Purpose of a Financial Plan
When we gave an overview about writing a business plan, we had said that there could be several reasons behind writing a business plan. Besides serving the purpose of being a documented blueprint of your thoughts on running the business, one of the most common purposes behind a business plan relates to the funding needs. Your business plan is the only document through which you can communicate the proposed road map laid out by you to potential investors and other funding agencies about your business.
Why do you need potential investors or funding agencies, and who are these possible targets? Any business is funded by a combination of the promoter's equity, equity contributions from other 'owners, retained earnings pumped back into the business, Grants received, and various types of Loans - long-term and short-term loans. As you grow, (or in some cases, while starting up a new business itself), you quite often need additional funds over and above what the original promoters and internal generation from the business can sustain. In such cases, the additional funding needs can be met by:
- Private equity investors
Venture Capital Partners
- IPO (for large public equity funding)
- Banks and financial institutions for long-term loans as well as short-term working capital needs
- Private lenders etc...
All these potential investors, and funding agencies, are interested in knowing all the components of your business plan - the marketing strategies yo propose to use, the operational plans, your human resources strategies etc... Besides all these, from a funding point of view, they are most interested in your bottom lines - as reflected in the crucial business financial plan, since that is the real indicator of the health of your business. We will now see what is needed to prepare the financial plan for your business.