Every small business needs a financial plan. It helps you attract investment, plan for growth and prepare for setbacks. Your financial plan demonstrates whether your idea is viable – then as your business grows, it helps you keep it in good financial health. The financial plan is a core part of your overall business plan, showing how you will make money, what people and resources you will need to get going, and what your operating budget will be.
In this article, we will look at how to create a financial plan, outline the components of a typical financial plan for a small business, and then briefly explore how today’s software can simplify the financial planning process and make it more efficient.
The Four Steps to Create a Financial Plan
- Start with strategy. Financial planning starts with your goals. What does your business want to achieve? This strategic picture is the foundation for a financial plan as it determines your what you will need to spend and invest in, and how this will impact any existing costs and assets.
- Project your financial future. What will it take to achieve your goals? Using different scenarios, estimate the resources you need. And if you’re seeking funds from lenders and investors, make sure you’re ready to
- Make contingency plans. What do you do when the unexpected happens? Your financial plan should include provisions for downturns in business. Options include cash reserves or a line of credit if you need cash fast, or options to sell assets to help balance the books.
- Regularly check in on progress. To monitor whether you’re on track, compare your actual performance with your plan at regular intervals throughout the year. This helps to identify potential issues early.
Drilling Down: Eight Elements of a Financial Plan for a Small Business
| What it shows | Components | |
|---|---|---|
|
Profit/loss performance over time |
Cost to produce your products/services (cost of sales) Operating expenses Revenue streams Gross margin – total net profit/loss |
|
Your current financial position |
Assets – your cash, goods and resources Liabilities – what you owe to suppliers, creditors etc. Shareholder equity – assets minus liabilities |
|
Who you need to achieve your goals |
Number of staff and how they are to be employed, i.e. full time,
contracted, part time Compensation levels and forecasts |
|
How individual areas are performing | Business ratios(opens in a new tab) include numbers such as net margins, return on equity and accounts payable turnover(opens in a new tab) |
|
What you will sell in a certain period | Sales projections segmented depending on how granular you need the forecast to be |
|
Difference between your profit and cash position | How much cash you have, where it’s going, where it’s coming from and how it is scheduled |
|
How much money you will make in a certain period | Forecast income minus projected expenses |
|
What you need to sell to cover your costs |
Fixed costs (e.g. rent, insurance) Variable costs, such as materials or shipping Price per unit of products or services that you sell Contribution margin: selling price minus variable cost per unit Break-even point: where total revenue = total costs |
How Financial Management Software Helps Financial Planning
The best financial plans are the ones that are quick and efficient to build and monitor. Spreadsheets may be fine for the very earliest days of planning but as soon as you add more people they can quickly become unwieldy.
Financial management software has important advantages:
- Collaboration and visibility. Everyone can work together and see the same up-to-date, accurate version of financial data.
- Efficiency. Analysis, reporting and forecasting can all be automated, saving valuable time and reducing the potential for error.
- Speed. Finance teams can produce budgets and forecasts, model what-if scenarios and generate reports quickly and easily.
NetSuite’s financial planning tools help you to look into the future efficiently. Whether you want to secure funding or just ensure your growth is as efficient as possible, a strong financial plan will help you make the best strategic decisions.
