Proper financial planning will increase your company’s ability to foresee and address potential problems, and to adapt to any changes that may arise. Getting a good handle on your finances is one of the most crucial jobs of a business owner. However, many business owners don’t do the basic financial housekeeping that will give them greater control over their company and more peace of mind.
A financial plan is different from your financial statements. Instead of looking at what’s already happened, you make projections for the coming months, forecasting income and outlays. Your projections will act as an early warning system, helping you to plan for cash flow dips, identify financing needs and pinpoint the best timing for projects. More importantly, it is a tool for monitoring your finances, allowing you to gauge your progress and quickly head off trouble.
Here are the steps to create your financial plan:
1. Review your strategic plan
Financial planning should start with your company’s strategic plan. Think about what you want to accomplish over the plan’s timeframe. Then, determine the financial impact in the next 12 months, including spending on major projects such as equipment purchases, a move to a new location or a website redesign.
2. Develop financial projections
Create monthly financial projections by recording your anticipated income based on sales forecasts and anticipated expenses for labor, supplies, overhead, etc. Then, plug in the costs for the projects you identified in the first step.
For this job, you can use simple spreadsheet software or tools available in your accounting software. Don’t assume sales will convert to cash right away. Enter them as cash only when you expect to get paid based on your past experience.
Also prepare a projected income (profit and loss) statement and a balance sheet projection. It can be useful to include various scenarios—most likely, optimistic and pessimistic—for each projection in order to help you foresee the financial impacts of each one.
Your projections can also help you analyze the impacts of different strategies for your new business. What if you charged a different price? Or were able to collect bills more quickly? Or opted for more efficient equipment? Entering the various numbers shows how such decisions would affect your finances.
3. Determine your financial needs
Your financial projections will help you see if your business plans are realistic, whether you’ll have any shortfalls and what financing you may need. Use your financial projections to determine your financing needs. The documents will also be vital for building a case for business loans. Approach your financial partners ahead of time to discuss your options. Well-prepared projections will help reassure bankers that your financial management is solid.
4. Plan for contingencies
What would you do if an unexpected event threw off your projections? You should do some contingency planning ahead of time. It’s a good idea to have emergency sources of money before you need them. You may want to consider having enough cash for 90 days of operations by maintaining a cash reserve in the bank or having an available balance on your line of credit.
Periodically, compare actual results with your projections to see if you’re on target or need to adjust. Monitoring helps you learn more about your company’s cash flow cycle and spot financial problems early on, when they’re usually easier to address.
6. Get help
If you lack the expertise, consider hiring an expert to help you put together your financial plan.
If you’d like help creating your comprehensive financial plan and understanding the related financial statements … we can help. We specialize in helping businesses create comprehensive financial plans, monitor their financial activity and understand their financial statements. So, if you don’t have the expertise or resources, click here to contact us!
Here's more information on how to create a comprehensive financial plan for you business.