Despite the fact that a thorough financial plan has been proven to be essential to the long-term success and growth of any business, many small businesses don’t have a thorough financial plan.
For example, a study in the New England Journal of Entrepreneurship found that entrepreneurs with a business plan are more successful than those without. If you're not sure how to get started, read on to learn the six key elements of a successful small business financial plan.
What is business financial planning and why is it important?
A business financial plan is an overview of a company's financial position and future projections for growth. A business financial plan typically consists of six parts: sales forecast, expense expenditures, financial position statement, cash flow forecast, break-even analysis, and operations plan.
Proper financial planning helps you manage your cash flow and account for months when your income is lower than expected. It also helps you budget for your daily and monthly expenses and plan for your annual taxes.
The important thing is that a financial plan keeps you focused on the long-term growth of your business, so you don't get caught up in the day-to-day activities and lose sight of your goals. Focusing on your long-term vision makes it easier to prioritize your financial resources.
6 Elements of Successful Financial Planning for Business
1. Sales forecast
You need to estimate your monthly, quarterly and annual sales revenue. Identifying patterns in your sales cycle will help you understand your business better. This knowledge will be extremely useful when planning your marketing efforts and growth strategies.
For example, seasonal businesses can aim to increase sales during the off-season and eventually become a year-round business, while other businesses can be better prepared by understanding how factors like the weather and the economy relate to the ups and downs of their business.
Sales forecasts are also the basis for setting growth goals for your company — for example, you might aim to increase sales by 10 percent compared to the previous period.
2. Expenses
A complete expense plan includes ordinary expenses, expected future expenses, and related expenses. Ordinary expenses are the current, ongoing costs of your business, including operating expenses such as rent, utilities, and payroll.
Recurring expenses relate to standard business activities that occur each year, such as attending conferences, advertising and marketing, office holiday parties, etc. It's a good idea to distinguish between essential expenses and those that can be reduced or eliminated if necessary.
Expected future expenses are expenses that you know will occur in the future, such as increases in tax rates, increases in the minimum wage, or the need for maintenance. Generally, a portion of your budget should also be allocated for unexpected future expenses, such as damage to your business from a fire, flood, or other unforeseen disaster. Planning for future expenses can help your business be financially prepared, whether through budget cuts, increased sales, or financial assistance.
Associated expenses are the estimated costs of various initiatives like acquiring and training new employees, opening a new store, expanding delivery to a new region, etc. Accurately estimating associated expenses can help you properly manage growth and prevent your business from exceeding its cost capacity.
Understanding how much capital you'll need to achieve various growth goals, as well as expected future expenses, will help you make sound decisions about your financing options.
3. Statement of Financial Position (Assets and Liabilities)
Assets and liabilities are the basis of a company's balance sheet and the primary determinants of a company's net worth. Tracking both can help you maximize your company's potential value.
Small businesses often undervalue their assets (machinery, real estate, inventory, etc.) and fail to properly account for outstanding invoices. The balance sheet provides a more comprehensive picture of the health of a business than the income statement or cash flow statement.
An income statement shows a company's performance over a particular period of time, while a balance sheet shows a company's financial position on a particular date.
4. Cash flow forecast
You need to be able to forecast your cash flows on a monthly, quarterly and annual basis. Forecasting your annual cash flows can help you stay ahead of financial difficulties and challenges.
It also helps you identify cash flow issues before they negatively impact your business. You can set the most appropriate payment terms, such as the amount to be paid up front or the number of days payment is due after invoicing.
A cash flow forecast will show you how much money you expect to have left at the end of each month so you can plan for expansion or other investments. It can also help you with budgeting, for example by reducing expenses in one month to meet expected cash needs in another.
5. Break-even analysis
A break-even analysis evaluates your fixed costs against the profit you make from each additional unit you produce and sell. This analysis is essential to understanding your business's revenues and potential costs compared to the benefits of expanding or growing your production volume.
Having a complete understanding of your expenses, as mentioned above, will make your break-even analysis more accurate and useful. It's also the best way to determine your price.
Additionally, a break-even analysis will tell you how many units you need to sell at different prices to cover your costs. You should aim for pricing that gives you a comfortable margin over your expenses while still keeping your business competitive.
6. Operational Plan
To run your business as efficiently as possible, you need a detailed understanding of your operational needs. Understanding the roles required to run your business at different production volumes, the production or workload each employee can handle, the costs at each stage of your supply chain, and more, will allow you to make informed decisions about the growth and efficiency of your business.
As you grow, it's important to keep tight control over expenses like salaries and supply chain costs. Operational planning also helps you determine if there is room to optimize your operations and supply chain through automation, new technologies, and better supply chain vendors.
For this reason, it is imperative that business owners do their due diligence and educate themselves about merchant services before obtaining an account. Once an owner signs a contract, it cannot be changed unless the business owner breaks the contract and obtains a new account with a new merchant services provider.
Tips for Creating a Business Financial Plan
Business owners should create a financial plan each year to have a clear and accurate picture of their business's financial position and a realistic outlook for future growth and expansion. A financial plan helps business leaders make informed decisions about purchases, debt, hiring, expense management, and overall operations for the coming year.
A business financial plan is essential if a business owner is considering selling the business, attracting investors, or partnering with another business. Here are some tips for creating a business financial plan.
Review the previous year's plan.
We recommend comparing your prior year plan with your actual performance and financial position to see how accurate your previous plans and forecasts were so that you can address any discrepancies or overlooked elements in your plan for the coming year.
Collaborate with other departments.
As a business owner or other individual responsible for creating a business financial plan, you will need to collaborate with your finance department, human resources department, sales team, operational leaders, and those responsible for machinery, vehicles, and other critical business tools.
Each department must provide the necessary data on forecasts, values and costs. All these elements combine to create a comprehensive financial picture of the business.
Use available resources.
The Small Business Administration (SBA) and its nonprofit partner, SCORE, are excellent resources for learning about financial planning. Both can 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 Intuit, offer advice on this matter.
If you have questions or problems creating your business financial plan, seek advice from your accountant and other small business owners in your network. Your city or state may have a small business office that you can contact for help.
Business Financial Plan Template
Many business organizations offer free information that small business owners can use to create their financial plans. For example, the SBA's learning platform offers courses on how to write a business plan, as well as worksheets and templates to help you get started. You can also seek additional help or 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 business owners and executives in a variety of industries. Advice is free and available online, and there are SBA district offices in every state in the U.S. You can participate in group or at-home learning sessions, or you can be paired with a mentor for one-on-one support.
SCORE offers templates and tips for creating a financial plan for your small business. SCORE is a great resource because it caters to different levels of experience and offers personalized support.
You can find other templates from places like Microsoft Office's template library, QuickBooks' online resources, Shopify's blog, etc. You can also ask your accountant for advice, as many offer financial planning services in addition to their regular tax services.
Diana Wertz contributed to the writing and research of this article.
