

To ensure the validity of your financial profile, the banker will check that the sum of needs is equal to or less than the sum of resources. Ideally, you should leave your surplus resources with enough margin in case of unforeseen events or a drop in activity.

If the needs greatly affect the balance of the financing plan, it will be necessary to provide other sources of financing, possibly external. Be aware that if you apply for a bank loan, you will need to justify a personal contribution sufficient to reassure the bank.

Create a multi-year vision for your fundraising plan. For example, don’t forget to include changes in working capital requirements and earnings over several accounting years. The initial financing plan should evolve into a temporary financing plan.

Projected balance sheet, projected income statement, financial ratios (payment capacity, break-even point, etc.) or even market research is done along with the financing plan in the business plan. These financial projections are essential to the success of your venture and should not be overlooked.

The difference between a financing plan and a cash flow plan

A cash flow plan is one of the four main schedules of a financial business plan, which are composed as follows:

  • Preliminary financing plan
  • Projected income statement
  • cash flow plan
  • 3 year future plan

The cash plan features a table in which all planned receipts and payments are mentioned during the first year of your company’s activity, and distributed month by month.

The financing plan table, for its part, is presented in two columns that define on the one hand your investment needs, including the needs of working capital requirements in working capital and on the other hand your resources in terms of financing (loans and personal contribution).

The difference between resources and needs determines either a cash surplus or a cash shortage.

some advices

Be careful not to underestimate your financing needs. It will always be difficult to request resources a second time if this is not planned.

Remember not to put all of your finances into your creation from the start: you must also be able to hold on to the personal side or return capital if necessary.

State only what is certain: for example, if you depend on a subsidy but do not have certainty, do not refer to it or reduce its value to account for its random nature. Do not forget that the bank will analyze your financing plan to check your ability to repay the loans. Unable to get a loan in a solid financing plan. Balance sheet analysis is also essential (equity, liabilities, etc.). The role of the financing plan is also to determine your ability to meet new investments in the future.

common questions

What is the financial plan for the business creation project?

A financial plan is a forecast table that can be found in a business plan. The creator of the company must have a good understanding of its content, especially to be fully aware of the risks that he is exposed to in the framework of the project.

What are the stages of the financial study work?

The financial study should include three main parts:

investment plan,

projected income statement,

and cash flow chart.

Who can make a financial plan?

A financial plan is often a legal obligation when companies are set up; It must be submitted with a notary public. The forecast should cover the first three years of activity. In the event of bankruptcy during this period, the commercial court may request the submission of this plan.

How is the financial study conducted for a project?

The first stage of the financial study is to conduct a strategic financial analysis of your project; In other words, you must determine the future opportunities of your company, as well as the difficulties that it may encounter, in the short, medium or long term.

Who sets the temporary budget?

The interim budget can be drawn up by the manager himself, the financial director of the company or the accountant

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