Whether your business is focused on eCommerce, SaaS, or marketing, and design service outsourcing, it needs revenue to stay operational. Writing a financial plan for your small business is a challenge, especially if you haven’t written such a document before.
Its inclusion in your business workflow is appreciated, however, as it can help you make more informed decisions in the foreseeable future. Data shows 82% of businesses fail due to cash flow issues, with only 40% of small businesses being profitable and 30% losing money in 2021.
This can be avoided or at least mitigated by writing a financial plan to determine where you are as a business at the moment. Let’s discuss the ins and outs of financial plans for small businesses and how you can write one yourself without much issue.
Benefits of Writing a Financial Plan for your Small Business
A financial plan is an organic extension of your business’ yearly plan and shouldn’t be avoided, as daunting as it may appear at first. Even if you don’t have a dedicated accountant or a financial expert in your small business, writing a financial plan is fairly straightforward.
It will allow you to objectively determine how much money your business made in the past and how much you’ve spent on business expenses. This will help you project your future growth, inform you of potential cash flow issues, and allow you to make informed business development investments.
In practice, it is a comprehensive summary of your finances which can then be used to project future income and expenditure. Such a document can bring several important benefits to your business’ workflow going forward:
Steps to Write a Proper Financial Plan for your Small Business
Audit Past Sales and Create a Forecast
Starting on your financial plan should revolve around looking back at your past sales performance. Depending on how long your business has been operational, you may have access to months or years’ worth of sales data to work with. Writing a sales forecast is based on past performance, allowing you to “predict” how much you will sell going forward. This forecast will allow you to smartly allocate your marketing resources during peak sales periods and scale back when your stakeholders grow uninterested. This part of your financial plan can take a form of a simple grid with the following data points inserted as rows:
- Unit sales (number of units sold)
- Unit pricing (pricing per unit)
- Unit times price calculation (A x B = C)
- Unit costs (cost of production per unit)
- Unit times unit cost (cost of sale, or direct cost)
With these data points, you can enter monthly unit sales data to see which periods are more lucrative for your business and which are not. Use as many monthly financial data points as you have access to, the more the better.
Use Writing Tools to Format your Financial Plan
Given that you are likely to share your financial plan with your employees, partners, or investors, its formatting and writing style should be impeccable. College students who’ve graduated recently often open startups or solo businesses without the know-how on writing business documentation given their academic level writing.
Whenever students need writing experts to review their papers, they might think “Can someone write my paper for me?” and look for help online. This is good thinking, since developing business-level writing skills takes time, and a financial plan needs to be written and formatted properly regardless.
Use online writing tools to properly grammar check and format your financial plan once you’ve written down all the information you needed. This will ensure that your financial plan is free of any glaring proofreading, formatting, or stylistic issues.
Prepare your Cash Flow Document
As we’ve mentioned before, every business needs cash flow to stay operational. Writing a cash flow statement serves to explain how much money you’ve made and how much you’ve paid out to staff or for business expenses. This part of financial planning will require you to gather your past sales invoices, calculate their tax and VAT expenses, and your net income.
Comparing the total monetary value against how much you’ve spent on staff salaries, utilities, and business upkeep will show you how much money you’ve made. With these two data points in hand, you will be able to write down exactly how much money you’ve retained each month (as a net gain). Understanding where your business’ income comes from, how it came to you, and what happened to it, is extremely important.
You can justify your expenses to the local tax authorities such as the IRS and make sure your business is positive. Even if your business is doing well, mismanaging your cash flow can lead to problems such as tax fines or business liquidation in extreme cases.
List your Assets and Liabilities
Assets and liabilities represent a critical part of financial planning for a small business. Your assets represent any infrastructure, hardware, and software you may have acquired in your business’ name. These include office desks, chairs, notebooks, office supplies, etc. as well as computers, tablets, projectors, and their related software. Your assets represent a serious but necessary expense for the business to operate as intended.
Liabilities on the other hand represent financial obligations you have toward the government or private institutions. Credits, loans, investments, and other forms of financial aid you may have received came at some cost or requirement. Without adhering to those requirements (such as paying off a loan or fulfilling an investor’s milestone), your business may face financial penalties or liquidation.
List both your assets and liabilities, as well as their respective monetary values to have a clear overview of where you stand at the moment. These will also help you not make any rash decisions regarding business development or expansion without being certain that you can take it.
Analyze your Breakeven Point
With all the above-mentioned financial planning elements in place, you will be able to create your breakeven point more accurately. A breakeven point represents a monetary value you need to exceed to cover operational costs.
Any number above the breakeven point is considered a profit, while anyone under it is considered a loss. Your goal should be to slowly increase the breakeven point each month or quarter to organically grow your business. It’s important to be realistic with your forecast, since you may not reach net profit for several months or years if your business is new.
Breakeven point analysis is very useful for financial planning as it can help you modify the prices of your products/services and lower operational costs as needed. You can also elaborate on how you came to your breakeven point projection, why you think it’s accurate, and how you aim to achieve it. This is a good point since your plan may be seen by parties who may not be familiar with how you manage your finances daily.
Consult a Financial Professional Before Locking the Financial Plan Down
While you can write your financial plan without any outside interference from a financial agency or an accountant, it’s still worthwhile to have it checked. You may have overlooked an important government regulation present in your country or not be up-to-date with current accounting standards.
Reach out to a local financial advisor or a lawyer and explain what you’ve done with your financial plan so far. Ask for a review and listen to any feedback they may have on your first draft. This may only be necessary the first few times you write the financial plan. Afterwards, you can write your plan and only consult a professional in case of extreme circumstances, such as continuous profit loss or large liabilities.
Consulting no financial advisor on your financial plan may backfire and lead to your business’ liquidation – avoid that at any means to remain operational. Once your financial plan is locked down, keep it handy and share it with any investors or third parties with a stake in your business.
Making Good Use of your Financial Plan (Conclusion)
The most important part of writing a financial plan for your small business is implementing it once it is written. Many businesses fall into the trap of writing a financial plan to tick off a box in their workflow without considering practical implementation.
Send the financial plan to all relevant parties, including any financial experts you may have, partner businesses you trust, and investors you work with. Take their feedback into consideration and learn to practically apply your cash flow forecast during the next year.
Make a financial plan a recurring activity, as you can compare and contrast financial plans every year to make even more informed decisions. Over time, this will become second nature for your small business, and you will greatly benefit from financial planning.