Writing a financial plan can be pretty daunting for small business owners, but it’s vital for long-term success. Here we explore the why and how of planning your small business finances, as well as some tips from the experts.
What is a small business financial plan and why do you need one?
A small business financial plan is an outline of the business’s financial status and it’s usually part of your overall business plan. It includes income statements, balance sheets, and cash flow information. They’re a must-have for small business owners because, as the saying goes, ‘knowledge is power’ when it comes to running a business.
A good financial plan will show you where your startup stands and help you decide where to allocate resources. Financial plans help you set your financial goals and business goals, make well-informed financial decisions, spot opportunities and track your metrics. Importantly, they also provide proof that your ideas are profitable — both for an entrepreneur’s own reassurance and for when pitching to lenders and investors.
What’s more, a sound financial plan can help a small business make its way towards sustainable growth because you can use it to plan business growth and survive cash flow fluctuations.
What goes into a financial plan for a small business?
The essential parts of a financial plan for a small business are:
- An income statement (or profit-and-loss statement) This shows your business’s day-to-day profits and losses over a short period, typically three months. It lists factors such as your expenditure on producing goods and services; your operating expenses (eg rent and utility bills); revenue streams, gross margin (ie the amount of total net profit or loss); and a balance sheet.
- A personnel plan: an overview of everyone employed by the business, helping you to see when it’s time to add to the team, and whether they should be full time, part time or contractors, as well as compensation levels and future forecasts of these costs.
- Business ratios: these provide a way to drill down into individual areas of the business; things like your net profit margin, return on equity, accounts payable turnover, assets to sales, working capital and total debt to total assets. Numbers used to calculate these ratios come from your P&L statement, balance sheet and cash flow statement and are often used to back up your request for funding for the business.
- Sales forecast: ie how much you expect to sell during a given period. This needs to be an ongoing part of the plan because it helps predict cash flow and the overall financial health of your business. It needs to be consistent with the sales number within your P&L statement.
- Cash flow projections: the cash flow statement is probably the most important part of the financial plan. The cash flow forecast should show how much cash you have now, where it’s going, where it will come from and a schedule for each activity.
- Income projections: this is how much money will your company make in a given period, usually a year, less the anticipated expenses.
- Assets and liabilities: what your company owns (business assets) and your business obligations such as payroll, taxes, short-term and long-term loans (liabilities) are both part of your balance sheet.
- Break-even analysis: Your break-even point is how much you’d need to sell to cover all of your expenses. This is used to guide your sales revenue and volume goals. By understanding your fixed costs you can work out how much to charge for your goods and services and what sales and revenue goals to set to be a successful business.
Five financial planning tips for small business owners
1. Don’t mix business with pleasure
While it’s tempting to use a single bank account for everything, don’t. It can leave you personally liable for your company’s debts and liabilities, leaving you in a state of financial confusion or even ending up in legal trouble.
Forbes financial expert Justin Goodbread recommends having a separate business bank account and credit card. This division makes tracking expenses, calculating taxes and maintaining clear financial records simple. It also safeguards your personal assets from any potential business liabilities, he says.
2. Create a bullet-proof business budget
It’s pretty much impossible to hit your targets and achieve business success without a clear direction for your business’s finances. Budgets are your road map to setting realistic expectations for revenue and expenses. Start by listing each of your income sources and breaking down your expenses. When you’ve made a budget, you should review and update it regularly to keep yourself on track.
3. Watch cash flow like a hawk
Cash flow is the lifeblood of small businesses and startups. But Business Insider reports that 82% of small-business failures are down to poor cash flow management. To keep your business in a strong financial position, always invoice promptly and follow up on overdue payments; negotiate fair payment terms with suppliers; cut out any non-strategic expenses; keep a safety net reserve of cash for emergencies and think about taking out short term loans to cover seasonal fluctuations.
4. Get a financial advisor
Getting professional guidance from accountants, financial advisors or consultants can make all the difference for your business. Engaging the services of someone with financial planning know-how will help you to make properly informed decisions, aid your tax planning to minimise your tax liabilities and help to spot chances to save money.
5. Talk to tax professionals
Taxes can place a substantial burden on your small business. But with a bit of strategic planning and the help of a tax professional, you can cut down your tax burden perfectly legally. Understanding the tax code and taking advantage of deductions and credits available to you can make a big difference to your bottom line.
Get a head start on your business career
If you want to kick start a new career in finance or you’re an ambitious professional focused on becoming a finance leader, the online MBA Finance at North Wales Management School is for you.
This uniquely flexible MBA provides the chance for busy working professionals to transform their career prospects, fitting study around family and work commitments.
Join this MBA and you’ll benefit from career-focused, high-quality teaching: North Wales Management School is ranked in the top 10 in the UK for teaching quality in the Times and The Sunday Times Good University Guide, 2024.
What’s more, you’ll develop key management skills needed by senior finance professionals and finance entrepreneurs alike, from how to prepare financial statements to managing overseas investment. Find out more
