A financial plan is essential as it is a financial roadmap for your business’ success. Creating a financial plan will set the tone for your business goals each year and prepare you for potential costs that need attention. Therefore, it is one of the most critical and valuable plans you’ll put together as a small business owner.
What is a financial plan?
Financial plans will allow you to focus on your most important goals and measures of success. A financial plan assists you in analysing your current and future financial ideas as well as planning for future investments. Then, you can track and develop these ideas as your business grows. It should include varied budgets to suit your business needs. It’s a vital part of your overall plans, helping to determine if your finances are viable.
There are multiple steps you need to take to build a solid financial plan. The following article will cover borrowing funds, profit and loss margins, balance sheets, financial projections, and understanding your break-even point.
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If you are a start-up company, you must consider any funds you need to borrow. Your business may be profitable, but you are still at risk of running out of money due to customers needing to pay their accounts immediately. If you aren’t a start-up company, you will still need a good grasp of upcoming costs as you may need to borrow funds. It would be best if you also prepared for unexpected contingencies, such as needing new and expensive equipment immediately or a sudden need for more staff. Once you have identified possible upcoming costs that may require you to borrow funds, calculate the impact over the next twelve months and add these details to your financial plan.
Profit and Loss Margins
You need to evaluate your expected profit and expenses over the next twelve months so your business can take a balanced approach with future pricing targets and profit goals. This information will serve as a baseline for your profits and loss expected for the year. In addition, this will help determine when weaknesses or strengths appear in unexpected areas of your finances throughout the year.
Create a list of your liabilities and assets from your past twelve months. This set of information will provide you with an approximate evaluation of your business's financial health. Your balance sheet should include your liabilities, assets, and the owner's equity. A clear and accurate balance sheet will provide enough information to understand if your business can continue to run yearly.
As mentioned in the "borrowing funds" section, you may have slow-paying customers, resulting in needing to borrow money. Look at your previous twelve months – are there many significant accounts that make unpunctual payments? Will these payments dramatically affect your business and cause trouble in your cash flow? These are essential questions to answer.
A clear projection of your cash flow can help you determine if your company has enough funds to continue daily operations or if you need to plan for borrowing at specific points in your financial year. Managing your cash flow effectively is a great way to avoid unnecessary fretting.
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Understanding Your Break-even Point
Break-even is the point at which your total costs and revenue are equal, the point where your production costs are equal to your product's income. Firstly, analyse the approximate sales you will need to make in the financial year to cover all expected costs and expenses. Once you’ve calculated these figures, it will guide your financial forecasting and your expected profit and loss margin. The break-even point will also determine if your business is viable now and in the future.
By now, you should have a strong idea of what information you need to gather to put together a financial plan. Each of these sections is essential to analyse and evaluate your current situation, so you can create a well-informed plan. The plan will set the tone for your financial year and your success.
Without goals, where are you aiming? And how will you make an informed decision without the information to guide your financial decisions?
Your business may be profitable, but you are still at risk of running out of money. Be realistic with your expectations from paying customers because they don't all pay their accounts immediately.
Budgeting will prove to be a key tool for maintaining healthy finances. Focus on good cash flow and operating your business within its limits.
It is encouraged to keep tabs on your financial health throughout the year by paying close attention to your balance sheets and cash flow. Your financial health requires proper attention, so you know when something is going wrong or you notice something out of the ordinary.
Financial projections will keep your business striving toward goals and help you set up manageable steps to reach them in no time.
It is beneficial to have a member of staff or management keep a close eye on all areas of finances to ensure things run smoothly. They can reassure you are on track to hit targets, identify if your business is moving in the wrong direction, and then take necessary actions to change this.
We recommend onboarding a professional to assist in your financial planning, as your numbers and estimates must be accurate to create a solid financial plan. Creating a financial plan is vital to ensuring your business is viable and able to maintain financial health for years to come.
Be sure to spot-check your financial plan more than once a year, as it’s a significant part of your business that requires attention to detail and which calls for frequent revisiting.
You never know - If you keep modifying your financial plan, your goals may begin to lead your business in directions you’d otherwise never thought was possible!
If you would like more information on setting a financial plan or on our Profit First system, please reach out and book an appointment.