American businessman Sanford I. Weill once said, “details create the big picture.” One of the details a small business needs as a part of that big picture business strategy is a solid financial plan.
What a financial plan does
A financial plan takes a snapshot of the current economic situation of a small business and using growth projections, maps a route to the business owner’s vision. By forecasting income and expenses, a business owner can detail the route needed to arrive at the desired destination and mark the goals that need to be reached along the way.
The argument for a small business financial plan
A small business financial plan requires setting short and long-term goals. It is also important to determine how a business owner is going to achieve them. To make clear pathways for success, a company needs to be able to define reachable goals, establish benchmarks, identify potential obstacles, and create a process to overcome said obstacles.
A financial plan is a key factor in being able to monitor finances, provide warning of possible financial problems and give a realistic picture of the future of the business. It can also reveal potential issues that should be considered when planning growth.
What’s the worst that can happen if you don’t create a plan
According to the Small Business Administration, about half of all new small businesses make it to their fifth anniversary. Only a third survive to celebrate ten years in existence.
How to develop your plan
If you’re preparing to apply for a loan, line of credit or some other type of financing, the lender will be more receptive if you provide a detailed financial plan. If you’re not comfortable preparing the plan on your own, you might want to seek professional assistance.
Either route you take, let’s look at a few of the key components of a financial plan.
An income statement, also known as a profit and loss statement, presents an itemized outline of a business’ expenses, revenues, and profits for a specified period. While it is typically produced quarterly, newly established businesses may want to produce these financial statements monthly, or at least until the data starts to stabilize.
There are different formats for these statements, but they all typically include:
- Total or operating income (earnings before interest, taxes, depreciation, and amortization (EBITDA)
- Net income (total income - ITDA = net income)
Cash Flow Statement
A cash flow statement provides an overview of how much money came in and out of your business. Cash flow statements are for a specific period, typically done monthly. We provide a more in-depth look at impacts on cash flow in an earlier blog.
A balance sheet is a financial statement that reports a company’s assets, liabilities, and shareholder equity at a specific point in time. More specifically defined:
- Assets are defined as cash, accounts receivable, inventory, real estate, furnishings/equipment, etc.
- Liabilities are expenses or debts. This includes accounts payable, money owed to suppliers and vendors, credit card balances, employee compensation, loan payments, etc.
- Equity is the value of your business’ assets after subtracting its liabilities. While small business equity is usually the owner’s equity, it could also include investors’ shares, stock options, or retained earnings.
A projection of future sales for a set period. These financial projections should be consistent with data from the profit and loss statement.
In addition to these key components of a financial plan, a small business may want to include additional information such as a personnel plan (a justification of how each team member contributes to the business, their salary, and any planned additional hires), lines of credit or funding options, and standard business ratios.
What could possibly go wrong?
As noted earlier, having a solid financial plan will prepare your business for growth and help you secure financing. It can also help you avoid these fairly common financial missteps.
While growth is good, make sure you utilize financial planning and strong cash flow projections to ensure you’re not outpacing your ability to keep cash on hand to cover expenses.
Not accounting for future expense
This can occur if you sell a product or service that is paid for upfront but carries service obligations for the remainder of the year or beyond.
So use care developing your cash flow projections.
Counting your cash before you are paid
Enter payments as cash either when you get paid or when you expect to get paid. Not all sales result in immediate cash availability. More information about cash flow is available here.
Not revisiting the plan
If you do the work to put together a financial plan, don’t just put it away in a safe place. Use it throughout the year to monitor your business financials, and identify issues before they become significant problems. Compare your projections to real data to see if you’re reaching your goals; or if adjustments need to be made.
Not getting help
Preparing a financial plan may take a lot of time, and be a challenging task for those not familiar with the process. If that is the case then you may want to consider outsourcing the task to a CFO service. Once they complete the plan, the CFO can go over it with you to ensure you completely understand all the financial information it provides.
Find a trusted partner
Ascension CPA provides a wide range of services for all of your small business needs. If you are considering an outsourced CFO to develop your business’ financial plan, we’re here to help.