Thorough strategizing is key if you want your small business to thrive long-term. A great concept is nothing without a sound business model, and that includes detailing a financial business plan.
A financial plan for small businesses provides a roadmap for achieving short and long-term revenue goals. Financial planning also takes some guesswork out of running your organization’s operations. You gain a clearer view of expenses and projected revenue and can better prepare to navigate unexpected hurdles.
(If you’re short on time and want to learn to create a dynamic financial business plan in four easy steps, scroll to the last section.)
What’s a financial plan?
A financial plan is a formal strategy that outlines a team’s current monetary resources and future goals and projections. It promotes efficient finance usage and informs decision-making processes, including price setting, labor spending, and growth initiatives.
Well-thought-out financial business plans clarify where your business stands and where it can go. When considering whether to pursue a growth opportunity, such as launching a new product or expanding, your plan helps you determine if the move is viable and fiscally responsible.
Why is a financial plan important for businesses?
Without a financial plan, your team lacks transparency in revenue, expenses, and profits. This can increase and further complicate the day-to-day tasks involved in running a business, and the minutiae may distract you from growing your venture.
The financial planning process forces you to consider how each decision could impact your bottom line and which scenarios would require you to dip into your reserves. It’s also helpful for monitoring financial performance, tracking key metrics, and managing cash flow.
Key components of a financial business plan
Regardless of your business’s size or industry, you must include the following critical components in your financial plan. Each element provides a piece of the puzzle — and together, they reveal your company’s recent financial performance, current revenue and expenses, and projected sales.
Sales forecasting
Do you know how much your business will generate in sales next month? What about next quarter or next year? If these questions have you scratching your head, it’s time to engage in sales forecasting. A sales forecast provides a rough estimate of your sales revenue for each increment.
Before you create forecasts, look back on previous sales cycles and note trends that may impact your revenue. If February is a historically slow month, for instance, your monthly and Q1 forecasts should reflect this dip. Otherwise, you might overestimate your revenue, spend too much, and stumble into a financial bind.
Expense plan
An expense plan, sometimes called an “expense outlay,” details all recurring expenses. Some to include are:
- Labor hours
- Utilities
- Shipping and storage expenses
- Inventory costs
- Equipment maintenance
- Rent
- Marketing
When creating your plan, make sure to differentiate between essential and regular expenses. A regular expense is something you’d like to continue paying for but can cut back on if necessary. Marketing is a good example — while it’s essential for your business, the amount you spend on it is flexible if you find yourself in a financial bind.
Cash flow projection
You should clearly understand your monthly, quarterly, and annual cash flow. Projecting a year’s worth of cash flow allows you to stay ahead of financial challenges that may manifest in the months ahead.
Creating and analyzing cash flow projections is also a great way to identify bottlenecks or sources of waste. Once you pinpoint cash flow problems, proactively address them before they send your business into the red.
Assets and liabilities
Assets and liabilities are the core components of your company’s balance sheet as they determine your organization’s net worth.
First, carefully value your assets, including inventory, machinery, and property. Then, account for all outstanding bills. Use this information to create a balance sheet that offers a real-time glimpse into your team’s financial position.
Operations plan
Your operations plan outlines the company’s operational needs, such as critical tasks, required labor, and necessary resources. In your plan, identify what roles are mission-critical, how much work each team member can handle, and the cost of each link in your supply chain.
If you’re focused on growth, you’ll need to tightly control supply chain costs and payroll. An operational plan will reveal opportunities to optimize your business model via vendor changes, technology investments, and automation.
Break-even analysis
A break-even analysis evaluates your business’s fixed costs compared to the generated revenue from each product you sell. This calculation identifies how much sales volume you need to cover all fixed costs and begin turning a profit.
After completing a break-even analysis, you can determine your margin of safety.
How to create a financial plan for your business: 4 steps
When crafting an effective financial plan, there’s no one-size-fits-all approach — each business has unique needs and circumstances that affect optimal finance management. However, there are established best practices that can help you put together a cohesive financial strategy.
These four steps will help you form a plan aligned with your business goals.
1. Begin with a strategic plan
Before you break out your calculator and start crunching numbers, ensure you have a comprehensive strategic plan that covers your primary business goal, secondary objectives, and a series of milestones that will push you closer toward success. It must also identify the necessary resources to achieve your goals. For example, you may need to hire more personnel, upgrade your equipment, or form a new partnership. If achieving your strategic goals requires a large-scale revamping of your business model, it’s wise to invest in change management.
Retooling your business is a great way to circumvent growth barriers, but it’s also hard on your staff and customers. It can convolute employee workflows, lead to changes in roles and duties, and disrupt customer interactions. Make sure you account for these challenges in your strategic plan.
2. Generate financial projections
Next, create financial projections based on your sales forecasts and anticipated expenses. If you’ve been in business for a few years, you should understand your recurring expenses well.
At a minimum, you must run sales forecasts and anticipated expense calculations to address best and worst-case scenarios and the most likely outcome. Your annual journey will likely include a mix of successes and missteps, but it’s wise to know what will happen if nothing goes your way.
3. Prepare for the unexpected
Your financial business plan should leverage cash flow statements and balance sheets to help you prepare for worst-case scenarios. For instance, what would you do if incoming cash vanishes for 30 days or your primary supplier goes under, leading to a multi-week production delay?
Sitting on a huge pile of cash all year can hinder your long-term growth, so it’s understandable if you want to keep your reserves lean. But it’s still wise to maintain some reserves to deal with the unexpected. If this isn’t possible in your current situation, you could open a line of credit to access funds quickly in an emergency.
4. Monitor and adapt
Meticulously track your sales and cash flow to see if your company’s performance aligns with your financial plan, regularly checking in to uncover potential problems before they put you in a financial bind.
Make it a point to track everything that could impact your financial health, including inventory turnover, dead stock levels, and fulfillment efficiency. Financial metrics signify what happened, but they often don’t reveal the “why.”
With that in mind, you need to look at big-picture data points and more granular insights. Not sure where to start? Check out our list of 15 production planning KPIs, which will help you gauge your organization’s health.
Easy inventory management with Fishbowl
If you want to transform your financial business plan into a roadmap for success, you’ve got to rein in your unruly inventory. Your stock represents one of your single largest expenses. Investing in inventory management software like Fishbowl will give you real-time insights into your manufacturing processes, stock control, sales, and warehouse management.
Make every dollar count and support your financial business plan now and into the future with Fishbowl.