Sound financial management is one of the best ways for your business to remain profitable and solvent. How well you manage the finances of your business is the cornerstone of every successful business venture. Each year thousands of potentially successful businesses fail because of poor financial management. As a business owner, you will need to identify and implement policies that will lead to and ensure that you will meet your financial obligations.

To effectively manage your finances, plan a sound, realistic budget by determining the actual amount of money needed to open your business (start-up costs) and the amount needed to keep it open (operating costs). The first step to building a sound financial plan is to devise a start-up budget. Your start-up budget will usually include such one-time-only costs as major equipment, utility deposits, down payments, etc.

The start-up budget should allow for these expenses.

β€’ Start-up Budget
β€’ personnel (costs prior to opening)
β€’ legal/professional fees
β€’ occupancy
β€’ licenses/permits
β€’ equipment
β€’ insurance
β€’ supplies
β€’ advertising/promotions
β€’ salaries/wages
β€’ accounting
β€’ income
β€’ utilities
β€’ payroll expenses

An operating budget is prepared when you are actually ready to open for business. The operating budget will reflect your priorities in terms of how you spend your money, the expenses you will incur and how you will meet those expenses (income). Your operating budget also should include money to cover the first three to six months of operation. It should allow for the following expenses.
β€’ Operating Budget
β€’ personnel
β€’ insurance
β€’ rent
β€’ depreciation
β€’ loan payments
β€’ advertising/promotions
β€’ legal/accounting
β€’ miscellaneous expenses
β€’ supplies
β€’ payroll expenses
β€’ salaries/wages
β€’ utilities
β€’ dues/subscriptions/fees
β€’ taxes
β€’ repairs/maintenance

The financial section of your business plan should include any loan applications you've filed, a capital equipment and supply list, balance sheet, breakeven analysis, pro-forma income projections (profit and loss statement) and pro-forma cash flow. The income statement and cash flow projections should include a three-year summary, detail by month for the first year and detail by quarter for the second and third years.

The accounting system and the inventory control system that you will be using is generally addressed in this section of the business plan also. If a franchise, the franchiser may stipulate in the franchise contract the type of accounting and inventory systems you may use. If this is the case, he or she should have a system already intact and you will be required to adopt this system. Whether you develop the accounting and inventory systems yourself, have an outside financial advisor develop the systems or the franchiser provides these systems, you will need to acquire a thorough understanding of each segment and how it operates. Your financial advisor can assist you in developing this section of your business plan.

The following questions should help you determine the amount of start-up capital you will need to purchase and open a franchise.

β€’ How much money do you have?
β€’ How much money will you need to purchase the franchise?
β€’ How much money will you need for start-up?
β€’ How much money will you need to stay in business?

Other questions that you will need to consider are:

β€’ What type of accounting system will you use? Is it a single entry or dual entry system?
β€’ What will your sales goals and profit goals for the coming year be? If a franchise, will the franchiser set your sales and profit goals? Or, will he or she expect you to reach and retain a certain sales level and profit margin?
β€’ What financial projections will you need to include in your business plan?
β€’ What kind of inventory control system will you use?

Your plan should include an explanation of all projections. Unless you are thoroughly familiar with financial statements, get help in preparing your cash flow and income statements and your balance sheet. Your aim is not to become a financial wizard, but to understand the financial tools well enough to gain their benefits. Your accountant or financial advisor can help you accomplish this goal.

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