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Improve your chances of growth by covering these bases in your plan.
Many small businesses lack a complete, well-thought-out financial plan — even though evidence shows one is essential for long-term success and growth. A business financial plan can help an organization better manage cash flow, guide investment and financing decisions, and take advantage of growth opportunities with confidence. We’ll explain nine elements of a solid business financial plan. We’ll also share tips for writing a comprehensive plan to guide and nurture your company’s financial health.
A business financial plan is an overview of an organization’s financial situation and a forward-looking growth projection. It can help you manage cash flow and accounts for months when revenue might be lower than expected. It also helps you plan for taxes and create a business budget that accounts for daily and monthly expenses.
A financial plan helps business leaders make informed decisions about purchases, debt, hiring, expense control and overall operations for the year ahead. It’s particularly important if a business owner is looking to sell, attract investors or enter a partnership with another business.
However, perhaps the most crucial benefit of a financial plan is helping you focus on your business’s long-term growth. It allows you to look beyond your company’s day-to-day activities and avoid losing sight of your goals. Focusing on your long-term vision ensures you prioritize your financial resources.
Your unique business financial plan may differ by industry and business type. However, all businesses should include the following nine components.
Sales forecasting is a crucial element of your business financial plan. A sales forecast estimates how much of a product or service a business will sell in the next week, month, quarter or year.
Sales forecasting can help you identify patterns in your sales cycles and better understand — and improve — your business. For example, a seasonal business can use sales forecasting to inform strategies for improving off-season sales and becoming a year-round venture. Another business might use sales forecasting to understand how factors like the weather or the economy influence sales fluctuations and prepare more effectively.
This knowledge is invaluable as you plan marketing initiatives. Additionally, sales forecasting can be the foundation of your business growth plan and goals. For instance, you could aim to improve your sales by 10 percent over each previous period.
Your financial plan should include an accounting of all regular expenses, expected future expenses and associated expenses.
Business assets and liabilities are the foundation of your company’s balance sheet and the primary determinants of your business’s net worth. Tracking assets and liabilities allows you to maximize your business’s potential value.
Small businesses frequently undervalue their assets (such as machinery, property or inventory) and fail to properly account for outstanding bills. Your balance sheet offers a deeper view of your business’s health than does a profit-and-loss statement or a cash flow report.
You should be able to predict your cash flow on a monthly, quarterly and annual basis.
Projecting cash flow for the entire year allows you to anticipate financial struggles or challenges. It can also help you identify a cash flow problem before it harms your business. You can set the most appropriate payment terms — such as how much you charge a customer upfront or how many days after invoicing you expect payment.
A cash flow projection reveals how much money will remain at the end of each month, allowing you to plan for expansion or other investments. It also helps you budget. For example, you can spend less during one month to meet the anticipated cash needs of another month.
A break-even analysis evaluates fixed costs relative to the profit earned by each additional unit you produce and sell. This analysis is essential to understanding your business’s revenue and potential costs vs. profits of expansion or growth.
Having your expenses fully fleshed out, as described above, makes your break-even analysis even more accurate and useful, allowing you to:
To run your business efficiently, you must craft a detailed overview of your operational needs. You can make more informed decisions for your business’s growth and efficiency when you:
Tightly controlling expenses — such as payroll or supply chain costs — relative to growth is essential. An operations plan can also help determine if there is room to optimize operations or supply chains through automation, new technology or superior vendors.
Focusing on profit margins is also essential for many businesses. For example, credit card processing fees can take a big bite out of your bottom line. Managing these costs can make the difference between turning a profit or going into the red.
Your financial plan will include a funding plan. While some business owners bootstrap their companies out of their own pockets, many others will require funding. In your funding plan, you must consider whether to use debt or equity financing and outline the reasons for your decision. If you decide to take on debt, ensure you understand the process of applying for a business loan. U.S. Small Business Administration (SBA) loans are especially prized for their low interest rates and long repayment periods.
Equity financing involves finding business investors. In exchange for funding your company, investors will take an ownership stake in the business. It’s crucial to know how to present your idea to investors to maximize your chances of a successful pitch.
An investment analysis looks at industry trends, investment opportunities, and resource allocation to ensure funds are spent wisely and effectively. For instance, determining which projects will yield the highest return on investment (ROI) is crucial for long-term success. Acquiring customers is especially important for growing your business. So, for example, it’s essential to measure the ROI of digital marketing campaigns to maximize limited investment funds. By incorporating investment analysis into your financial plan, you can make informed decisions that drive growth and profitability.
While it’s essential to plan for success, it’s also crucial to identify financial risks and develop mitigation strategies. Does your industry tend to move through cycles of boom and bust? Is there an elevated risk of litigation? Does your business face potential disruption from weather-related events? Ensure you create contingency plans for potential financial setbacks and secure appropriate insurance.
Business owners should create a financial plan annually to ensure they have a clear and accurate picture of their business’s finances and a realistic view of future growth or expansion. Here are some tips for writing a comprehensive business financial plan.
It’s a good idea to compare the previous year’s plan against actual performance and finances to see how accurate it was. That way, you can address any discrepancies or overlooked elements in next year’s plan.
The individual charged with creating the business financial plan should collaborate — mainly with the finance department, human resources department, sales team, operations leader and those in charge of machinery, vehicles or other significant business tools.
Each division should provide the necessary data about projections, value and expenses. These elements combine to create a comprehensive financial picture of the business.
Business owners don’t have to go it alone to create their financial plans. Numerous resources exist to provide guidance and even templates. Consider the following options:
Mike Berner contributed to this article.