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How to Make a Financial Plan for a Small Business

How to make a financial plan for your small business

Written by: Kelly Hillock

February 21, 2024

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How to make a financial plan for your small business
5 min read

Small business owners understand the need for a robust financial plan to navigate the uncertainties of market and business operations. A business financial plan is a comprehensive document outlining the financial goals, strategies, and projections for a company while serving as a roadmap for managing finances and achieving both short-term and long-term objectives. Key components typically include revenue forecasts, expense budgets, cash flow projections, and balance sheets. Before we move further, check out the basics of financial planning to learn its importance in business growth.  

From setting attainable goals and gathering essential financial documents to planning accurate sales forecasts and cash flow projections, this article will look into the nuances of crafting a comprehensive financial plan for small businesses.  

Set Your Goals 

Setting clear, achievable goals is the start of any successful financial plan. They provide direction and purpose, helping small businesses focus their core financial strategies and measure progress. In the following sections, we’ll learn how to define these goals, set short-term and long-term objectives, and measure performance.  

Defining Your Business Goals 

Aligning your business goals with the financial planning process ensures that every financial decision contributes to your broader objectives. Utilizing the SMART framework is key here. Goals should be Specific, Measurable, Achievable, Relevant, and Time-bound. For instance, a SMART goal could be “Increase net profit by 15% over the next 12 months through cost reduction strategies and expanding the customer base.” This goal is clear, quantifiable, realistic, aligned with business growth, and has a defined timeline. 

Setting Short-term and Long-term Objectives 

Short-term objectives offer immediate targets, like improving cash flow or reducing expenses in the next quarter. In contrast, long-term objectives, such as doubling revenue in five years, set a vision for the future. Using data-driven goals based on your business’s past performance and market trends helps set realistic and achievable targets. For example, a short-term objective could be to improve the inventory turnover ratio by 20% in the next six months, while a long-term goal might be to enter two new international markets in the next three years. 

Measuring Performance 

Monitoring and measuring performance against set goals involves regularly tracking key metrics such as sales revenue, expenses, and profitability. These figures provide insights into how well the business is doing and where adjustments might be necessary. Key financial ratios and indicators like gross profit margin, return on investment (ROI), and liquidity ratios are invaluable tools in this analysis. For example, tracking the ROI on marketing expenditures can show the effectiveness of promotional campaigns. At the same time, the current liquidity ratio gives a quick view of the company’s ability to meet short-term liabilities with its short-term assets. 

Establish Your Business Finances 

Establishing your business finances involves carefully handling financial documents, understanding your company’s fiscal standing, and ensuring liquidity for smooth operations. We will look into key practices such as collecting essential financial statements, analyzing balance sheets and income statements, and effectively tracking and managing cash flow and reserves. 

Collecting Financial Statements 

There are three fundamental financial statements required to create a business financial plan: the income statement, balance sheet, and cash flow statement. The income statement should detail your revenue, expenses, and net profit, showing the company’s profitability over a specific period. The balance sheet is a snapshot of assets, liabilities, and owner’s equity, reflecting your business’s financial standing at a given time. Finally, the cash flow statement tracks the inflows and outflows of cash, highlighting the operational, investing, and financing activities. 

Analyzing the Balance Sheet & Income Statement 

The balance sheet provides a comprehensive view of your company’s financial position at any given moment. It showcases assets, liabilities, and owner’s equity, helping you understand what your business owns and owes. Meanwhile, the income statement details revenue and expenses over a specific period, signaling whether the company is operating at a profit or loss. Regular analysis of these statements is vital. It guides strategic decision-making and helps fine-tune your financial plan to enhance efficiency and profitability. 

Tracking Cash Flow & Manage Cash Reserves 

Monitoring cash flow can help maintain the financial health of a business. It involves creating a cash flow statement, examining historical cash movements, and projecting future flows. This process helps identify periods of surplus or shortage, allowing for timely adjustments in operations. Additionally, a key aspect of financial prudence is building and managing cash reserves. A buffer of readily available funds can be instrumental in navigating unexpected expenses or downturns. Effective cash reserve management might involve setting aside a portion of profits as emergency funds and tweaking operational strategies based on regular cash flow needs. 

Monitoring Variable Costs & Expenses 

Understanding and managing variable expenses can help small businesses, as these costs directly correlate with production levels and business activity. Variable expenses fluctuate based on the company’s output; common examples include hourly wages, costs of raw materials, and utility expenses proportional to production. For instance, a bakery may see higher flour and electricity costs during peak holiday seasons. Efficient monitoring and controlling of these expenses are useful to align them with business goals. For example, during slower months, a business might reduce hours for part-time staff or negotiate lower rates with suppliers to maintain profitability. On the other hand, in profitable periods, the business could invest more in marketing to boost sales further, ensuring variable costs are in sync with the company’s operational needs and financial objectives. 

Create Projections & Forecasts 

Accurate projections and financial forecasts are fundamental to small businesses’ financial planning. Below, we will look into the intricacies of creating sales and cash flow forecasts, important tools for managing future business strategies effectively. 

Creating Sales Forecasts & Cash Flow Forecasts 

Sales forecasting is used to help manage inventory and cash flow, ensuring that a business can meet customer demand without overinvesting in stock. The first steps to create a reliable sales forecast are analyzing market trends, customer behavior, and the overall competitive landscape. For instance, a retail clothing store would factor in seasonal fashion trends and historical sales data to predict future demand. Alongside sales forecasting, building cash flow forecasts is equally important. It involves analyzing past cash flow patterns to make educated projections about future inflows and outflows. This dual sales and cash flow forecasting approach enables businesses to anticipate financial needs, plan for growth, and make informed decisions about resource allocation and investment strategies. 

Developing Financial Projections 

Financial projections are challenging for small businesses but allow for informed planning and strategic decision-making. First, you must create detailed monthly income and expense forecasts, drawing on your sales forecasts and anticipated costs. Utilize spreadsheet software or accounting tools for accurate recording and tracking, ensuring your data remains organized and accessible. Your financial projections should include projected income statements, balance sheets, and cash flow statements for the next five years. Focus on specificity, especially for the first year, breaking down projections into quarterly or monthly intervals. Visually represent these projections using graphs and charts, which can help comprehensively understand and communicate your business’s financial options.  

Using Historical Data to Make Informed Decisions 

Historical financial data is extremely useful for business decisions. Analyzing past performance and trends helps identify patterns and anomalies, which are valuable when making accurate future projections. Key financial ratios and indicators, such as the return on investment (ROI), gross profit margin, and liquidity ratios, should be closely examined to understand financial health. For example, if historical data reveals that the ROI ratio has consistently fallen below one during the holiday season for the past three years, it should be factored into future ROI projections. Such analyses not only aid in avoiding past mistakes but also in capitalizing on successful trends, ultimately guiding strategic financial planning and growth. 

Figure out Your Funding Needs & Sources of Funding 

Determining your funding needs is an integral part of financial planning for any small business. Consider what your goals and objectives reveal about your funding requirements. Common funding needs include acquiring a competitor, opening a new warehouse or storefront, hiring additional employees, increasing production capabilities, purchasing new equipment, or covering dips in sales during off-peak seasons. Once these needs are clearly defined, explore the types of funding that align best with your business’s situation and goals. Options might include bank loans, grants, SBA loans, alternative business loans, lines of credit, or even crowdfunding. Each funding source has unique advantages and requirements, so do your due diligence before entering into an agreement. 

Outline Contingency Plan for Emergencies 

A contingency plan for emergencies is crucial for small business financial planning. Unforeseen events can severely impact operations, such as equipment breakdowns, cash flow challenges, significant sales downturns, supply chain disruptions, or natural disasters. To safeguard your business against these emergencies, identify potential risks, list down a flow of action to deal with each risk, establish a dedicated emergency fund, and make wise investment choices. An effective contingency plan provides a financial safety net, ensuring the business can withstand unexpected financial strains and maintain stability during challenging times, which will undoubtedly occur. 

Tips to create a financial plan for small business 

1. Review and Learn from Past Financial Plans:  

It is useful to reflect on the previous year’s financial plan and compare it against the actual performance. This analysis helps pinpoint where expectations diverged from reality, revealing insights for improvement. Using this information to adjust and enhance the upcoming year’s financial plan can lead to more accurate forecasting and efficient resource allocation. 

2. Collaborate with Other Departments: 

Successful financial planning in a small business context requires a collaborative approach. Engaging various departments – finance, human resources, sales, and operations – ensures comprehensive input into the financial plan. Each department contributes unique insights, from revenue projections and operational costs to staffing needs and resource allocation. 

3. Use Financial Planning Templates: 

Financial planning templates on platforms like the SBA’s Learning Center, SCORE, Microsoft Office’s template library, and QuickBooks’ online resources provide the right financial planning guidance for new entrepreneurs. Consulting with an accountant who offers financial planning services can also provide tailored guidance, ensuring the financial plan is complete, realistic, and aligned with the business’s specific needs and goals. 

4. Utilize Tools and Resources for Financial Planning:  

Financial management software has revolutionized small business financial planning by automating analysis, reporting, and forecasting. Tools like QuickBooks, FreshBooks, Xero, and other reputed software streamline financial processes, offering insights that lead to better-informed decision-making. These tools save time and enhance the accuracy of financial projections, budgeting, and long-term planning. 


About the Author

Kelly Hillock

Kelly Hillock is the content marketing manager for SmallBusinessLoans, where she writes and edits articles for small business owners. Kelly has over eight years’ experience in copywriting across a variety of industries, focusing on entrepreneurship and finance. She has a Bachelor of Arts in journalism from San Diego State University.

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