If you own a small business or you’re considering starting one, the business financial plan should be one of your priorities. It’s not always easy to do, and sometimes the bare honesty of the figures can be daunting, but it’s a crucial step in starting or growing your business.
What is a Financial Plan?
A business financial plan is a snapshot of your company’s financials and future growth projections. It’s made up of several important financial documents which we’ll explain shortly. Generally, you use a financial plan in a business plan – bearing in mind that your business plan includes a range of other factors that aren’t necessarily financial. Business financial plans are usually used during business planning, when applying for loans, or to attract investors and other shareholders.
Benefits of a Financial Plan
The main benefit of a financial plan is to assist with business planning. You get an accurate, honest overview of your financials, meaning you can plot a way forward. If you’ve got financial goals for your business, the financial plan is a way to get you there. You can analyse your performance, look for ways to reduce expenses, and even analyse the viability of expansion or new products and services.
As we mentioned, it’s also beneficial if you’re looking for investors, because they want to see how you’re performing and what scope you have for future growth.
Key Components of a financial plan
There are several key elements to understand when learning how to write a financial plan. These include:
Profit and loss statement
The profit and loss statement shows your total revenue, your cost of goods sold, all other operating expenses, and finally a net income figure.
The balance sheet is a list of all your assets, liabilities and equity.
You use your sales forecast to help project cash flow throughout the year. It’s an accurate expectation of the sales you make during the year, and how much income is generated.
The personnel plan may not be significant for start-ups or very small businesses, but if you intend to employ staff, you need a good representation of their costs and the value they bring to the business.
This is the number of sales you need to generate to cover all of your expenses.
For existing businesses, the best source of gathering all this information is through your accounting system, or your point-of-sale system. Square Point of Sale is more than just a system to manage transactions. It will also collect all of the data and analytics you need to compare your progress against a financial plan throughout the year. Square POS also gives you the historical data you need to make accurate projections.
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How to Write a Financial Plan for Your Small Business
If you want to learn how to write a financial plan in your business plan, for example, for a new business, the process will be slightly different because you rely mainly on forecasting rather than previous financial analysis. However, we’ll cover both situations below to give you a good understanding of a financial business plan regardless of whether your business already exists, or hasn’t yet started.
1. Prepare your profit and loss
If you have any existing profit & loss statement, this is a great place to start because it gives you solid data on how much income you’ve generated and what your expenses are. This is a vital tool for all sorts of business planning because here you can identify where you can reduce expenses or increase revenue.
For a brand-new business, you would be projecting a lot of these figures. Some of your expenses will be known, but you’ll need to rely on industry benchmarks and market research to get a good picture of your projected profit and loss.
2. Work out cash flow projections
Cash flow is a crucial, yet often forgotten factor when writing a business financial plan. In a cash flow projection, you need to consider month by month what your incomings and outgoing will be. This is to ensure you have enough money on hand at all times to keep the business afloat. For example, you always need to have enough money to cover wages, rent and other overheads.
To do this, you can analyse previous financial years. If that’s not possible, you’ll need to do a little bit of guesswork. When projecting cash flow, allow for late payment of invoices, because the reality is that some customers may not pay you on time.
It’s also important to stick to one method of accounting. You can choose between accrual and cash accounting. In accrual counting, you record income and expenses as the event occurs. So, when you issue an invoice, that instantly becomes income. In cash accounting, you only record income and expenses when money changes hands.
For smaller businesses trying to accurately predict cash flow, the cash accounting method is a good option because it shows you when money physically comes in and goes out of your business. Alternatively, if you run a business that takes pre-orders, you may want to use the accrual method so that your income and expenses match up for certain events. Consider a business that promotes concerts. You may sell all your tickets in October but not stage the concert until December. If you used the cash method, your income and expenses for that event wouldn’t line up.
3. Assess your balance sheet
As we touched on, a balance sheet shows all of your assets and liabilities at any given time. When planning, consider everything you have on hand, including inventory, materials, vehicles, hardware and everything else the business owns.
Then, look at all your liabilities. This might include business loans and unpaid debtor invoices. For a brand-new business, you’ll need to forecast the value of your assets and liabilities based on everything you need to get up and running.
4. Run a break-even point analysis
Perhaps the most important part of a business financial plan is your break-even point. This shows you how many sales you need to make to cover your costs. Accuracy is paramount here, because if you can’t reach a break-even point, your business isn’t going to be profitable. Many new business owners make the mistake of trying to manipulate income or expense projections to show a favourable break-even point, however, this isn’t healthy. It’s important to take an honest look at your profitability, otherwise, you risk putting yourself in financial distress.
Once your break-even point is determined, you can confidently bring everything together in a neat financial business plan.