When it comes to long-term business success, preparation is the name of the game. And the keyto that preparation is a solid financial plan that sets forth a business’s short- andlong-term financial goals and how it intends to reach them. Used by company decision-makersand potential partners, investors and lenders, alike, a financial plan typically includesthe company’s sales forecast, cash flow projection, expected expenses, key financialmetrics and more. Here is what small businesses should understand to create a comprehensivefinancial plan of their own.
What Is a Financial Plan?
A financial plan is a document that businesses use to detail and manage their finances,ensure efficient allocation of resources and inform a plethora of decisions —everything from setting prices, to expanding the business, to optimizing operations, to namejust a few. The financial plan provides a clear understanding of the company’s currentfinancial standing; outlines its strategies, goals and projections; makes clear whether anidea is sustainable and worthy of investment; and monitors the business’s financialhealth as it grows and matures. Financial plans can be adjusted over time as forecastsbecome replaced with real-world results and market forces change.
A financial plan is an integral part of an overall business plan, ensuring financialobjectives align with overall business goals. It typically contains a description of thebusiness, financial statements, personnel plan, risk analysis and relevant key performanceindicators (KPIs) and ratios. By providing a comprehensive view of the company’sfinances and future goals, financial plans also assist in attracting investors and othersources of funding.
Key Takeaways
- A financial plan details a business’s current standing and helps businessleaders make informed decisions about future endeavors and strategies.
- A financial plan includes three major financial statements: the income statement,balance sheet and cash flow statement.
- A financial plan answers essential questions and helps track progress toward goals.
- Financial management software gives decision-makers the tools they need to makestrategic decisions.
Why Is a Financial Plan Important to Your Small Business?
A financial plan can provide small businesses with greater confidence in their short- andlong-term endeavors by helping them determine ways to best allocate and invest theirresources. The process of creating the plan forces businesses to think through how differentdecisions could impact revenue and which occasions call for dipping into reserve funds.It’s also a helpful tool for monitoring performance, managing cash flow and trackingfinancial metrics.
Simply put, a financial plan shows where the business stands; over time, its analysis willreveal whether its investments were worthwhile and worth repeating. In addition, when abusiness is courting potential partners, investors and lenders, the financial planspotlights the business’s commitment to spending wisely and meeting its financialobligations.
Benefits of a Financial Plan
A financial plan is only as effective as the data foundation it’s built on and thebusiness’s flexibility to revisit it amid changing market forces and demand shifts.Done correctly, a financial plan helps small businesses stay on track so they can reachtheir short-term and long-term goals. Among the benefits that effective financial planningdelivers:
- A clear view of goals and objectives: As with any type of businessplan,it’s imperative that everyone in a company is on the same financial page. Withclearresponsibilities and expected results mapped out, every team member from the top downseeswhat needs to be done, when to do it and why.
- More accurate budgets and projections: A comprehensive financial planleadsto realistic budgets that allocate resources appropriately and plan for future revenueandexpenses. Financial projections also help small businesses lay out steps to maintainbusiness continuity during periods of cash flow volatility or market uncertainty.
- External funding opportunities: With a detailed financial plan in hand,potential partners, lenders and investors can see exactly where their money will go andhowit will be used. The inclusion of stellar financial records, including past and currentliabilities, can also assure external funding sources that they will be repaid.
- Performance monitoring and course correction: Small businesses cancontinueto benefit from their financial plans long after the plan has been created. Bycontinuouslymonitoring results and comparing them with initial projections, businesses have theopportunity to adjust their plans as needed.
Components of a Small Business Financial Plan
A sound financial plan is instrumental to the success and stability of a small business.Whether the business is starting from scratch or modifying its plan, the best financialplans include the following elements:
Income statement: The income statementreports the business’s net profit or loss over a specific period of time, such amonth, quarter or year. Also known as a profit-and-loss statement (P&L) or proforma income statement, the income statement includes the following elements:
- Cost of goods sold (COGS): The direct costs involved in producing goods orservices.
- Operating expenses: Rent, utilities and other costs involved in running thebusiness.
- Revenue streams: Usually in the form of sales and subscription services, amongother sources.
- Total net profit or loss: Derived from the total amount of sales less expensesand taxes.
Balance sheet: The balance sheet reportsthe business’s current financial standing, focusing on what it owns, what it owesand shareholder equity:
- Assets: Available cash, goods and other owned resources.
- Liabilities: Amounts owed to suppliers, personnel, landlords, creditors, etc.
Shareholder equity: Measures the company’s net worth, calculated with thisformula:
Shareholder Equity= Assets –Liability
The balance sheet lists assets, liabilities and equity in chart format, with assetsin the left column and liabilities and equity on the right. When complete — and asthe name implies —the two sides should balance out to zero, as shown on the samplebalance sheet below. The balance sheet is used with other financial statements tocalculate business financial ratios (discussed soon).
Balance Sheet
Assets =
Liabilities + ShareholderEquity
Debit Balance
Credit Balance
Assets Liabilities Shareholder Equity - Cash: $175,000
- Inventory: $225,000
- Land/Real Estate: $645,000
- Accounts Payable: $17,000
- Long-term Debt: $450,000
- Common Stock: $150,000
- Retained Earnings: $428,000
Cash flow projection: Cash flow projection is a part of the cash flowstatement, which is perhaps one of the most critical aspects of a financialplan. After all, businesses run on cash. The cash flow statement documents how muchcash came in and went out of the business during a specific time period. Thisreveals its liquidity, meaning how much cash it has on hand. The cash flowprojection should display how much cash a business currently has, where it’s going,where future cash will come from and a schedule for each activity.
Personnel plan: A business needs the right people to meet its goalsand maintain a healthy cash flow. A personnel plan looks at existing positions,helps determine when it’s time to bring on more team members and determines whethernew hires should be full-time, part-time or work on a contractual basis. It alsoexamines compensation levels, including benefits, and forecasts those costs againstpotential business growth to gauge whether the potential benefits of new hiresjustify the expense.
Business ratios: In addition to a big-picture view of the business,decision-makers will need to drill down to specific aspects of the business tounderstand how individual areas are performing. Businessratios, such as net profit margin, return on equity, accounts payableturnover, assets to sales, working capital and total debt to total assets, helpevaluate the business’s financial health. Data used to calculate these ratios comefrom the P&L statement, balance sheet and cash flow statement. Business ratioscontextualize financial data — for example, net profit margin shows theprofitability of a company’s operations in relation to its revenue. They are oftenused to help request funding from a bank or investor, as well.
Sales forecast: How much will you sell in a specific period? A salesforecast needs to be an ongoing part of any planning process since it helps predictcash flow and the organization’s overall health. A forecast needs to beconsistent with the sales number within your P&L statement. Organizing andsegmenting your sales forecast will depend on how thoroughly you want to track salesand the business you have. For example, if you own a hotel and giftshop, you maywant to track separately sales from guests staying the night and sales from theshop.
Cash flow projection: Perhaps one of the most critical aspects ofyour financial plan is your cash flowstatement. Your business runs on cash. Understanding how much cash is comingin and when to expect it shows the difference between your profit and cash position.It should display how much cash you have now, where it’s going, where it willcomefrom and a schedule for each activity.
Income projections: Businesses can use their sales forecasts toestimate how much money they are on track to make in a given period, usually a year.This incomeprojection is calculated by subtracting anticipated expenses from revenue.In some cases, the income projection is rolled into the P&L statement.
Assets and liabilities: Assets and liabilities appear on the business’sbalance sheet. Assets are what a company owns and are typically divided into currentand long-term assets. Current assets can be converted into cash within a year andinclude stocks, inventory and accounts receivable. Long-term assets are tangible orfixed assets designed for long-term use, such as furniture, fixtures, buildings,machinery and vehicles.
Liabilities are business obligations that are also classified as current andlong-term. Current liabilities are due to be paid within a year and include accruedpayroll, taxes payable and short-term loans. Long-term liabilities includeshareholder loans or bank debt that mature more than a year later.
Break-even analysis: The break-even pointis how much a business must sell to exactly cover all of its fixed and variableexpenses, including COGS, salaries and rent. When revenue exceeds expenses, thebusiness makes a profit. The break-even point is used to guide sales revenue andvolume goals; determination requires first calculating contributionmargin, which is the amount of sales revenue a company has, less itsvariable costs, to put toward paying its fixed costs. Businesses can use break-evenanalyses to better evaluate their expenses and calculate how much to markup its goods and services to be able to turn a profit.
Four Steps to Create a Financial Plan for Your Small Business
Financial plans require deliberate planning and careful implementation. The following foursteps can help small businesses get started and ensure their plans can help them achievetheir goals.
Create a strategic plan
Before looking at any numbers, astrategic plan focuses on what the company wants to accomplish and what it needs toachieve its goals. Will it need to buy more equipment or hire additional staff? Howwillits goals affect cash flow? What other resources are needed to meet its goals? Astrategic financial plan answers these questions and determines how the plan willimpactthe company’s finances. Creating a list of existingexpensesand assetsisalso helpful and will inform the remaining financial planning steps.
Create financial projections
Financial projections should bebased onanticipatedexpenses and sales forecasts. These projections look at the business’sgoals and estimate the costs needed to reach them in the face of a variety ofpotentialscenarios, such as best-case, worst-case and most likely to happen. Accountants maybebrought in to review the plan with stakeholders and suggest how to explain the plantoexternal audiences, such as investors and lenders.
Plan for contingencies
Financial plans should use data from thecash flow statement and balance sheet to inform worst-case scenario plans, such aswhenincoming cash dries up or the business takes an unexpected turn. Some commoncontingencies include keeping cash reserves or a substantial line of credit forquickaccess to funds during slow periods. Another option is to produce a plan to sell offassets to help break even.
Monitor and compare goals
Actual results in the cash flowstatement, income projections and relevant business ratios should be analyzedthroughoutthe year to see how closely real-life results adhered to projections. Regularcheck-insalso help businesses spot potential problems before they can get worse and informcoursecorrections.
Three Questions Your Financial Plan Should Answer
A small business financial plan should be tailored to the needs and expectations of itsintended audience, whether it is potential investors, lenders, partners or internalstakeholders. Once the plan is created, all parties should, at minimum, understand:
How will the business make money?
What does the business need to achieve its goals?
What is the business’soperatingbudget?
Financial plans that don’t answer these questions will need more work. Otherwise, abusiness risks starting a new venture without a clear path forward, and decision-makers willlack the necessary insights that a detailed financial plan would have provided.
Improve Your Financial Planning With Financial Management Software
Using spreadsheets for financial planning may get the job done when a business is firstgetting started, but this approach can quickly become overwhelming, especially whencollaborating with others and as the business grows.
NetSuite’s cloud-based financial managementplatform simplifies the labor-intensive process through automation. NetSuite Planning andBudgeting automatically consolidates real-time data for analysis, reporting andforecasting, thereby improving efficiency. With intuitive dashboards and sophisticatedforecasting tools, businesses can create accurate financial plans, track progress and modifystrategies in order to achieve and maintain long-term success. The solution also allows forscenario planning and workforce planning, plus prebuilt data synchronization with NetSuiteERP means the entire business is working with the same up-to-date information.
Whether a business is first getting started, looking to expand, trying to secure outsidefunding or monitoring its growth, it will need to create a financial plan. This plan laysout the business’s short- and long-term objectives, details its current and projectedfinances, specifies how it will invest its resources and helps track its progress. Not onlydoes a financial plan guide the business along its way, but it is typically required byoutside sources of funding that don’t invest or lend their money to just any company.Creating a financial plan may take some time, but successful small businesses know it iswell worth the effort.
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Small Business Financial Plan FAQs
How do I write a small business financial plan?
Writing a small business financial plan is a four-step process. It begins with creating astrategic plan, which covers the company’s goals and what it needs to achieve them.The next step is to create financial projections, which are dependent on anticipating salesand expenses. Step three plans for contingencies: For example, what if the business were tolose a significant client? Finally, the business must monitor its goals, comparing actualresults to projections and adjusting as needed.
What is the best financial statement for a small business?
The income statement, also known as the profit and loss (P&L) statement, is often consideredthe most important financial statement for small businesses, as it summarizes profits andlosses and the business’s bottom line over a specific financial period. For financialplans, the cash flow statement and the balance sheet are also critical financial statements.
How often should businesses update their financial plans?
Financial plans can be updated whenever a business deems appropriate. Many businesses createthree- and five-year plans and adjust them annually. If a market experiences a large shift,such as a spike in demand or an economic downturn, a financial plan may need to be updatedto reflect the new market.
What are some common mistakes to avoid when creating a small businessfinancial plan?
Some common mistakes to avoid when creating a small business financial plan includeunderestimating expenses, overestimating revenue, failing to plan for contingencies andadhering to plans too strictly when circ*mstances change. Plans should be regularly updatedto reflect real-world results and current market trends.
How do I account for uncertainty and potential risks in my smallbusiness financial plan?
Small businesses can plan for uncertainty by maintaining cash reserves and opening lines ofcredit to cover periods of lower income or high expenses. Plans and projections should alsotake into account a variety of potential scenarios, from best case to worst case.
What is a typical business financial plan?
A typical business financial plan is a document that details a business’s goals,strategies and projections over a specific period of time. It is used as a roadmap for theorganization’s financial activities and provides a framework for decision-making,resource allocation and performance evaluation.
What are the seven components of a financial plan?
Financial plans can vary to suit the business’s needs, but seven components to includeare the income statement, operating income, net income, cash flow statement, balance sheet,financial projections and business ratios. Various financial key performance indicators anda break-even analysis are typically included as well.
What is an example of a financial plan?
A financial plan serves as a snapshot of the business’s current standing and how itplans to grow. For example, a restaurant looking to secure approval for a loan will be askedto provide a financial plan. This plan will include an executive summary of the business, adescription and history of the company, market research into customer base and competition,sales and marketing strategies, key performance indicators and organizational structure. Itwill also include elements focusing on the future, such as financial projections, potentialrisks and funding requirements and strategies.
