How to make a financial plan for a small business

financial plan

Today, what many small businesses lack is a full financial plan. A complete financial plan is crucial to the long-term success and growth of a business. According to a survey, organizations that had a complete business plan for their venture successfully grew their business than those that had no plan or an incomplete financial plan.

What is a financial plan, why is it so essential?

A financial plan is an overview of your current business financials and a forward-looking projection for growth.

A financial plan helps businesses set realistic expectations regarding the success of the business. A thorough financial plan also makes your business more attractive to investors.

Six Components of a Successful Business Financial Plan

All business plans, whether you’re planning an expansion for an existing business or just starting a business, should include the following:

  1. Sales Forecasting

A sales forecast is a projection of what you think of your future sales in a given period. It is a crucial part of a business plan, especially when investors are involved.

There isn’t a one-size-fits-all kind of sales projection – every business is unique. How you segment and organize your forecast depends on the type of your business and how you want to track your sales. Generally, it is better to break down sales projections into segments beneficial to you for planning and marking purposes.

  1. Expense Outlay

An expense plan includes:

  • Fixed Expenses

These are current ongoing costs of business, including operational costs like rent, payroll, and utilities. Make a list of fixed expenses as it will make it easier to distinguish critical expenses from expenses that can be reduced or eliminated if required.

  • Variable Expenses

These are also known future costs, such as promotional expenses and advertising. Plan for variable expenses to ensures that your business is financially ready via budget reduction, increases in sales, or financial assistance.

  1. Cash Flow Statement

A cash flow statement gives you an account of how much cash the business brought in, how much money it paid out, and its ending cash balance. Without this information, you won’t be able to run a healthy business.

If you are running an existing business, you should have historical documents to base these forecasts on. And if you’re starting a new business and don’t have financial statements, project a cash-flow statement breaking down into 12 months. When compiling this cash-flow projection, you should choose a realistic ratio for how many invoices will be paid in cash, 30 days, 60 days, 90 days, and so on.

  1. Profit and Loss Statement

It is a financial statement that explains how your business made a profit or incur a loss over a period of time. There are different formats for P&L statements, depending on the type of your business and the structure of your organization.

Things you should include in the profit and loss statement:

  • Your revenue
  • Your cost of sale
  • Your gross margin, which is revenue less cost of sale

Also, list your operating costs, which are the expenses related to running your business that isn’t directly associated with making a sale.

  1. Statement of Financial Position (Balance Sheet)

The balance sheet is a snap of the financial position of your business. It is essential to have an estimated balance sheet. You also have to deal with assets and liabilities that are not in the profit and loss statement.

You may get confused about dealing with assets and liabilities that don’t show up in the P&L statement. Firstly, start with assets, and estimate what you’ll have on hand, month by month for cash, receivable, and substantial assets like land, equipment, and buildings. After that, figure out your debts, such as account payable and outstanding loans.

  1. Break-even Analysis

Break-even analysis is a calculation of how much sales you require to cover all your expenses. To determine the break-even point, you need to figure out the contribution margin of what you’re selling. It is a crucial analysis for potential investors who want to know that they are investing in a rapidly-growing business with an exit strategy.

It is easy to feel overwhelmed with a financial plan when starting, but it is a crucial business plan, which you need to understand.