How to develop your small business financial plan
Every small business needs a financial plan. If it is your first time developing a financial plan for your business, the good news is that it doesn’t have to be hugely complicated.
There are many accepted templates that are typically used for consistency and supporting business owner’s accounting processes. Creating your financial plan in a professional format from the beginning means that you’ll be less likely to have to change it at a later stage. Getting this right from the offset will help you achieve a clear picture of your business’s financial health, therefore better informing your future decision making.
Let’s take a look at six simple steps that will help you create a successful business financial plan:
Start with your business strategy
Your business strategy is an important place to start when creating your financial plan. If you start by outlining what you hope to achieve in the year ahead, you are better positioned to then ask yourself the important decisions, such as: Do I need to invest in new equipment? Will I need to invest in R&D? Will I need more staff or more technology? What other resources will I need to achieve my business strategy?
The key here is to pin down all of the likely costs for the period ahead. In this way, your business strategy can go on to inform your financial strategy.
From here, you must work out whether you will need external financing to pay for these investments, resources and assets, and identify an expected figure. Estimating these finances will allow you to determine the financial impact for the year ahead, which should include anticipated spend on any key projects.
Calculate your projections
Ascertain your projected income, using sales forecasts and expected expenses for the business, such as staffing, overheads, cost of goods sold, and so forth. If your cash flow is tight, you may want to do this on a weekly or fortnightly basis. Next, include the additional project costs you identified in step 1. The easiest way to do this is to create a spreadsheet (ideally using a template – these are widely available) or to make use of an online accounting software.
Next up, create your balance sheet and P&L statement, with scenario planning for the best and worst outcomes. This will allow you to carry out a sensitivity analysis with your projected figures, accounting for the impact of different scenarios. Having the help of a professional accountant may be helpful in this process.
Your financial plan should include:
– A sales forecast to attract lenders and investors. Set up monthly sales for ‘Year One’ and move to quarterly reporting from ‘Year Two’ onwards.
– An expenses budget to balance out the sales forecast and to identify the cost of goods sold – from equipment leasing through to overhead payments on rent and payroll.
– Finally, a cash flow statement which shows the immediate financial health of the business.
These statements must all be included, but can be developed in whatever order best suits your needs. You may also want to add some financial ratios which flag up the immediate health of your business to decision-makers and potential investors alike. Examples of these are debt ratios, stock ratios, current ratios(assets against liabilities), acid tests (to measure liquidity) and average collection period ratios.
Review financing needs
During their lifecycle, most businesses need some form of external funding. You may be seeking a bank loan, investment, grant funding, equity finance, or exploring another route to securing finance for the future of your business. The more accurate your financial reporting, the easier funding will come, so make sure you set up a business bank account that supports your company’s financial needs. This will help show investors that your business is financially stable and run well.
There are various reasons why your business may require a source of emergency finance, such as a reserve, or a substantial credit line. A financial contingency plan acts as a source of protection for when the financial health of your small business may be at risk.
Monitor the plan
It is vital to monitor the performance of your business against its projections continuously. Monitoring performance will allow you to make adjustments to forecasts at regular intervals based on what actually happens. This will ensure that the business can focus on any underperforming areas and use extra resources to combat problem areas before they turn serious.
Get professional help
Business finance is a complex area that requires constant and expert management. While it is possible for entrepreneurs and SME owners to get the basics in place, they will typically need ongoing professional help. Perhaps from an accountant or bookkeeper who can take over the regular production of figures, ratios and reports for monitoring and taxation purposes.
With the availability of accounting and business finance software, these processes are now heavily automated and therefore more efficient and accurate. Your business financial professional can therefore use these to provide vital insights and free up your time to focus on running the business. Professionals can assist with the timely and precise figures that you need to make the right decisions for your small business’s future.
Follow these steps and you will feel more confident about the future of your business. With the right financial documents in place to assist future strategic and managerial decisions, you can protect the long-term financial health of your business.