When a company embarks on a project or seeks to develop, the issue of managing its financing is crucial. Indeed, to carry out its projects, a company must be able to have the necessary financial resources.
The financing plan is therefore an essential element of the company’s financial management. It consists of identifying the different sources of financing available to the company, determining the financial needs related to its projects and establishing a debt repayment schedule.
Below, we will discuss the different components of a business financing plan. We will thus see the internal and external sources of financing, as well as the financial forecasts which make it possible to determine the financing needs in the short, medium and long term. We will also discuss the financial analysis which makes it possible to evaluate the profitability and the capacity of the company to repay its debts. Finally, we will emphasize the importance of good management of the financing plan for the sustainability of the company.
The Components of the Business Financing Plan
1. Internal company resources
The company’s internal resources correspond to the equity generated by the company itself. They can be distinguished into three categories: equity, retained earnings and self-financing.
- Equity: Equity consists of funds contributed by the shareholders and partners of the company. They represent the part of the capital which is not refundable. Equity allows the company to finance its projects without having to incur debt.
- Reserved profits: Reserved profits correspond to the profits that the company has made, but which have not been distributed to shareholders in the form of dividends. They can be used by the company to finance its projects.
- Self-financing: Self-financing corresponds to the funds generated by the company itself from its activities. It can come from retained earnings, but also from the management of the company’s assets, including the management of inventory, trade receivables and payables.
2. External company resources
The company’s external resources correspond to the funds obtained by the company from third parties. They can be divided into several categories: bank loans, crowdfunding, bonds and honor loans.
- Bank loans: Bank loans are loans granted by banks to the company. They can be short, medium or long term and are repayable according to a determined schedule. Bank loans are often used to finance large investments.
- Participatory financing: Participatory financing, also called crowdfunding, is fundraising carried out with the general public. Individuals can invest in the company in exchange for financial compensation.
- Bonds: Bonds are debt securities issued by the company. They are repayable on a fixed date and generate interest for investors.
- Honor loans: Honor loans are zero-interest loans granted to companies by public or private bodies. They are intended to support companies in the creation or development phase.
3. Financial forecasts
In a financing plan, the financial forecasts make it possible to determine the company’s financing needs in the short, medium and long term. They include in particular revenue forecasts, expense forecasts, investment forecasts and cash flow forecasts.
- Short-term financial needs: Short-term financial needs correspond to the funds needed to meet the company’s current expenses, in particular operating expenses and working capital requirements.
- Medium-term financial needs: Medium-term financial needs correspond to the funds needed to finance the company’s investments over a period of one to five years.
- Long-term financial needs: Long-term financial needs correspond to the funds needed to finance the company’s investments over a period of more than five years. They often concern large-scale projects such as the creation of a new production unit, the acquisition of new equipment or the extension of premises.
4. Financial analysis
The financial analysis makes it possible to assess the financial health of the company and its ability to repay its debts. It is based on several financial ratios such as the debt ratio, the profitability ratio, the liquidity ratio and the financial expense coverage ratio.
- The debt ratio: The debt ratio corresponds to the share of debts in the total financial resources of the company. It assesses the company’s ability to repay its debts.
- The profitability ratio: The profitability ratio measures the profitability of the company. It is calculated by dividing the net result by the turnover or by the shareholders’ equity of the company.
- The liquidity ratio: The liquidity ratio measures the ability of the company to meet its short-term maturities. It is calculated by dividing the liquid assets by the current liabilities of the company.
- Financial expense coverage ratio: The financial expense coverage ratio measures the company’s ability to repay its debts. It is calculated by dividing the operating result by the company’s financial expenses.
In short, the financing plan is a key tool for the company’s financial management. It makes it possible to determine the company’s financing needs, to identify internal and external sources of financing, to forecast short, medium and long-term financial flows and to analyze the financial health of the company. Good management of the financing plan is essential for the sustainability of the company and must be put in place from the start of the activity.
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