6 elements of a successful financial plan

Many small businesses don’t have a comprehensive financial plan.

Evidence shows that comprehensive financial plans are critical to the success and long-term growth of your business: a Palo Alto Software survey found that entrepreneurs who had developed a business plan for their business were more than twice more likely to grow their business successfully than those who had no plan or an incomplete financial plan. Here’s a guide to the six key elements of a successful small business financial plan.

What is a business financial plan and why is it important?

A financial plan for your business is an overview of your business’ financial condition and a forward projection for growth. A complete financial plan typically has six parts: sales forecast, expenses, statement of financial position, cash flow projection, break-even analysis, and operating plan.

Tips for Writing a Business Financial Plan

Business owners should create a financial plan every year, ideally at the beginning of the calendar or fiscal year, to ensure they have a clear and accurate picture of their business finances, as well as a realistic vision of future growth or expansion. Having a plan in place helps business leaders make informed decisions about purchases, debt, hiring, expense control, and overall operations for the coming year. A business financial plan is also essential if a business owner is looking to sell their business, attract investors, or enter into a partnership with another business.

It is also recommended that the author of the financial plan review the previous year’s plan against actual performance and finances to see how accurate the previous plan and forecast was. Any discrepancies or overlooked items can be better addressed or incorporated into next year’s plan, making it more accurate and reliable.

A business owner, or the person responsible for creating the company’s financial plan, should work with the finance department; Human Resources Management ; the sales team; the head of operations; and those in charge of machinery, vehicles or other important business tools. Each division must provide the necessary data on projections, value and expenditures. All of these elements come together to create a complete financial picture of the business.

The Small Business Association (SBA) and SCORE, the SBA’s nonprofit partner, are two great resources to learn about financial plans, the elements of a comprehensive plan, and how best to work with different departments. of your company to collect the necessary information. Many editorial entities like business.com and service providers like Intuit offer advice on this.

If you are unsure or encounter a challenge when creating your business financial plan, business owners and managers can seek advice from their accountant or other small business owners in their network. Your local city or state has a small business office that you can contact for assistance.

Point: Financial plans should be created each year at the beginning of the fiscal year as a collaboration between finance, human resources, sales and operations.

Business Financial Plan Templates

Several small business organizations offer free financial plan templates that small business owners can use. You can find templates for the financial plan components listed here through the SBA or SCORE.

The SBA Learning Center offers a course on creating a business plan; it also offers spreadsheets and templates to help you get started. Because SBA is a government organization, its resources are free. You can seek further assistance from your local office for more personalized advice.

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 grown to include business owners and executives from many different industries. Advice is free and available online; there are also 320 offices nationwide. In addition to group or home-based learning, you can be matched one-on-one with a mentor for personalized assistance. SCORE offers templates and tips for creating a small business financial plan. SCORE is a great resource; their courses cater to different levels (from beginner to seasoned business owner), and the one-on-one help from a mentor is extremely valuable.

Other templates can be found in the Microsoft Office Template Library, QuickBooks Online Resources, Shopify Blog, and HubSpot Business Resources. You can also ask your accountant if he can provide you with advice; many accountants offer financial planning services in addition to their usual tax services.

The 6 components of a successful financial plan for a business

1. Sales Forecast

You should have an estimate of your revenue for each month, quarter, and year. Identifying any patterns in your sales cycles helps you better understand your business; it is also invaluable when planning marketing initiatives and growth strategies. A seasonal business may aim to improve sales during the former off-season to become a year-round business, while another business may be better prepared by understanding the correlation between ups and downs in business due to factors such as the weather or the economy.

The sales forecast is also the basis for setting the company’s growth objectives. For example, aim to improve your sales by 10% over each previous period.

2. Expenses

A complete spending plan includes regular spending, planned future spending, and associated spending.

Regular expenses are the current running costs of your business, including operational costs such as rent, utilities, and payroll. Regular expenses relate to standard business activities that occur each year, such as conference attendance, advertising and marketing expenses, or the office Christmas party. A complete list of regular expenses will make it easier to distinguish essential expenses from expenses that can be reduced or eliminated if necessary.

Expected future expenses are known future costs, such as tax rate increases, minimum wage increases, or maintenance needs. Typically, a budget should also be allocated for unforeseen future expenses, such as damage to your business caused by fire, flood, or other unforeseen disasters. Planning for future expenses ensures that your business is financially prepared through reduced budget, increased sales, or financial relief.

Associated expenses are the estimated costs of various initiatives, such as the cost of acquiring and training a new employee, opening a new store, or expanding delivery to a new territory. Accurately estimating associated expenses helps you properly manage growth and prevents your business from exceeding your cost capabilities. As with expected future expenses, understanding the capital needed to achieve various growth goals helps you make the right decision about financing options.

3. Statement of financial position (assets and liabilities)

Assets and liabilities are the foundation of your company’s balance sheet and the primary determinants of your net worth. Tracking both ensures that you maximize the potential value of your business. Small businesses frequently undervalue their assets, such as machinery, property, or inventory, and misaccount for unpaid invoices.

Your balance sheet, or financial position, provides a more comprehensive view of the health of your business than a profit and loss statement or cash flow report. A profit and loss statement shows how the business has performed over a given period, while a balance sheet shows the financial position of the business on a given day.

4. Cash flow projection

Similar to projecting your expenses, a savvy business owner should be able to forecast their cash flow on a monthly, quarterly, and yearly basis. Projecting cash flow for the full year allows you to anticipate financial difficulties or challenges. It can also help you identify a cash flow problem before it negatively impacts your business. You can set the most appropriate payment terms, such as how much you charge upfront or how many days after billing you expect payment.

A cash flow projection gives you a clear overview of how much cash should be left at the end of each month, allowing you to plan for possible expansion or other investments. It also helps you budget smarter, such as spending less in one month for another month’s projected cash needs.

5. Break-Even Analysis

This section analyzes the fixed costs versus the profit made by each additional unit you produce and sell. This is critical to understanding your business’s potential revenue and costs versus the benefits of expanding or growing your production. Having your expenses fully fleshed out, as described above, makes your break-even analysis more accurate and useful.

Break-even analysis is also the best way to determine your price. A break-even analysis can tell you how many units you need to sell at different price points to cover your costs. You should aim to set a price that gives you a comfortable margin on your expenses while allowing your business to remain competitive.

6. Plan of operations

To run your business as efficiently as possible, draw up a detailed overview of your operational needs. Understanding what roles are needed to operate your business at different production volumes, the amount of production or labor each employee can handle, and the costs of each stage of your supply chain helps you make informed decisions for growth and the efficiency of your business.

It is important to tightly control expenses, such as payroll or supply chain, against growth. An operating plan can also make it easier to determine whether your operations or supply chain can be optimized through automation, new technologies, or superior supply chain vendors.

For this reason, it is imperative that the business owner do their due diligence and familiarize themselves with merchant services before opening an account. Once the owner has signed a contract, it cannot be changed unless the business owner breaks the contract and acquires a new account with a new merchant service provider.

In conclusion, the business owner must take steps to plan for cash flow generation in order to derive maximum profit from accepting credit cards for products and services.