Many small businesses lack a complete financial plan, even though evidence shows it is essential to the long-term success and growth of any business.
For example, a study published in the New England Journal of Entrepreneurship found that entrepreneurs who have a business plan are more successful than those who don't. If you're not sure how to get started, keep reading for his 6 key ingredients for successful small business financial planning.
What is a business financial plan and why is it important?
A business financial plan is an overview of a business's financial situation and future projections of growth. A company's financial plan typically consists of six parts: sales forecasts, expense expenditures, statement of financial position, cash flow forecasts, break-even analysis, and business plan.
A good financial plan can help you manage your cash flow and prepare for months when your income is lower than expected. It also helps you budget your daily and monthly expenses and plan your annual taxes.
Importantly, financial planning helps you focus on the long-term growth of your business. That way, you won't get too caught up in your daily activities and lose sight of your goals. Focusing on the long-term vision helps prioritize financial resources.
A financial plan should be developed at the beginning of each fiscal year, in collaboration with finance, human resources, sales, and operations leaders.
Six elements of successful financial planning for your business
1. Sales forecast
You need estimates of sales revenue by month, quarter, and year. Identifying patterns in your sales cycle helps you better understand your business, and this knowledge is invaluable when planning marketing and growth strategies.
For example, a seasonal business can aim to increase off-season sales and eventually become a year-round business. Understanding how the rise and fall of a business is related to factors like weather and the economy can make you better prepared for another business.
Sales forecasts are also the basis for setting growth goals for a company. For example, he could aim to increase sales by 10% compared to each previous period.
A full expense plan includes regular expenses, expected future expenses, and related expenses. Regular expenses are the current, ongoing costs of your business, including operating expenses such as rent, utilities, and payroll.
Regular expenses relate to standard business activities that occur each year, such as conference attendance, advertising and marketing, and office holiday parties. It's a good idea to differentiate between essential expenses and expenses that can be reduced or eliminated if necessary.
Expected future costs are known future costs, such as tax rate increases, minimum wage increases, or maintenance needs. Generally, a portion of your budget should also be allocated to unforeseen future expenses, such as damage to your business from fire, flood, or other unforeseen disasters. Planning for future expenses can ensure that your business is financially prepared through budget cuts, increased sales, or financial assistance.
Related expenses are the estimated costs of various initiatives, such as acquiring and training new employees, opening new stores, and expanding delivery to new regions. Accurately estimating related expenses helps you better manage growth and prevent your business from exceeding its cost capabilities.
Understanding how much capital is needed to achieve various growth goals, as well as expected future expenses, will help you make the right decisions about financing options.
3. Statement of financial position (assets and liabilities)
Assets and liabilities are the basis of a business's balance sheet and are the main determinants of a business's net worth. By tracking both, you can maximize the potential value for your business.
Small businesses often underestimate their assets (machinery, real estate, inventory, etc.) and do not properly account for unpaid invoices. The balance sheet provides a more complete picture of the health of your business than the income statement or cash flow report.
The income statement shows the performance of a business over a specific period of time, while the balance sheet shows the financial position of a business on a specific date.
4. Cash flow forecast
You need to be able to predict cash flow on a monthly, quarterly, and annual basis. Forecasting your annual cash flow can help you stay ahead of financial problems and challenges.
It also helps you identify cash flow problems before they negatively impact your business. You can set optimal payment terms, such as the amount of upfront payment and the number of days you plan to pay after billing.
Cash flow forecasting gives you a clear idea of how much money you expect to have left over at the end of each month, so you can plan for expansion or other investment possibilities. It also helps him create a budget, such as reducing his monthly expenses to prepare for the cash needs expected in the next month.
5. Break-even point analysis
Break-even analysis evaluates fixed costs compared to the profit earned for each additional unit produced and sold. This analysis is essential to understanding the potential cost to your business's revenue and the benefits of expanding or growing your production.
Fully specifying your expenses as described above will make your break-even analysis more accurate and useful. Break-even analysis is also the best way to determine pricing.
Additionally, break-even analysis lets you know how many units you need to sell at different prices to cover your costs. You should aim to set prices that give you a good margin on your expenses while keeping your business competitive.
6. Operation plan
To run your business as efficiently as possible, create a detailed overview of your business needs. Understanding what roles are needed to run a business at different production volumes, how much production and work each employee can handle, and the costs of each stage of the supply chain can help your business grow and be more efficient. help you make informed decisions about. .
As you grow, it's important to tightly manage expenses such as labor and supply chain costs. Creating an operations plan will help you determine if there is room to optimize your operations and supply chain through automation, new technology, and superior supply chain vendors.
For this reason, it is essential for business owners to conduct due diligence and gain knowledge about merchant services before acquiring an account. Once the owner signs the contract, it cannot be changed unless the business owner cancels the contract and obtains a new account with a new seller service provider.
Tips for writing a business financial plan
Business owners should create a financial plan each year to have a clear and accurate picture of their business' finances and to create realistic expectations for future growth and expansion. Financial planning helps business leaders make informed decisions about purchases, debt, hiring, expense management, and overall operations for the year ahead.
Business financing planning is essential if a business owner is considering selling their business, attracting investors, or partnering with another business. Here are some tips for creating a business financing plan.
Review the previous year's plan.
It's a good idea to compare your previous year's plans to your actual performance and financials to see how accurate your previous plans and forecasts were. That way, you can address any inconsistencies or overlooked elements in next year's plans.
Collaborate with other departments.
Business owners or other individuals responsible for developing a business financial plan must collaborate with finance departments, human resources departments, sales teams, operational leaders, and personnel responsible for machinery, vehicles, or other critical business tools.
Each department must provide the necessary data on forecasts, values, and expenses. All these elements combine to create a comprehensive financial picture of your business.
Use available resources.
The Small Business Administration (SBA) and SCORE, the SBA's nonprofit partner, are great resources for learning about financial planning. Both teach you the elements of a comprehensive plan and how best to work with different departments within your business to gather the information you need. Many websites such as business.com and service providers such as his Intuit offer advice on this issue.
If you have questions or encounter challenges when creating a financial plan for your business, seek advice from your accountant or other small business owners in your network. There are small businesses in your city or state that need support.
Several small business organizations offer free financial planning templates for small business owners. You can find templates for the financial planning components listed here from SCORE.
business financial plan template
Many business organizations offer free information that small business owners can use to create a financial plan. For example, the SBA's learning platform offers courses on how to write a business plan. We also provide worksheets and templates to help you get started. You can seek additional support and more personalized service from your local office.
SCORE is the largest volunteer network of business mentors. It started as a group of retired executives (SCORE stands for “Service Corps of Retired Executives”), but has expanded to include executives and executives from many industries. The advice is free and available online, and he has an SBA district office in every state in the United States. In addition to participating in group and home study sessions, you can also be paired with a mentor for individual support.
SCORE provides templates and tips for creating financial plans for small businesses. SCORE is a great resource because it accommodates different levels of experience and provides personalized support.
Other templates can be found in the Microsoft Office Template Library, QuickBooks Online Resources, Shopify Blog, and more. You can also ask your accountant for advice, as many offer financial planning services in addition to regular tax services.
Diana Wertz contributed to the writing and research of this article.