FINANCIAL PLAN: ANALYSES
In some cases, it is necessary to examine specific aspects of the company’s financial position more closely. The goal is to answer the questions that most entrepreneurs face in the startup phase:
- How do deviations in revenue from the planned figures affect the company?
- Can the company repay its debts on time?
- How long does it take for the company to recoup its initial investment?
- How much does the company need to produce or market at a minimum to be profitable?
Answers to these questions can be provided by various financial analyses in the business plan.
Scenario analysis
There is often a desire to incorporate various scenarios into a plan to prepare for corresponding countermeasures. Typically, three basic scenarios are considered: a negative (Low Case), a positive (High Case), and a standard scenario (Base Case). The standard scenario is the most probable.
This method takes into account various factors that influence a company’s profit and analyses their mutual dependencies. Potential factors that are considered include:
- Number of customers/sales
- Percentage of variable or fixed costs
- Amount of required investments
- Taxes, etc.
Such an analysis is complex, and not all the mentioned factors need to be examined in every case. Therefore, most often, only the impact of the number of customers or sales is analysed.
Sensitivity analysis
Sensitivity analysis, in general, shows the impact of changes in input data on the final outcome. This analysis demonstrates how sensitive a system is to changes.
This analytical method determines which factors have a greater or lesser impact on a company’s profitability. The larger the range of variation in the parameters of the analyzed factors that have a positive impact on returns, the more sustainable the company or project is. Variable inputs that can be considered include sales volume, unit price, investments, operating costs, payment terms, loan interest rates, discounts, etc.
One of the weaknesses of this analysis method is that it only considers changes in selected factors. At the same time, these adjustments can lead to changes in other factors that are no longer considered in the analysis. Furthermore, this method does not indicate the probability of changes in key factors or their combinations.
Break-Even analysis
The break-even analysis shows how many products must be produced and sold (or services provided) to neither make a profit nor incur a loss after deducting all costs. This is a central tool for business planning.
It analyses a combination of the following factors: quantity sold, price, variable costs, and fixed costs. In break-even analysis, it is assumed that three of the four factors mentioned above are known, and the value for the fourth factor is calculated. This analysis answers the question for the company of how much or at what price goods/services must be sold to remain profitable.
Capital planning
This analysis examines how much capital a company needs until it becomes profitable. It also shows whether the expected cash flows from an investment are truly high enough to service a loan. A company’s liquidity is influenced by various factors. Being in the black in the income statement does not always mean that a company has sufficient liquidity. The issue becomes particularly acute when a company has a very limited budget or the first signs of a corporate crisis are evident. A situation of tight liquidity and simultaneous profitability is typical for rapidly growing startups because while profits are recognised on a accrual basis, the cash flow reflects the actual outflow of money.
Business valuation
The fair value of a company can be determined through various methods. The usefulness of such a valuation is important in the following two cases:
- When the company is in an active development phase and is seeking to attract investors to provide additional capital for growth.
- When the company is already well-developed, and the owners wish to sell the company or explore options for its sale.
In these cases, there is often uncertainty about the value of the company and what constitutes a fair price. Different methods can be used to determine the fair value of the company.
Investment analysis
Investment analysis is primarily conducted when there is a question of a significant investment (representing more than 50% of the company). This process assesses the profitability of an investment to facilitate an objective decision-making process for or against the project. The most commonly used methods for investment analysis are the Payback Period method, Net Present Value (NPV) method, and Internal Rate of Return (IRR) method.
Small startups in the early stages of their existence should pay close attention to this aspect, especially if they require additional capital. As financing startups carries higher risks, these investments must be analysed meticulously.
Whether it is necessary to include specific analyses in the business plan depends primarily on the project’s goals and nature. It is advisable to consult our expert team for qualified recommendations on this matter.