Financial planning and analysis tips for small business owners
Essential Points
- A small business financial plan can be used to manipulate revenue, expenses and opportunities for growth.
- Common elements will include cash flow forecasting, budgeting and financial projections.
- A strong financial plan to support sustainability and can entice potential investors and/or lenders
- A financial plan is an essential element for any small business. A financial plan provides a structured way to manage revenue, manage expenses and ultimately prepare for growth. A small business financial plan can also help you source funding and assist in the financial decision-making process.
What is a Business Financial Plan
A business financial plan is a comprehensive document that outlines the financial well-being and financial plans of a business. A business financial plan is a fundamental part of a business plan and includes forecasts for revenues, estimates for expenses, and planning for cash flow.
While a business plan addresses bigger picture issues such as marketing approaches, a business financial plan is concentrated only on the financial viability of the business and how it is going to manage its resources, including financial ones. It can also be an important aspect of obtaining a small business loan, establishing realistic financial targets, and encouraging sustainability for the business over time.
Why every small business needs a financial plan
A financial plan gives structure and direction to a business. It gives small business an opportunity to operate efficiently and make effective decisions by clearly defining their financial objectives. Businesses with a clear financial plan will have a higher likelihood of growing and the ability to navigate through their economic unknowns.
When business owners have a clear financial strategy, they can get ahead of potential problems and make proactive decisions when challenges arise. Other benefits of a financial plan include:
- Improved cash flow management
- Better revenue and expense management
- Improved decision making around growth opportunities
- An improved likelihood of receiving financing
- Better prepared to respond to unforeseen financial issues
Small businesses without a financial plan may experience major setbacks such as cash flow problems or excessive debt. Without an plan, you may also miss out on financing opportunities as banks and investors require a reasonable financial projection. Additionally, a lot of businesses that have a plan, often find they are making short-term decisions that are negatively impacting their future success.
Necessary components of a financial plan
A financial plan is useful for business owners to understand their financial situation, make prudent decisions and get financing. By looking at expenses, profitability and cash flow businesses can set realistic goals and minimize risk. Here are some of the components business owners should include to develop a useful financial plan.
Revenue statement projections
A revenue statement, sometimes called a profit-loss statement is a look at a business's revenue, expenses and net income over a particular period of time. Revenue statements are valuable to business owners to determine profitability and cost cutting opportunities.
Cash flow forecasting
Forecasting cash flow helps to anticipate the movement of money going in and out of a business to keep the business in enough liquidity to meet day-to-day expenses. The QuickBooks Small Business Insights survey found that 43% of small business owners stated cash flow was a problem for their business and 74% stated that their cash flow problems have remained on equal pace or worsened over the last twelve months. Knowing cash requirements comes through financial modelling and planning, and will help mitigate cash shortages and provide some stability.
Balance sheet
A balance sheet summarizes a business's position and assets, liabilities and equity at a certain point in time. A balance sheet will help you understand the net worth of your business, and provide a snapshot of financial stability. Assets will include cash, inventories, and equipment, while liabilities will include outstanding loans and accounts payable, etc.
Updating your balance sheet at regular intervals provides accurate historical financial measurements and, consequently, should increase your chance of obtaining funds from external funding or debt instruments.
Break-even analysis
Break-even analysis assists you in determining how many units of a product or service you need to sell to break-even (or cover your total costs). Understanding this is essential when pricing goods or new products and services, gauging profitability, and understanding the associated financial risk of running a business. Knowing the break-even point of your business opens the door for entrepreneurs to consider changes in the product, the production process or the effective margin productively to improve operational efficiencies and profitability.
Expense management plan
One of the ways to trip the wire leading to improved profitability is managing expenses. Your business will be mixed with fixed and variable expenses such as rent, wages, utilities… It is critical to identify expenses, know if they are fixed or variable, and to find the areas where costs you do not have to incur and where you can find savings without digging into, compromising, or altering in any way your operations.
You can always jump start a long-term cost-control process with ideas like meeting with your suppliers and negotiating contracts, or re-evaluating how you approach operational efficiencies.
How to create a financial plan for your small business
Building a financial plan can involve many steps, all of which are crucial in helping small business owners understand their financial position today and in the future. By preparing a financial plan, a business can improve its decision-making, better manage its cashflow and foster long-term strong financial stability.
1. Review your current financial position. Start by analyzing the current financial position of the business. Review the income statement, balance sheet and the cash flow statement in order to prepare an assessment of the current strengths, weaknesses, and opportunities. Establishing an understanding of these metrics provides a starting point for future planning.
2. Set your business goals. Look to set relevant financial goals, and measurable financial goals that align with your business’s overall vision. This will help you map out what realistic goals to set during the financial planning meeting.
- Create revenue and expense budgets. When estimating your future revenue, draw from historical data and market trends. Break down your projected expenses into variable and fixed costs so you can create an accurate budget that will allow you to be profitable.
- Keep cash flow. Weekly cash flow should be monitored, especially in the early stages of a business, to ensure ongoing operational expenses can be met. Send invoices promptly, manage payment terms with suppliers and clients and build an emergency fund to cover you if cash is short.
- Review and adjust. Financial planning is a continuous process and as you put together and review financial reports, you'll want to adjust your projections to account for market changes as well as business growth or
- unforeseen expenses. By proactively revisiting your projections, you will maintain your financial health over the long term.
Most small business owners and particularly solo founders and those without finance experience will benefit from seeking out financial advisors or similar professionals to help develop a financial plan.
How to use your financial plan for business development
A financial plan is not a one-time document. It is a tool for understanding and creating business development. It sets the goal financially, and you develop benchmarks to measure progress against and keep you accountable.
When you measure your actual performance against projections, you may uncover trends or opportunities, identify potential risks, and make decisions based on current financial information.
Every business should periodically compare actual results to projections and revise its strategies to maximize profitability and improve efficiency.
Common financial planning mistakes to avoid
There are many financial missteps that can be made by small businesses that may create holes in their long-term success. By avoiding the errors above, you can improve your financial standing and the overall business performance.
- Unrealistic forecasts. Overspending can happen when you are overly optimistic about your future income.
- Little or no allowances for costs. Underestimating expenses will also create cash flow issues that can hurt your finances.
- No adjustments. Financial planning should have flexibility. Changes in the economy or business growth may create the need for changes.
- No industry or seasonal reflection. Incorporating predictable shifts in demand into your financial plan will help avoid inventory and cash flow problems.
- No emergency fund. Financial reserves are a critical component to helping your business get through sudden expenditures or declines in performance.
The bottom line
To sum up, business success hinges on establishing a financial plan! When you develop a systematic and structured financial plan, you are unlocking the potential of making better choices and achieving stability for your business in years to come.
