The process of financial planning for a business involves developing a comprehensive strategy to manage the company’s financial resources and achieve its goals. It entails analyzing the company’s present financial situation, identifying potential risks and opportunities, and developing a plan to optimize cash flow, minimize expenses, and increase revenue.
Businesses of all sizes require effective financial planning, as it enables them to make informed decisions about investments, expansions, and other financial decisions. With a well-designed financial plan in place, a business can navigate economic uncertainties, anticipate changes in the market, and ultimately achieve long-term success.
Financial Planning for Business Plan
Any potential investors’ attention will be drawn to the financial section of your business plan, which assesses the viability of your business idea. The income statement, the cash flow projection, the balance sheet, and the statement of shareholders’ equity make up the four financial statements that make up the financial section.
It should also provide a succinct breakdown and examination of the following.
- Taking stock of expenses
- The income statement
- The cash flow projection
- The balance sheet
#1. Taking stock of expenses
Consider your company’s expenses as falling into the two cost categories of startup and ongoing. Start-up expenses should include all costs associated with starting your firm. They might consist of:
- Registration fees for businesses
- Licenses and permissions for businesses
- Beginning inventory
- Rent deposits
- Down payments for a house
- Equipment deposits are made
- Setup charges for utilities
As soon as you begin to list them specifically, your list will grow.
Operating costs are what it costs to keep your business open. Consider this to be your monthly expenses. Your breakdown of running costs could include:
- Salaries (including your own)
- Paying rent or a mortgage
- Communications costs
- Utilities
- Basic components
- Storage
- Distribution
- Promotion
- Repaying a loan
- Admin equipment
- Maintenance
The total will show the monthly cost of running your firm once you have recorded all of your operating expenses. This number multiplied by six will give you an estimate of your running costs for the next six months. You can estimate your total start-up costs by adding this sum to your list of other startup expenditures.
Your financial statements for your business plan can now be assembled, starting with the income statement.
#2. The income statement
An overview of your company’s financial health is provided by the income statement, which lists your sales, costs, and profit for a specific time period. To calculate your profit or loss, deduct expenses from your revenue.
While established businesses often publish an income statement once every fiscal quarter or once every fiscal year, an income statement for the first year should be produced weekly.
The revenue part of the income statement will be different if your company is product-based. Sales will be the term for revenue, and you must account for any inventories.
#3. The cash flow projection
The cash flow projection displays the predicted inflow and outflow of cash for your company. It is a crucial tool for managing cash flow since it shows you when your expenses are excessive or whether you might need to make a quick investment to deal with a cash flow surplus.
The cash flow estimate will demonstrate how much capital your business idea requires as part of your business plan.
If your company has enough cash on hand to qualify for a line of credit, a short-term loan, or a longer-term investment, the cash flow projection will demonstrate to investors whether your company is a good credit risk and whether it has the liquidity to do so. In the financial portion of your company plan, you should predict cash flow for each month over a year.
Components of Cash Flow Projections
The cash flow forecast consists of three components:
- Cash receipts – Indicate the monthly sales you anticipate making. In each month you are documenting, only include the sales that are cash collectible.
- Cash disbursements – List the actual cash outlay you anticipate having to make each month using the various expense categories from your ledger.
- Cash revenue to cash expense reconciliation – The opening balance in this part represents the carryover from the operations of the previous month. This balance is increased by the current month’s revenues, decreased by the current month’s expenses, and carried over to the following month as the adjusted cash flow balance.
#4. The Balance Sheet
The balance sheet details the net worth of your company at a specific point in time. It categorizes all of the financial information about your company into three groups:
- Assets – The company’s tangible possessions that have a monetary value.
- Liabilities – Money owed to a creditor of the business.
- Equity – The remaining amount after subtracting all obligations from all assets.
Assets = Liabilities + Equity is the formula used to express the relationship between various financial data components.
You should draft a pro forma balance sheet for your business plan that compiles the data from the income statement and cash flow forecasts. A balance sheet is normally created for a company once a year.
Financial Planning Business Plan Example
The following are financial planning business example:
- Executive summary
- Company description
- Market analysis
- Products and services
- Marketing Plan
- Logistics and operations plan
- Financial plan
a. Executive summary
A page known as your executive summary provides a high-level overview of the remainder of your business plan. Saving this piece till the last is the simplest option.
b. Company description
A more thorough and complete explanation of your company’s operations and goals.
c. Market analysis
Research on supply and demand, your target market, market trends, and the competitive environment are all included in the market analysis. A SWOT analysis is something you might conduct and incorporate into your business plan.
- S – Strengths
- W – Weaknesses
- O – Opportunities
- T – Threats
Additionally, you should conduct a competitor analysis as part of your business plan’s market research section. This will outline your competitors and provide you with suggestions for how to set your brand apart.
d. Products and services
Which goods and services do you sell to your clients? This area of your business strategy defines your offerings.
e. Marketing Plan
Creating a marketing strategy before starting a firm is always a good idea. Your marketing strategy outlines how you’ll spread the news about any company, and it’s a crucial part of your business plan.
f. Logistics and operations plan
Everything behind the scenes keeps your company running well.
g. Financial plan
The financial plan breaks down sales, income, profit, costs, and other important financial parameters that are important for funding and benefitting from your firm.
Importance of Financial Planning for Small Business
Building a financial plan for a business from scratch is a useful practice for any business owner. The financial plan assists the business in making decisions on a daily basis. Information about the overall financial health and productivity of the company can be learned by comparing anticipated statistics to actual results.
A financial plan should exist for every business, even one run by one person.
- Cash management and budgets
- Long-range view
- Spotting trends
- Prioritizing expenditures
- Measuring progress
Cash management and budgets
According to Brilliant Tax & Accounting Services, creating a financial plan for a business can help you identify the items that will be needed in your short-term budgets. There are times when there is a cash shortage, and there are times when cash is in short supply because many firms see monthly or seasonal variations in revenue.
These cycles are taken into consideration when creating the financial plan by the owner in order to tightly control spending during the anticipated low revenue periods. Negative effects, such as being unable to pay employees, might arise from poor cash management.
The business owner can sleep better at night if their financial plan is set up such that there is always a cash reserve. The cash reserve enables the company to seize chances that come up, such as the chance to get goods from a supplier for a short period of time at a discount.
Long-range view
In business, it is simple to become preoccupied with the problems or crises that need to be resolved on a daily basis. The cost of being overly focused on the short term is that the owner might not devote enough time to preparing what has to be done to expand the company over the long run.
According to Spend Journal, the financial plan gives the business owner a better understanding of the expenditures necessary to keep the company growing and one step ahead of its rivals. The company’s performance can be continuously enhanced with the help of the financial strategy.
Spotting trends
It might be challenging to distinguish between judgments that led to success and those that did not since a business owner makes so many decisions over the course of a month. Setting measurable objectives that can be compared to actual outcomes over the course of the year is a necessary step in creating the financial plan.
For instance, the owner can determine whether an increase in advertising costs resulted in the anticipated increase in sales. The owner’s judgments regarding how to spend marketing funds are aided by trends in the sales of specific products.
Prioritizing expenditures
In order to succeed, small businesses must efficiently manage their finances and allocate their cash.
The advantages of financial planning for business include a business owner determining which expenses are most crucial, i.e., those that result in immediate increases in productivity, efficiency, or market penetration, as opposed to those that can wait until there is more money available.
Even the biggest, most financially secure organizations go through this prioritizing process, weighing the advantages and disadvantages of each proposed investment.
Measuring progress
Small business owners put in a lot of labor and face many obstacles, particularly in the beginning. It can be challenging to determine whether the company is making strides or stumbling in mediocrity. The small business owner gets vital inspiration from seeing that actual outcomes are better than expected.
A chart displaying consistent month-over-month revenue growth or a rising cash balance is a terrific motivator. The value of a financial plan for a business is comparable to the value of financial planning for students in that it gives the owner the ability to assess, with the help of objective statistics, whether or not the business is headed for success.
Besides, to plan your finances personally, you may check out Personal Finance Planning Process | Step-by-step Guide
Benefits of Financial Planning for Business
There are undoubtedly many benefits of business financial planning, but these few stand out.
- Clear company goals
- Sensible cash flow management
- Smart budget allocation
- Necessary cost reductions
- Risk mitigation
- Crisis management
- Smooth fundraising
- A growth roadmap
- Transparency with staff and investors
Clear company goals
Actually, this serves as the foundation of your entire financial strategy. What goals does the company have for the upcoming quarter, year, three years, and so on?
You should prove right away that there is a genuine need for your business and that it satisfies that need. Also referred to as “product/market fit,” this is The initial years of many startups that may be spent developing a product and determining product/market fit. So, with smaller checkpoints along the way, this would be your main one- to two-year aim.
Importantly, if this is your primary objective, you won’t establish ambitious sales goals or significant marketing KPIs. If the product isn’t ready to sell, what’s the sense of investing in sales and marketing for new clients?
Sensible cash flow management
The money coming into and going out of the business should be clearly defined in your financial plan. Of course, at first, you’ll spend more than you earn. However, what is a reasonable amount of spending, and how will you stay on schedule?
You must also consider how you will readily measure cash flow as part of this plan. Can you swiftly and accurately keep track of where your money is going even though the team may not include any seasoned financial experts?
You can foresee difficulties with both getting and spending money by developing your plan now, and you can find strategies to do both more successfully.
Smart budget allocation
This certainly has a tight connection to cost-cutting and cash flow management (above) (below). You need to decide how you’ll use the money after you’ve determined how much you have to spend, whether it comes from sales revenue or investments.
The business is aware of its overall budget, or its “burn rate,” for each quarter or year. Make sure that the funds allocated to each team budget (for example, those for product development, marketing, and customer service) represent their relative importance.
Each team has its own limitations to work within because of the budget. They are able to plan campaigns and the growth of their own people or products since they are aware of the resources that are accessible to them.
Tracking project or team budgets will always be simpler than keeping tabs on overall expenditures at the corporate level. It’s rather easy to keep track of who is spending what once each budget has been broken down.
Necessary cost reductions
A financial plan not only outlines how much you may spend (and on what), but it also enables you to identify savings opportunities in advance. If you’ve been in business for a while, you should first assess how much money you’ve previously spent and how quickly your company is expanding before creating a financial plan.
You’ll look back on prior expenditures as you create your budget(s) for the upcoming year and spot extraneous or exorbitant costs along the way. The budget for the following year is then simply adjusted accordingly.
Spend control, the process of maintaining business spending within your expectations includes all of this deliberate effort. The best part is that a quarterly or annual assessment nearly always reveals areas where you can save money and utilize your resources more effectively.
Risk mitigation
Helping businesses handle risk, from financial fraud to economic crises, is an essential component of the finance team’s job. There are many risks that you can see coming, even if many of them are difficult to anticipate or even avoid.
Your budget should account for some business insurance costs, and losses from dangerous inefficiencies, and maybe set aside funds for unforeseen costs.
You might really make a few financial projections, especially during tumultuous times, that depict multiple outcomes for the company: one where money is easy to come by, and one or two others where circumstances are tougher.
Again, the idea is to have backup plans in place and to try to figure out how your roadmap would alter if your growth the following quarter was only 20% instead of 30%. (or 50%). There is no need to take unnecessary risks, but you may identify potential pitfalls in your company and plan your best course of action in the event that something goes wrong.
Crisis management
Any corporate crisis usually starts with you reviewing and rebuilding your strategies. Naturally, this implies that you must start off with a well-defined company plan. If not, your only option in a crisis is to improvise.
The need to continuously re-forecast has emerged as a recurring theme among finance leaders as the 2020 financial crisis plays out. Nobody can predict with certainty when the crisis will end or how it will have affected their company. As a result, businesses at least produce fresh financial strategies every month or quarter.
Additionally, this process will be simpler for individuals who have solid and well-thought-out financial plans. They have already identified the most important levers to pull in reaction to the most evident threats, so they are not constantly starting from scratch.
Smooth fundraising
Now let’s completely leave risk behind. At some time, you’ll probably need money, whether you’re a fresh startup, an established business in need of a modest injection of capital, or you’re seeking a sizeable series-level investment.
Your business plan is also the first thing any potential investor or bank will need from you. They want to know how you plan to expand the company, what risks and ambiguities exist, and how you’ll utilize their money wisely.
Investors need to understand your financial plan, and the more successful your preparation has been in the past, the more confident they will be in your projections. So a business financial plan is a crucial tool in your toolbox, whether or not you’re looking for funding right now.
A growth roadmap
Your financial plan also enables you to forecast where you want the company to be in the future and examine your existing condition. Once more, your larger business plan will address this in general terms, including the markets you’d like to serve, the amount of staff you’ll hire, and the goods or services you intend to promote.
Input your level of investment along the route and further information is added to these targets in the financial area. For instance, if you want to hire 100 new workers this year, you’ll probably need to include recruiters in your financial plan, along with a dedicated budget for hiring new personnel.
Write down your expectations for the company’s size, the costs that come with a bigger business, and the revenue that will make up the difference. It is common to expect to spend money more quickly than you bring in if you have raised venture capital to assist with your financial growth.
However, you’ll need to reassess your position if you spend all of your money and fall short of your growth goals. In order to be able to evaluate as you go, set those growth targets immediately.
Transparency with staff and investors
A financial plan is important for investors. Nowadays, employees anticipate openness and honesty from company executives. Some startups even go so far as to make their pay publicly available.Â
Modern employees at the very least seek assurances that the business is in capable hands and headed for success. And when CEOs can discuss the financial strategy in all-hands meetings, they add actual data to a business plan that would otherwise be lacking in specifics.
Besides, you may require the services of a Financial Advisor: Description, Jobs, Companies, And Career
FAQs
What are the 5 steps of business financial planning for start up?
Survival – Manage your Cash Flow
Early Revenue – Predict Your Sales
Early Growth – Create high level budgets
Growth – Build Your Operational Plans
Scale – Make your plans dynamic
How do I create a financial plan for my start up business?
Identifying the present financial condition
Set a realistic financial goal
Consider uncertainties
Make a portfolio
Evaluate consistently
What are the 3 parts of financial budget?
Three sections make up a financial budget. These include the budgeted balance sheet, cash budget, and capital expenditure budget.
References
- https://study.com
- https://www.smartsheet.com
- https://smallbusiness.chron.com
- https://www.thebalancesmb.com
- https://blog.spendesk.com