The Importance of Financial Planning For Entrepreneurs

Financial planning as the basis

Before a financial plan is drawn up, the question of which type of profit calculation is available must be clarified. On the one hand, there is the income-surplus-account, on the other hand, the accounting. If the entrepreneur opts for the income-surplus account, all income and expenses are recorded and offset according to the so-called inflow and outflow principle.

This means that all income and expenses must be recorded and booked in the month they were received or drained. The accounting is a comparison of business assets. A so-called profit and loss account is created here.

The realization principle applies here. The income and expenses must, therefore, be recorded in the month in which they actually arose. Once the entrepreneur has clarified the question of how to determine the profit, he can deal with financial planning.

The focus is on income and expenditure.

Of course, the focus is on income and costs. What is the expected monthly turnover? Is there sometimes the possibility that money – for example, through IG online trading – is made that is not obtained from direct sales? Are there financial reserves that can also be used if the monthly sales remain below expectations?

A question that absolutely needs to be clarified: How high do the monthly sales have to be so that the costs can be covered? To do this, of course, the entrepreneur needs to know what costs can be incurred.

Many expenses can be calculated relatively accurately; other expenses are subject to an estimate, whereby the entrepreneur should be careful not to calculate too narrowly. In the end, the fact that you have achieved a higher profit is far more pleasant – if the entrepreneur realizes that he has calculated too tightly. The estimated expenses are significantly higher; he gets into financial difficulties.

Of course, the personnel costs must be taken into account. Which positions will be filled? How many jobs and tasks can one employee take on? How many employees are needed? How high are the individual salaries of the employees?

What social security contributions have to be paid? These costs are particularly important and should be calculated precisely. Ultimately, these are monthly expenses that the entrepreneur should not underestimate.

Another point is depreciation. If high investments in fixed assets are necessary, the depreciation naturally also has an impact on the profit and loss account. The acquisition costs are divided over a fixed period of time – this is referred to as the useful economic life.

Of course, there are also other costs that can only be calculated in advance to a limited extent. These are marketing, infrastructure, and various other costs. These include rent regulations, maintenance, advertising, travel costs, and telephone and internet costs.

Many entrepreneurs forget about the costs of so-called capital services, which, however, can not be underestimated. This includes an interest in financing.

All costs that are not related to “ordinary business activity” must be recorded in a neutral or extraordinary result. For example, these are investment grants that were paid in advance through subsidy programs and sometimes had to be repaid.

The three most important key figures

There are three key figures in financial planning that should definitely not be missing. These are “gross margin,” “EBIT,” and “free cash flow.” “Gross Margin” (Sales – COGS – CAC)> 0) shows the entrepreneur how much he earns on the units sold after all previous costs have been subtracted.

The value must always be greater than 0 – if, on the other hand, it is less than or equal to 0, the entrepreneur is making a negative deal. “EBIT” (profit before taxes) clarifies the question of when the entrepreneur earns money. So how high does the so-called break-even turnover have to be for the company to achieve a plus? The “free cash flow” is nothing other than the money in the entrepreneur’s account and is therefore available.