A financial plan is a crucial tool that can help small business owners anticipate and manage their finances effectively. It differs from financial statements, which look at past performance, by projecting income and outlays for the coming months.
Here are six steps small business owners can follow to create a financial plan that acts as an early warning system for their business.
- Review your strategic plan: Start by reviewing your company’s strategic plan for the year. Ask yourself questions such as whether you need to expand, hire more staff, or invest in new resources. Determine the financial impact of these decisions in the next 12 months and how they will affect your cash flow. Consider whether you will need financing, and if so, how much.
- Develop financial projections: Create monthly financial projections based on anticipated income from sales forecasts and expected expenses for labor, supplies, and overhead costs. For businesses with tight cash flow, weekly projections may be necessary. Enter sales as cash only when you expect to receive payment based on prior experience. Prepare a projected income statement and balance sheet projection. It can be helpful to include multiple scenarios, such as most likely, optimistic, and pessimistic.
- Arrange financing: Use your financial projections to determine your financing needs and approach your financial partners ahead of time to discuss your options. Well-prepared projections can reassure bankers that your financial management is solid.
- Plan for contingencies: Have emergency sources of money before you need them, such as maintaining a cash reserve or keeping lots of room on your line of credit.
- Monitor: Throughout the year, compare actual results with your projections to see if you’re on target or need to adjust. Monitoring helps you spot financial problems before they get out of hand.
- Get help: If you lack expertise, consider hiring an expert to help you develop your financial plan.
Remember, a financial plan can act as an early warning system for your business, helping you to plan for cash flow dips, identify financing needs, and monitor your finances effectively.
By following these six steps, small business owners can create a financial plan that suits their needs and helps them manage their finances with confidence.