Whether you’re starting a brand new business or expanding an existing company, a financial plan is essential to help your small business grow. A financial plan is usually created after you’ve completed a business plan outlining your market research, your company’s operating principles, and described your services, products, and marketing strategies.
The main aim of creating a financial plan is to act as a proactive strategy and help your business run on a predefined budget so that there are no undefined or hidden costs that may put your business operations at risk in the future.
Here are a few steps to create an ultimate financial plan for your small business:
Step 1: Review your Strategic Plan
The first step for creating a financial plan is to review your company’s strategic plan. Your strategic plan determines where your company is going, and it focuses on optimizing your future potential. So you must know what you want to achieve from the beginning and ask yourself the following questions:
How will my plan affect my company’s cash flow?
Do I need to expand?
Do I require more resources?
Do I need more equipment?
Should I hire more staff?
Is more financing required? If so, how much?
Asking yourself these questions will help you to formulate and implement strategies, increase productivity, and measure your success. Once you’re done reviewing your strategic plan, now it’s time to identify what the financial impact looks like for the next 12 months, including expenditures on big projects.
Step 2: Create Monthly Financial Projections The next step is to start developing monthly financial projections, which will help you foresee your cash flow needs. To create financial projections, you can record the expected expenses for supplies, labor, overhead costs, and more.
You should also record your anticipated income based upon the company’s sales forecast. Note that businesses with limited cash flow should consider making weekly projections. Furthermore, add the costs of the projects you determined in the first step. There’s plenty of accounting software tools out there for you to choose from to help you keep track of it all. When entering sales, make sure not to assume and convert it to cash right away. Only convert the sales to cash when you expect to get paid.
You can even prepare a balance sheet projection or profit and loss statements, which can be useful to incorporate several optimistic scenarios for your projections that will further help you to anticipate the effects of each one.
Always remember, making financial and cash flow projection every year is an essential tool for the sustainable growth of your business. So it might be a good idea to seek the advice of an accountant as well.
Step 3: Organize Your Finances Make use of your financial projections to identify your financing requirements. Small business owners should consider talking to their financial partners beforehand to discuss all their options. This will help them to stay prepared for upcoming financial situations. Also, well-planned projections reassure bankers that your financial management skills are strong.
Step 4: Plan for Unforeseen Circumstances Have you ever thought about what you would do in a financial crisis? It’s essential to have emergency funds on-hand before you actually need them. A general rule of thumb is to have at least six month’s expenses set aside. This may sound like a lot, but if you start saving now you’ll reach your goal in no-time. To make matters even easier, try automatically depositing a portion of your profits into a savings account.
Another essential part of your emergency plan should include adding Business Interruption insurance to your portfolio. This policy will help cover revenue lost if your business is forced to close due to an unforeseen event, like a natural disaster.
Step 5: Monitor Over the year, keep comparing actual results with your projections to check whether you’re on track and adjust where needed. Regular monitoring will help you to point out financial issues before they spin out of control.
Step 6: Seek Assistance If you are still wondering how to create a financial plan for a small business and you lack expertise, you should seek assistance from an expert who will help you to set up your financial plan.
Final Thoughts Hopefully, this guide on how to create a financial plan for a small business helps you meet your goals.
Creating a financial plan allows you to check all business expenses of the previous year and identify where you can improve.
In the end, make sure to review actual financial results every month as it will provide you with crucial information on changes you can make to improve your financing.
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