Preparation is the game’s heartbeat when setting a solid foundation for your small business. And what’s critical in that preparation is a solid financial plan. A financial plan helps you pitch to prospects, anticipate growth and forecast cash flow shortages.
Swissmoney, a fintech solution provider, reveals some significant elements and the importance of solid financial planning for your small business. But first, let’s discuss what’s known as a financial plan.
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What Is A Financial Plan?
A financial plan helps measure your idea’s sustainability and your financial health as your business grows. It involves a well-put-out evaluation of your business’s money situation, which includes debt, saving, and spending habits within a financial year.
It is also an integral part of your financial statements – balance sheet, cash flow, and income statement – it is necessary to include a short explanation or analysis of each statement in your business plan.
A strong financial plan helps you know where your business stands and lets you make informed decisions about your business.
Why A Strong Financial Plan is Important for Your Small Businesses?
Every small business owner desire to enlarge their business. But one thing that determines how possible that can be is their financial plan. A business with a weak financial plan will not swim but sink.
A detailed financial plan enhances the level of your confidence while helping you understand how to generate ideas on how to allocate resources.
More so, setting a strong financial plan for your business helps you make informed decisions that can positively impact and set it up for growth.
Furthermore, a financial plan can effectively convince investors to consider investing in your business. It helps to show them how your organization manages expenditures, income, and debt.
Therefore, it doesn’t only help you make informed decisions and make prospects have a good impression of your business. It shows your business’s current financial position and how much it needs from sales and investors to meet financial targets.
Elements of a Small Business Financial Plan
Whether you are starting from scratch or you just want to brunch your plan, a financial plan should have the following elements;
Income statement: This component will show how your business faces loss or profit over a time – usually within three months. Other names people call this section are pro forma income or profit-and-loss statements, which should include the following;
- The cost of goods
- The total net loss or profit, or what’s known as a gross margin.
- Operating expenses such as utilities and rent.
- Revenue streams – this comes in the form of sales.
Balance Sheet: instead of peering into the future or turning back to see what’s left behind, the balance sheet shows where your business stands – what you owe and what you own. And in your balance sheet, you figure out the following;
- Your asset
- Shareholder equity
- Liabilities
Sales forecast: Your products need to be sold. So, you must know how much you will sell at a particular time. A sales forecast is an ongoing process that must be done constantly to know how well your product is selling. This will help you determine your business’s financial health.
Income projections: How much you think your business can make within a specific period, usually a year. Calculate that subtract your anticipated expenses and you will figure out your income projections.
Cash flow projection: without a doubt, this part stands as one of the most important aspects of forming a strong financial plan. You need money to run your business. So, understanding how much you are expecting and when it will come will reveal the difference between your cash position and profit.
Steps to Set up a Financial Plan for Your Small Business
If you are thinking up a financial framework for your small business, below are provable steps you can follow;
Have a strategic plan: almost everything we do will succeed if we have an accurate plan. Starting with a strategic plan will help you figure out the solution you want your business to provide or the problem to solve.
Before thinking about the figures, first reflect on what you will need to achieve your business goals. Will you need to hire more hands or buy more equipment? What are other resources you need to put things in place? Is there a chance of new goals negatively impacting your cash flow?
Create financial projections: you should do this based on the anticipated expenditure and sales forecasts. Check your goals and add the cost needed to achieve them. Add various circumstances or scenarios that may affect your expectation.
Create a range that is optimistic but doesn’t forget that unprepared or worse things happen at times. So, you prepare for both situations and anticipate the impact of both on each other.
If you have an accountant in your team or plan to have one, it is wise you go over your plan with them to understand how to explain it to your prospect in case you are called to defend your plan.
Track and compare your goals: Take a look at your actual results in your cash flow statement, business ratios, and income projections. It is necessary you check them regularly to know whether you are still on track or not.
Regular checking helps you figure out possible areas where they might be issues so you can quickly attend to them before they get out of hand.
Plan for Emergencies: In setting up your financial plan, an important thing you must never overlook is the areas of cash flow statement and assets. You do a regular checking of these areas as often as possible.
Also, create a plan for when money will not come as expected or when your business has to pivot.
Consider having some substantial amount in place so you can pick from them whenever you need urgent cash. You may also need diverse ways to sell off assets to help break even.
Conclusion
In conclusion, having a solid financial plan is a step in the right direction if you want to have a strong financial framework for your small business. This will help you know where your business stands in terms of cash flow and financial projections.
This understanding helps you make informed decisions about your business and what’s required to take your business to the next phase as quickly as possible.
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