Many small businesses lack a full financial plan.
Evidence shows that complete financial plans are essential to the long-term success and growth of your business: A Palo Alto Software survey found that entrepreneurs who had completed a business plan for their venture were more than twice as likely to successfully grow their business as those who had no plan or an incomplete financial plan. Here's a guide to the six key elements of a successful small business financial plan.
What is a business financial plan, and why is it important?
A financial plan for your business is an overview of your business's financial situation and a forward-looking projection for growth. There are typically six parts to a full financial plan: sales forecasting, expense outlay, a statement of financial position, cash flow projection, break-even analysis, and an operations plan.
Tips on writing a business financial plan
Business owners should create a financial plan annually, ideally at the beginning of the calendar or fiscal year, to ensure they have a clear and accurate picture of their business's finances, as well as a realistic view on future growth or expansion. Having a plan in place helps the business's leaders make informed decisions around purchases, debt, hiring, expense control and overall operations for the year ahead. A business financial plan is also essential if a business owner is looking to sell their business, attract investors or enter into a partnership with another business.
It is also recommended that the author of the financial plan review the previous year's plan against actual performance and finances to see how accurate the previous plan and forecast was. Any discrepancies or overlooked elements can be better addressed or incorporated in next year's plan, making it more accurate and dependable.
A business owner, or the individual charged with creating the business financial plan, should collaborate with the finance department; the human resources department; the sales team; the operations leader; and those in charge of machinery, vehicles, or other significant business tools. Each division should provide the necessary data about projections, value and expenses. All of these come together to create a comprehensive financial picture of the business.
The Small Business Association (SBA) and SCORE, the SBA's nonprofit partner, are two excellent resources to learn about financial plans, the elements of a comprehensive plan, and how best to work with the different departments in your business to collect the necessary information. Many editorial entities like business.com and service providers such an Intuit offer advice on this matter.
If you are unsure or encounter a challenge while creating your business financial plan, business owners and leaders can seek advice from their accountant or other small business owners in their network. Your local city or state has a small business office that you can contact for help.
Business financial plan templates
The SBA's Learning Center offers a course about creating a business plan; it offers worksheets and templates, too, to help you get started. Because SBA is a government organization, its resources are free. You can seek additional help from your local office for more personalized advice.
SCORE is the largest volunteer network of business mentors. It began as a group of retired executives (SCORE stands for Service Corps of Retired Executives) but has expanded to include business owners and executives from many different industries. Advice is free and available online; there are also 320 offices nationwide. In addition to group or at-home learning, you can be paired one on one with a mentor for individualized help. SCORE offers templates and tips for creating a small business financial plan. SCORE is an excellent resource; their courses address different levels (from beginner to seasoned business owner), and the individualized help of a mentor is incredibly valuable.
Other templates can be found in Microsoft Office's template library, QuickBooks' online resources, Shopify's blog, and HubSpot's business resources. You can also ask your accountant if they can provide guidance; many accountants provide financial planning services in addition to their usual tax services.
The 6 components of a successful financial plan for business
1. Sales forecasting
You should have an estimate of your sales revenue for every month, quarter and year. Identifying any patterns in your sales cycles helps you better understand your business; it's also invaluable as you plan marketing initiatives and growth strategies. A seasonal business can aim to improve sales in the former off season to become a year-round venture, while another business might become better prepared by understanding correlation in upticks and downturns in business due to factors like the weather or economy.
Sales forecasting is also the foundation for setting company growth goals. For instance, aim to improve your sales 10% over each previous period.
2. Expense outlay
A full expense plan includes regular expenses, expected future expenses and associated expenses.
Regular expenses are the current ongoing costs of your business, including operational costs like rent, utilities and payroll. Regular expenses relate to standard business activities that occur each year, such as conference attendance, advertising and marketing spend, or the office Christmas party. A full list of regular expenses will make it easier to distinguish essential expenses from expenses that can be reduced or eliminated if needed.
Expected future expenses are known future costs, such as tax rate increases, increased minimum wage or maintenance needs. Generally, budget should also be allocated for unexpected future expenses, such as damage to your business caused by fire, flood or other unexpected disasters. Planning for future expenses ensures your business is financially prepared via budget reduction, increases in sales or financial assistance.
Associated expenses are the estimated costs of various initiatives, such as the cost to acquire and train a new hire, open a new store or expand delivery to a new territory. An accurate estimate of associated expenses helps you properly manage growth and prevents your business from exceeding your cost capabilities. As with expected future expenses, understanding how much capital is required to accomplish various growth goals helps you make the right decision about financing options.
3. Statement of financial position (assets and liabilities)
Assets and liabilities are the foundation of your business's balance sheet and the primary determinants of your net worth. Tracking both ensures you are maximizing your business's potential value. Small businesses frequently undervalue their assets, such as machinery, property or inventory, and fail to properly account for outstanding bills.
Your balance sheet, or financial position, offers a more complete view of your business's health than a profit and loss statement or a cash flow report. A profit and loss statement shows how the business performed over a specific time period, while a balance sheet shows the financial position of the business on any given day.
4. Cash flow projection
Similar to projecting your expenses, a savvy business owner should be able to predict their cash flow on a monthly, quarterly and annual basis. Projecting cash flow for the full year allows you to get ahead of any financial struggles or challenges. It can also help you identify a cash flow problem before it negatively impacts your business. You can set the most appropriate payment terms, such as how much you charge upfront or how many days after invoicing you expect payment.
A cash flow projection gives you a clear look at what money is expected to be left at the end of each month, enabling you to plan a possible expansion or other investments. It also helps you budget smarter, such as spending less one month for the anticipated cash needs of another month.
5. Break-even analysis
This section analyzes fixed costs relative to the profit earned by each additional unit you produce and sell. This is essential to understanding your business's revenue and potential costs versus profits of expansion or growth of your output. Having your expenses fully fleshed out, as described above, makes your break-even analysis more accurate and useful.
Break-even analysis is also the best way to determine your pricing. A break-even analysis can tell you how many units you need to sell at various price points to cover your costs. You should aim to set a price that gives you a comfortable margin over your expenses while allowing your business to remain competitive.
6. Operations plan
To run your business as efficiently as possible, craft a detailed overview of your operational needs. Understanding what roles are required to operate your business at various volumes of output, how much output or work each employee can handle, and the costs of each stage of your supply chain aid you in making informed decisions for your business's growth and efficiency.
It's important to tightly control expenses, such as payroll or supply chain, relative to growth. An operations plan can also make it easier to determine if there is room to optimize your operations or supply chain via automation, new technology or superior supply chain vendors.
For this reason, it is imperative that the business owner conducts due diligence and becomes knowledgeable about merchant services before acquiring an account. Once the owner signs a contract, it cannot be changed, unless the business owner breaks the contract and acquires a new account with a new merchant services provider.
In conclusion, the business owner should undertake steps to plan cash flow generation in order to derive maximum profits from accepting credit cards for products and services.
Original article at : https://www.business.com/articles/6-elements-of-successful-financial-plan/