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Key components of a financial plan
What to include if you plan to pursue funding, financial ratios and metrics, financial plan templates and tools.
How to Write a Small Business Financial Plan
Creating a financial plan is often the most intimidating part of writing a business plan. It’s also one of the most vital. Businesses with well-structured and accurate financial statements in place are more prepared to pitch to investors, receive funding, and achieve long-term success.
Thankfully, you don’t need an accounting degree to successfully put your budget and forecasts together. Here is everything you need to include in your financial plan along with optional performance metrics, specifics for funding, and free templates.
A sound financial plan is made up of six key components that help you easily track and forecast your business financials. They include your:
What do you expect to sell in a given period? Segment and organize your sales projections with a personalized sales forecast based on your business type.
Subscription sales forecast
While not too different from traditional sales forecasts—there are a few specific terms and calculations you’ll need to know when forecasting sales for a subscription-based business.
Create, review, and revise your expense budget to keep your business on track and more easily predict future expenses.
How to forecast personnel costs
How much do your current, and future, employees’ pay, taxes, and benefits cost your business? Find out by forecasting your personnel costs.
Profit and loss forecast
Track how you make money and how much you spend by listing all of your revenue streams and expenses in your profit and loss statement.
Cash flow forecast
Manage and create projections for the inflow and outflow of cash by building a cash flow statement and forecast.
Need a snapshot of your business’s financial position? Keep an eye on your assets, liabilities, and equity within the balance sheet.
Do you plan to pursue any form of funding or financing? If the answer is yes, then there are a few additional pieces of information that you’ll need to include as part of your financial plan.
Highlight any risks and assumptions
Every entrepreneur takes risks with the biggest being assumptions and guesses about the future. Just be sure to track and address these unknowns in your plan early on.
Plan your exit strategy
Investors will want to know your long-term plans as a business owner. While you don’t need to have all the details, it’s worth taking the time to think through how you eventually plan to leave your business.
With all of your financial statements and forecasts in place, you have all the numbers needed to calculate insightful financial ratios. While these metrics are entirely optional to include in your plan, having them easily accessible can be valuable for tracking your performance and overall financial situation.
Common business ratios
Unsure of which business ratios you should be using? Check out this list of key financial ratios that bankers, financial analysts, and investors will want to see.
Do you want to know when you’ll become profitable? Find out how much you need to sell to offset your production costs by conducting a break-even analysis.
How to calculate ROI
How much could a business decision be worth? Evaluate the efficiency or profitability by calculating the potential return on investment (ROI).
Download and use these free financial templates and calculators to easily create your own financial plan.
Sales forecast template
Download a free detailed sales forecast spreadsheet, with built-in formulas, to easily estimate your first full year of monthly sales.
Accurate and easy financial forecasting
Get a full financial picture of your business with LivePlan's simple financial management tools.
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Financial plan FAQ
What is a financial plan?
A financial plan is simply an overview of your current business financials and projections for growth. Think of any documents that represent your current monetary situation as a snapshot of the health of your business and the projections being your future expectations.
Why is a financial plan important for your business?
The financial plan informs your short and long-term financial goals and gives you a starting point for developing a strategy.
It helps you, as a business owner, set realistic expectations regarding the success of your business. You’re less likely to be surprised by your current financial state and more prepared to manage a crisis or incredible growth, simply because you know your financials inside and out.
And aside from helping you better manage your business, a thorough financial plan also makes you more attractive to investors. It makes you less of a risk and shows that you have a firm plan and track record in place to grow your business.
What is in a financial plan?
A solid financial plan includes six key components, which are your:
– Sales forecast – Expense budget – Personnel statement – Profit and loss statement – Cash flow forecast – Balance sheet
As part of your business’s financial planning process, you may also include specific financial ratios and metrics that help you track overall business health.
What is the most important part of a financial plan?
Your sales forecast, expense budget, and cash flow forecast are the most important parts of your financial plan. These three documents will help you understand how much you’re spending, know how solvent your business is, and start setting goals for the future.
The remaining financial documents are still necessary for creating a full financial plan. They provide additional information that can help you make more informed decisions when reviewing your budget and forecasts.
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Free Financial Templates for a Business Plan
By Andy Marker | July 29, 2020
In this article, we’ve rounded up expert-tested financial templates for your business plan, all of which are free to download in Excel, Google Sheets, and PDF formats.
Included on this page, you’ll find the essential financial statement templates, including income statement templates , cash flow statement templates , and balance sheet templates . Plus, we cover the key elements of the financial section of a business plan .
Financial Plan Templates
Download and prepare these financial plan templates to include in your business plan. Use historical data and future projections to produce an overview of the financial health of your organization to support your business plan and gain buy-in from stakeholders
Business Financial Plan Template
Use this financial plan template to organize and prepare the financial section of your business plan. This customizable template has room to provide a financial overview, any important assumptions, key financial indicators and ratios, a break-even analysis, and pro forma financial statements to share key financial data with potential investors.
Download Financial Plan Template
Word | PDF | Smartsheet
Financial Plan Projections Template for Startups
This financial plan projections template comes as a set of pro forma templates designed to help startups. The template set includes a 12-month profit and loss statement, a balance sheet, and a cash flow statement for you to detail the current and projected financial position of a business.
Download Startup Financial Projections Template
Excel | Smartsheet
Income Statement Templates for Business Plan
Also called profit and loss statements , these income statement templates will empower you to make critical business decisions by providing insight into your company, as well as illustrating the projected profitability associated with business activities. The numbers prepared in your income statement directly influence the cash flow and balance sheet forecasts.
Pro Forma Income Statement/Profit and Loss Sample
Use this pro forma income statement template to project income and expenses over a three-year time period. Pro forma income statements consider historical or market analysis data to calculate the estimated sales, cost of sales, profits, and more.
Download Pro Forma Income Statement Sample - Excel
Small Business Profit and Loss Statement
Small businesses can use this simple profit and loss statement template to project income and expenses for a specific time period. Enter expected income, cost of goods sold, and business expenses, and the built-in formulas will automatically calculate the net income.
Download Small Business Profit and Loss Template - Excel
3-Year Income Statement Template
Use this income statement template to calculate and assess the profit and loss generated by your business over three years. This template provides room to enter revenue and expenses associated with operating your business and allows you to track performance over time.
Download 3-Year Income Statement Template
For additional resources, including how to use profit and loss statements, visit “ Download Free Profit and Loss Templates .”
Cash Flow Statement Templates for Business Plan
Use these free cash flow statement templates to convey how efficiently your company manages the inflow and outflow of money. Use a cash flow statement to analyze the availability of liquid assets and your company’s ability to grow and sustain itself long term.
Simple Cash Flow Template
Use this basic cash flow template to compare your business cash flows against different time periods. Enter the beginning balance of cash on hand, and then detail itemized cash receipts, payments, costs of goods sold, and expenses. Once you enter those values, the built-in formulas will calculate total cash payments, net cash change, and the month ending cash position.
Download Simple Cash Flow Template
12-Month Cash Flow Forecast Template
Use this cash flow forecast template, also called a pro forma cash flow template, to track and compare expected and actual cash flow outcomes on a monthly and yearly basis. Enter the cash on hand at the beginning of each month, and then add the cash receipts (from customers, issuance of stock, and other operations). Finally, add the cash paid out (purchases made, wage expenses, and other cash outflow). Once you enter those values, the built-in formulas will calculate your cash position for each month with.
Download 12-Month Cash Flow Forecast
3-Year Cash Flow Statement Template Set
Use this cash flow statement template set to analyze the amount of cash your company has compared to its expenses and liabilities. This template set contains a tab to create a monthly cash flow statement, a yearly cash flow statement, and a three-year cash flow statement to track cash flow for the operating, investing, and financing activities of your business.
Download 3-Year Cash Flow Statement Template
For additional information on managing your cash flow, including how to create a cash flow forecast, visit “ Free Cash Flow Statement Templates .”
Balance Sheet Templates for a Business Plan
Use these free balance sheet templates to convey the financial position of your business during a specific time period to potential investors and stakeholders.
Small Business Pro Forma Balance Sheet
Small businesses can use this pro forma balance sheet template to project account balances for assets, liabilities, and equity for a designated period. Established businesses can use this template (and its built-in formulas) to calculate key financial ratios, including working capital.
Download Pro Forma Balance Sheet Template
Monthly and Quarterly Balance Sheet Template
Use this balance sheet template to evaluate your company’s financial health on a monthly, quarterly, and annual basis. You can also use this template to project your financial position for a specified time in the future. Once you complete the balance sheet, you can compare and analyze your assets, liabilities, and equity on a quarter-over-quarter or year-over-year basis.
Download Monthly/Quarterly Balance Sheet Template - Excel
Yearly Balance Sheet Template
Use this balance sheet template to compare your company’s short and long-term assets, liabilities, and equity year-over-year. This template also provides calculations for common financial ratios with built-in formulas, so you can use it to evaluate account balances annually.
Download Yearly Balance Sheet Template - Excel
For more downloadable resources for a wide range of organizations, visit “ Free Balance Sheet Templates .”
Sales Forecast Templates for Business Plan
Sales projections are a fundamental part of a business plan, and should support all other components of your plan, including your market analysis, product offerings, and marketing plan . Use these sales forecast templates to estimate future sales, and ensure the numbers align with the sales numbers provided in your income statement.
Basic Sales Forecast Sample Template
Use this basic forecast template to project the sales of a specific product. Gather historical and industry sales data to generate monthly and yearly estimates of the number of units sold and the price per unit. Then, the pre-built formulas will calculate percentages automatically. You’ll also find details about which months provide the highest sales percentage, and the percentage change in sales month-over-month.
Download Basic Sales Forecast Sample Template
12-Month Sales Forecast Template for Multiple Products
Use this sales forecast template to project the future sales of a business across multiple products or services over the course of a year. Enter your estimated monthly sales, and the built-in formulas will calculate annual totals. There is also space to record and track year-over-year sales, so you can pinpoint sales trends.
Download 12-Month Sales Forecasting Template for Multiple Products
3-Year Sales Forecast Template for Multiple Products
Use this sales forecast template to estimate the monthly and yearly sales for multiple products over a three-year period. Enter the monthly units sold, unit costs, and unit price. Once you enter those values, built-in formulas will automatically calculate revenue, margin per unit, and gross profit. This template also provides bar charts and line graphs to visually display sales and gross profit year over year.
Download 3-Year Sales Forecast Template - Excel
For a wider selection of resources to project your sales, visit “ Free Sales Forecasting Templates .”
Break-Even Analysis Template for Business Plan
A break-even analysis will help you ascertain the point at which a business, product, or service will become profitable. This analysis uses a calculation to pinpoint the number of service or unit sales you need to make to cover costs and make a profit.
Break-Even Analysis Template
Use this break-even analysis template to calculate the number of sales needed to become profitable. Enter the product's selling price at the top of the template, and then add the fixed and variable costs. Once you enter those values, the built-in formulas will calculate the total variable cost, the contribution margin, and break-even units and sales values.
Download Break-Even Analysis Template
For additional resources, visit, “ Free Financial Planning Templates .”
Business Budget Templates for Business Plan
These business budget templates will help you track costs (e.g., fixed and variable) and expenses (e.g., one-time and recurring) associated with starting and running a business. Having a detailed budget enables you to make sound strategic decisions, and should align with the expense values listed on your income statement.
Startup Budget Template
Use this startup budget template to track estimated and actual costs and expenses for various business categories, including administrative, marketing, labor, and other office costs. There is also room to provide funding estimates from investors, banks, and other sources to get a detailed view of the resources you need to start and operate your business.
Download Startup Budget Template
Small Business Budget Template
This business budget template is ideal for small businesses that want to record estimated revenue and expenditures on a monthly and yearly basis. This customizable template comes with a tab to list income, expenses, and a cash flow recording to track cash transactions and balances.
Download Small Business Budget Template
Professional Business Budget Template
Established organizations will appreciate this customizable business budget template, which contains a separate tab to track projected business expenses, actual business expenses, variances, and an expense analysis. Once you enter projected and actual expenses, the built-in formulas will automatically calculate expense variances and populate the included visual charts.
Download Professional Business Budget Template
For additional resources to plan and track your business costs and expenses, visit “ Free Business Budget Templates for Any Company .”
Other Financial Templates for Business Plan
In this section, you’ll find additional financial templates that you may want to include as part of your larger business plan.
Startup Funding Requirements Template
This simple startup funding requirements template is useful for startups and small businesses that require funding to get business off the ground. The numbers generated in this template should align with those in your financial projections, and should detail the allocation of acquired capital to various startup expenses.
Download Startup Funding Requirements Template - Excel
Personnel Plan Template
Use this customizable personnel plan template to map out the current and future staff needed to get — and keep — the business running. This information belongs in the personnel section of a business plan, and details the job title, amount of pay, and hiring timeline for each position. This template calculates the monthly and yearly expenses associated with each role using built-in formulas. Additionally, you can add an organizational chart to provide a visual overview of the company’s structure.
Download Personnel Plan Template - Excel
Elements of the Financial Section of a Business Plan
Whether your organization is a startup, a small business, or an enterprise, the financial plan is the cornerstone of any business plan. The financial section should demonstrate the feasibility and profitability of your idea and should support all other aspects of the business plan.
Below, you’ll find a quick overview of the components of a solid financial plan.
- Financial Overview: This section provides a brief summary of the financial section, and includes key takeaways of the financial statements. If you prefer, you can also add a brief description of each statement in the respective statement’s section.
- Key Assumptions: This component details the basis for your financial projections, including tax and interest rates, economic climate, and other critical, underlying factors.
- Break-Even Analysis: This calculation helps establish the selling price of a product or service, and determines when a product or service should become profitable.
- Pro Forma Income Statement: Also known as a profit and loss statement, this section details the sales, cost of sales, profitability, and other vital financial information to stakeholders.
- Pro Forma Cash Flow Statement: This area outlines the projected cash inflows and outflows the business expects to generate from operating, financing, and investing activities during a specific timeframe.
- Pro Forma Balance Sheet: This document conveys how your business plans to manage assets, including receivables and inventory.
- Key Financial Indicators and Ratios: In this section, highlight key financial indicators and ratios extracted from financial statements that bankers, analysts, and investors can use to evaluate the financial health and position of your business.
Need help putting together the rest of your business plan? Check out our free simple business plan templates to get started. You can learn how to write a successful simple business plan here .
Visit this free non-profit business plan template roundup or download a fill-in-the-blank business plan template to make things easy. If you are looking for a business plan template by file type, visit our pages dedicated specifically to Microsoft Excel , Microsoft Word , and Adobe PDF business plan templates. Read our articles offering startup business plan templates or free 30-60-90-day business plan templates to find more tailored options.
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How to Prepare a Financial Plan for Small Business?
11 Min Read
Let’s face it—accurate financial forecasting and planning isn’t everyone’s cup of tea, nor is it something someone would enjoy scratching their heads over.
In fact, it is considered to be the most difficult part of the business plan.
While it’s the most challenging aspect of business planning, it’s also the most important when convincing potential investors to invest in your business.
(You can’t simply ignore that!)
That’s why we decided to help you eat this giant frog at once. This is the ultimate guide to preparing a small business financial plan .
It will help you understand the critical components of financial planning, articulate quick steps to prepare a financial plan and provide a small business financial plan example to help you get started.
Sounds good? Let’s dive right in.
What is a Business Financial Plan?
A financial plan is an integral part of a business plan that helps determine if your business idea is sustainable and keeps you on track to financial health.
It’s the process of planning the financial aspects of a small business, which comprises its three major components: balance sheet, income statement, and cash-flow statement.
Besides these financial statements, this section may also include details about assets & liabilities, revenue and sales forecasts, break-even analysis, and others.
- Cash flow projection, balance sheet, and income statement are considered to be the three core components of a financial plan.
- Make sure to be realistic and conservative about your revenue forecasts; it is better to be surprised than disappointed.
- Preparing a financial plan is easier and faster when you use a financial planning tool .
- A clear market understanding, realistic assumptions, and thorough research are crucial to preparing reliable financial projections.
Why is Financial Planning Important to a Small Business?
It’s no secret and won’t come off as a big surprise that financial planning is crucial to building a successful business.
In fact, Y Combinator, a leading US startup accelerator, considered recent financial statements and projections to be critical elements of their Series A due diligence checklist .
A solid financial plan helps you manage cash flow, provides clear economic direction, helps you set realistic financial projections, and accounts for months when revenue might be lower than expected.
It helps you budget expenses, plan for yearly taxes, and show if your business is committed to its financial goals. It helps your investors understand where your business stands today and in 5 years.
Now that you know how important financial planning is for your small business, let’s head straight to discussing the critical elements of a financial plan.
Key Components of a Small Business Financial Plan
As mentioned earlier, cash flow projections, income statements, and balance sheets are three major components of a financial plan—but that’s not all. Here are all the key components you must consider including in your very own financial plan.
1. Income Statement
An income or profit and loss statement is a financial statement that shows any business’s income and expenditure over a specific time.
Your income statement also helps determine whether your business is making any profit or loss over a specific period—usually prepared at the end of the month, quarter, or year.
Your income or P&L statement must list the following:
- Cost of goods or cost of sale
- Operating expenses
- Revenue streams
- Gross margin
- EBITDA (Earnings before interest, tax, depreciation, & amortization)
2. Cash flow Statement
A cash flow statement is yet another important financial statement that summarizes the amount of cash and cash equivalents entering and leaving a business over a given time.
Your cash flow statement will consist of the following three components:
- Cash revenue projection
- Cash disbursement
- Cash flow reconciliation
Your company’s cash flow forecast can be critical while assessing your firm’s liquidity and ability to generate positive cash flows, pay off debts, and invest in growth initiatives.
3. Balance Sheet
A balance sheet is a financial statement that reports any company’s assets, liabilities, and shareholder equity at a specific point in time. Your balance sheet is one of three major financial statements used in evaluating your company’s performance.
This statement consists of three parts: assets, liabilities, and the balance calculated by the difference between the first two. The final numbers on this sheet reflect the business owner’s equity or value.
Balance sheets follow the following accounting equation with liabilities plus owner equity on one side and assets on the other.
Here is what the core purpose of having a balance sheet:
- Indicates the capital need of the business
- It helps to identify the allocation of resources
- It calculates the requirement of seed money you put up, and
- How much financing is required?
Considering it’s a critical element in helping investors understand the current condition of your business, this is something you can’t simply miss out on.
4. Break-even Analysis
A break-even analysis is referred to as a financial calculation that weighs the costs of a new business, product, or service against the unit sell price to determine a point at which you have sold enough units to cover all your costs.
Your break-even point helps you understand when your investment is returned dollar-to-dollar, no more or less. This is the point where your small business is neither making profits nor burning cash.
However, anything you sell beyond that will result in profits.
Break-even analysis can be mandatory in situations when you either plan to expand your business, lower your pricing, or narrow down your business scenarios.
5. Sales forecast
Your sales forecast is a process of estimating your expected future revenue. It estimates how much your business plans to sell within the next month, quarter, year, or so. Your sales projection needs to be consistent with the sales number within your profit and loss statement.
Segmentation of these forecasts will depend on how closely you want to monitor your sales revenue. For instance, if you are a restaurant business, you may consider keeping catering and dine-in revenues separate from each other.
6. Expense Budget
Managing expenses is one of the fundamentals of your financial plan, and it starts with an expense budget. The expense budgets can include operating expenses, direct costs, or repaying debts.
Consider it as an informed prediction of your future business expenses based on your research, experience, and common sense.
Having covered all the key elements of a solid financial plan, let’s discuss creating one.
How to Create a Financial Section of a Business Plan?
1. create a strategic plan.
A strategic plan helps you understand what you want to accomplish with your financial plan. You may consider your operational expenses, financing needs, objectives, and exit strategy while creating a strategic plan.
You can start by asking yourself a few questions, like how much financing you need, where most of your expenses go, and what other resources will you need.
Once you determine your financial needs, set realistic goals based on these requirements—identifying your business KPIs would make an excellent starting point.
2. Choose the Right Financial Planning Tool
It may take you forever to start and finish creating a financial plan using traditional and old-school methods.
It worked just fine earlier, but that’s not how you do it today.
Having a financial forecasting tool will not just simplify the process, but will also help speed things up. In fact, it’s the best way to prepare financial forecasts and meet financial obligations.
Create a Financial Plan with Upmetrics in no time
Enter your Financial Assumptions, and we’ll calculate your monthly/quarterly and yearly financial projections.
3. Make Presumptions to Project Financials
Of course, Upmetrics will help with automatic and accurate forecasting, but at least you have to feed it some information to get started. Right?
That’s why the next step—making predictions about your business financials.
It’s just about predicting your business growth and financial future based on its current performance and past financial records, so no need to overthink or complicate things.
Start off by gathering historical financial data, conducting industry research, and compiling relevant documents about your business and industry.
Once you have developed rough assumptions and understand your business finances, you can start preparing financial projections.
4. Prepare Realistic Financial Projections
Here we come—discussing the most important steps of all. Although it’s challenging to get through, Upmetrics’ forecasting tool makes it relatively easier for rookie entrepreneurs to follow.
Upmetrics allows you to forecast financials for up to 7 years, while new startups usually consider planning only for the next five years.
However, this is something that varies from business to business based on their financial goals and investor specifications, so it’s up to you how you plan your projections.
Following are the two key aspects of your financial projections:
Since your revenue projections help investors understand how much revenue your business plans to generate in the near future, it’s an important one for them to consider.
It generally involves conducting market research, determining pricing strategy, and cash flow forecast—which we’ve already discussed in the previous steps.
The following would be the key components of your revenue projections:
- Market analysis
- Sales forecast
- Pricing strategy
- Growth assumptions
- Seasonal variations
Although both are different, revenue and expense forecasts are closely related to each other.
Similar to how revenue forecasts project revenue predictions, expense projections will predict expenses or future costs associated with operating a small business.
The following would be the key components of your expense projections:
- Fixed costs
- Variable costs
- Employee costs or payroll expenses
- Operational costs
- Marketing and advertising expenses
- Emergency fund
Remember, a clear understanding of your industry and market, realistic presumptions, and thorough research are the key to reliable financial projections.
5. “What if” Scenarios and Sensitivity Analysis
We learned to forecast financials, next—let’s discuss conducting sensitivity analysis to understand potential risks and opportunities involved in your business operations.
“What if” scenario or sensitivity analysis analyzes a business in three scenarios: best, expected, and worst-case. It increases transparency and helps investors and lenders understand your business’s future considering all three scenarios.
This proactive exercise will help make necessary adjustments to your financial plan and will be of incredible use in making strategic decisions.
6. Track Progress and Adjust Your Financial Plan
This may not sound like a necessary step while creating a financial plan, but it’s also an important one.
It’s critical to closely monitor your assumptions and make adjustments to make sure the assumptions you made are still relevant and you are heading in the right direction.
There won’t be any complex data analysis or big calculations, so worry not!
You simply have to compare your assumptions with the actual numbers to stay relevant. You may consider key business metrics to do so, like the number of customers acquired, cost per acquisition, or any other specific metrics.
Consider making adjustments if your assumptions do not resonate or match actual numbers.
And it was the last step in our financial plan writing guide. Next? Here’s a business financial plan example to help you get started.
Small Business Financial Plan Example
Since we’ve already learned about small business financial planning, let’s quickly review the coffee shop financial plan example created using Upmetrics:
- The sales forecast is conservative and assumes a 5% increase in Year 2 and a 10% in Year 3.
- The analysis accounts for economic seasonality – wherein some month’s revenues peak (such as holidays ) and wane in slower months.
- The analysis assumes the owner will not withdraw any salary till the 3rd year; at any time, it is assumed that the owner’s withdrawal is available at his discretion.
- Sales are on a cash basis – nonaccrual accounting.
- Moderate ramp-up in staff over the 5 years forecast
- Barista’s salary in the forecast is $36,000 in 2023.
- In general, most cafes have an 85% gross profit margin.
- In general, most cafes have a 3% net profit margin.
Projected Balance Sheet
Projected Cash-Flow Statement
Projected Profit & Loss Statement
Improve Your Financial Planning with Upmetrics
What’s the best way to create a financial plan? If you had asked this question maybe a decade ago, I would definitely have said—EXCEL. Not today.
With the AI revolution and modern business & financial plan software, financial planning has never been this accurate before.
Want to improve your financial planning game? Upmetrics is the way to go. No manual calculations or preparing visual reports; simply enter your assumptions and watch things getting done.
What are you waiting for? Try Upmetrics for your business financial plan.
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Frequently Asked Questions
What components should be included in a business financial plan.
Your business financial plan should include the following six components:
- Income statement
- Cash flow projections
- Break-even analysis
- Balance sheet
- Sales forecasts
- Expense outlay
How often should I update my business financial plan?
Well, there is no certain rule about it. However, reviewing and updating your financial plan once a year is considered an ideal practice as it ensures that the financial aspirations you started and the projections you made are still relevant.
How to determine any business’s break-even point in a financial plan?
This is considered to be the formula for determining a break-even point: fixed costs ÷ gross profit margin = break-even point .
However, business plan tools like Upmetrics can automatically calculate different business ratios like break-even points and others.
What financial ratios should small businesses monitor in a financial plan?
There are multiple financial ratios, but here are some of the important ones for small business owners to consider:
- Working capital
- Return on equity
- Debt-to-equity ratio
- Net profit margin
- Current ratio
- Quick ratio
- Return on assets
- Debt-to-asset ratio
About the Author
Ajay is a SaaS writer and personal finance blogger who has been active in the space for over three years, writing about startups, business planning, budgeting, credit cards, and other topics related to personal finance. If not writing, he’s probably having a power nap. Read more
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Financial Planning for Small Business Owners
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There are many different kinds of small business owners in all stages of their business. Some have just started putting their ideas into action in a startup, while others are in the growth stage or even planning an exit strategy.
No matter which stage your business is in and whether you're a dreamer or more of a pragmatist, there is one thing you can't afford not to do. You need a holistic financial plan that takes into account where your business is now and what the plan is for the future.
For small business owners, establishing a financial plan comes with an added complexity, which is the business. In some ways, the business and personal sides of your financial plan will be mutually exclusive.
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Separate your personal financial goals from your business goals
Before making any plans, it's critical to understand that you are not your business. Most small business owners have goals for their business, but it's important to also make financial goals for yourself and to keep them separate.
It can be tempting to combine the two, especially for sole proprietors or single-member LLC owners whose business is included on their individual income tax return. However, by not separating your business from your personal financial goals, you could be missing out on some amazing personal achievements.
For example, some personal financial goals might include setting up and contributing to an education fund for your child, boosting your retirement savings, funding and going on a vacation, and buying your first home or downsizing when your children move out of the house.
On the other hand, some financial goals for your business might include increasing sales to a particular amount, finding more customers, or establishing a certain percentage of growth rate.
Consider alternative funding options to diversify your business-related risk
You may also want to look at other places where you can further separate yourself personally from your business. The easiest place to look is at the many available funding options for your business.
Most small business owners invest in their own businesses using their own money and time, which may be appropriate in certain situations. However, just as you would diversify your investment portfolio, so you may also want to diversify your business-related risks.
Using your own capital, or, in a worst-case scenario, your own credit cards, places you at significant personal financial risk if something happens to the business. In some cases, though, it might make sense to cede some of that risk to another party. After all, today's digital world has brought a wider array of potential funding options that range from venture capital and private equity to crowdfunding, business loans, and even more creative options like a small business incubator or accelerator.
The Small Business Administration is also an excellent resource for business owners, not only for information and guidance but also, in some cases, for low-interest business loans.
Remember to plan for retirement
For small business owners, retirement planning actually sits at the crossroads between personal and business financial planning. It can be tempting to just keep pouring your money back into the business, but that can make it difficult, if not impossible, to save for retirement.
Many small business owners don't save for retirement because they believe they'll be able to sell their business and live off the proceeds of the sale in retirement. However, most overestimate what their business might be worth, especially when looking decades into the future.
Simplified Employee Pension ( SEP ) IRAs and individual 401(k)s both enable small business owners to plan ahead for the days when they finally retire.
Another important thing small business owners should remember when creating their personal financial plans for themselves and their business is diversification. A small business is a piece of a larger investment portfolio, but many business owners don't recognize this.
Being in business represents a significant risk, even if it seems like you're in a safe industry. As a result, it makes sense for small business owners to target low-risk investments for the rest of their investment portfolio.
Prepare your exit strategies
Finally, small business owners should prepare their exit strategies — for both their personal legacy and their business. From a personal perspective, business owners can't afford not to have a will and estate plan to ensure the business doesn't fold upon their death. Many also want to leave their business to the next generation, but without a will, ownership succession becomes hazy.
In terms of the business, you should also create a succession plan designating who will take over when you retire or pass. The financial reasons for creating a succession plan are similar to those for creating a will and estate plan, although these plans differ from a practical standpoint. In terms of your personal financial plan, you're designating heirs, while for your business financial plan, you're designating the next CEO or manager. They could be the same person or different people, depending on your situation.
Don't be too busy to plan
These guidelines are only the very basics of what a small business owner needs to consider when creating a financial plan. Some other factors that may play a role in your personal and business financial plans include insurance (property, professional, and otherwise), preparations for growth, planning for disability, and more. No two financial plans are the same, and these other factors may fall under some of the earlier headings.
Unfortunately, many small business owners find themselves tapped out when it comes to financial planning. It takes so much energy and enthusiasm to keep the business going that they sacrifice their personal financial wellbeing. However, your busiest times will be when you need these financial plans the most, and having separate personal and business financial plans will make everything much easier.
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Jacob is the founder and CEO of ValueWalk. What started as a hobby 10 years ago turned into a well-known financial media empire focusing in particular on simplifying the opaque world of the hedge fund world. Before doing ValueWalk full time, Jacob worked as an equity analyst specializing in mid and small-cap stocks. Jacob also worked in business development for hedge funds. He lives with his wife and five children in New Jersey. Full Disclosure: Jacob only invests in broad-based ETFs and mutual funds to avoid any conflict of interest.
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9 Financial Planning Tips for Small Business Owners
Starting a small business can be exhilarating and overwhelming all at once. It’s tempting to devote the lion’s share of time and effort to developing your product or service, hiring the right people and finding customers. But it’s important to carve out some time to tend to the financial health of the company. It’s similar to how airlines recommend attaching your own oxygen mask before helping others: You can’t fulfill your customers’ needs or empower employees if you suddenly find yourself in a liquidity crisis.
What is Financial Planning?
Small business financial planning is an ongoing process. Your objectives: Develop short- and long-term business and fiscal goals and tactics to achieve them. Do some scenario planning to understand the financial barriers that can arise at every stage of growth, and consider your options in terms of funding sources.
While many aspects of small business financial planning are similar to handling personal finances — think creating a budget, risk management, tax and investment strategies and retirement and estate planning — there are some important differences.
1. Separate business and personal goals.
Blurring the lines between personal and business goals could mean compromising some aspects of your finances for another. Perhaps you want to add a new product to your inventory but also want to add funds to your child’s 529 plan. Which takes priority?
Of course, you’re building the business to make money to forward your personal financial goals. But if you don’t distinguish between personal and business objectives, you may end up hurting both.
We’re not just talking about separating your finances, including having separate checking accounts, for example — though that’s also critical, as we’ll discuss. We’re talking about visioning and goal setting. Ask yourself:
- Personal: What are my immediate personal priorities? Examples: Get more exercise, learn a new skill. What’s my five- and 10-year plan? What are my family’s priorities?
- Business: What are my immediate business priorities? Examples: Hire a new employee, make a marketing plan to acquire more customers. Where do I want my business to be in five years? What are our product or service development priorities?
2. Explore your funding options.
Small business owners tend to self-fund, or bootstrap, meaning that personal funds are the owner’s only or major source of capital. Putting money back into the business makes sense: Bootstrapping allows you to slowly and organically grow your business while ensuring that the model is financially viable.
On the downside, you’re not well-diversified. Using savings or credit cards for startup capital can put you at significant financial risk, depending on how capital intensive your business is.
It’s prudent to offset some of that risk by exploring one or more additional sources of funding.
Fortunately, there are plenty of other places to get capital. Bringing in outside sources, such as offering equity and getting a good or service in return, business loans or customer presales or recurring sales can ensure a constant inflow of capital.
3. Focus on liquidity.
Sure, your balance sheet shows you that your business is financially sound, but it doesn’t mean your assets are liquid. The goal should be to have more assets than liabilities, so you have a buffer to meet short-term financial obligations.
And, the professionals controlling those external funding sources — like business lines of credit or inventory/receivables factoring — will expect you to have a view into your liquidity status . Some key points are that while cash, not P&L, is your main metric, there are additional important KPIs like the cash conversion cycle (CCC), days sales outstanding (DSO), days payable outstanding (DPO) and days inventory outstanding (DIO) that all companies should track.
Some small businesses may even want to assemble a “cash committee” to closely monitor daily metrics and report back on liquidity status.
4. Cash flow.
A healthy cash flow enables you to meet current obligations, like paying employees and purchasing raw materials, while also building up a reserve for investments and emergencies. Amassing assets, like real estate or inventory, is great, but if cash flow is a challenge, your business will stall.
Performing a formal cash flow analysis will tell you how much money is flowing in and out of your business. This knowledge allows you to plan accordingly. When you do these analyses regularly, you will gain historical perspective and be able to determine the amount you should set aside as reserves to weather the leaner months or an unexpected cash flow shortage.
5. Manage taxes.
Going the do-it-yourself route may work for your personal finances, but tax planning can be far more complicated as a small business owner. Outsourcing tax planning and preparation to a qualified certified public accountant (CPA) or other financial professional who may be helping with your business will not only free up time, but that expertise may reduce your tax liability.
A CPA knows tax laws in your area inside and out and can advise you on various strategies, such as how to maximize qualifying business expenses and the amount to pay in estimated taxes so you don’t end up with a big bill — or giving Uncle Sam an interest-free loan.
One note: One business valuation expert has seen founders make a mistake by trying to structure their businesses to minimize the payment of taxes. When they’re successful at that, net income might be zero or even negative. However, that can cause major problems when seeking funding or investments.
6. Risk management.
Identifying and mitigating risk is something every small business needs to do, but it often falls to the bottom of the list simply because creating a plan that addresses all potential perils seems like a massive task. And yes, it is virtually impossible to address every risk that could possibly affect your business. But you can certainly narrow the list and put safeguards, like cybersecurity insurance and a crisis communications plan, in place.
Scenario Planning vs. Business Continuity Planning
Scenario planning is often conflated with business continuity planning. While both are structured processes, scenario planning plays a longer game that considers revenue over time. Business continuity planning is about how your business will react to a disaster, such as a warehouse fire or earthquake.
In both processes, the journey may be as valuable as the final work product. By bringing leaders together to think through what could affect your business, you may head off potential risk.
Here are some things to consider when crafting a risk management plan:
- Provide the right amount of coverage for yourself and your employees while avoiding overpaying for healthcare and worker’s compensation coverage
- Include cash flow contingencies in case of a business interruption due to a disaster or death of a key person.
- How will you cope with the loss or theft of business property or fraud by an employee, supplier, partner or other third party?
- Consult with counsel about protecting your business from lawsuits.
Note that you don’t need to start from scratch. The Small Business Administration provides a free “Risk Management for a Small Business” training guide.
One existential risk for any business is the loss of the founder or other key leader — do you have a plan for what happens when you must or want to leave?
That leads us to the next three items which, while related, deserve their own plans and attention.
7. Create succession and exit plans.
These are two different scenarios. In a succession, you’re turning the reins of the business over to the next leader. In an exit, you are selling or shutting down the business. As with risk management, the SBA offers a template for succession planning that also includes a section on selling the business.
When deciding whether to sell, close or pass along the company you’ve built, the Small Business Administration recommends looking at a few factors. Have you received a job offer from another company or a purchase offer for your business or your business assets? Are you satisfied with the business’ profitability? Do you foresee market or industry changes that you can’t or don’t wish to adapt to?
On a personal level, are you ready to retire or find you’re working too many hours? Are you simply no longer passionate about the business and ready to try something new? Answering these questions should provide clarity into your next steps.
Let’s look at both succession and exit.
Exit plan: If you wish to sell your company, you need an idea of the value. In fact, even if you aren’t looking to sell, it’s smart to always have a ballpark idea of the business’ market value. Experts advise looking at what similar firms have sold for recently, consider qualitative factors such as whether executives plan to stay on and decide what payment terms you’ll accept.
Succession plan: This is a strategy to cede control of the business to one or more people, or an acquirer. If the former, decide if you will pass the company on to a family member or an employee, and begin training. You’ll still need to know the business’ value, so take the steps mentioned above. Bring in an attorney and a tax professional early on.
8. Plan for retirement.
Retirement planning is crucial for everyone, business owner or not. Experts recommend saving at least 15% of pretax income for retirement in a tax-advantaged plan, such as a simplified employee pension individual retirement account, or SEP-IRA. Any employer, including sole proprietorships, are eligible to establish SEP-IRAs. You can extend this opportunity to employees.
As with taxes, an experienced financial planner can walk you through your options to create a plan suited to your company’s needs.
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9. Create an estate plan.
Proper estate planning helps to provide for your loved ones, business partners and employees who rely on your business; minimize tax exposure; and provide clear instructions on how the business should proceed. These plans are also critical in case you’re incapacitated. There’s no substitution for having an experienced estate planning attorney help you create an airtight plan.
Creating a customized financial plan is an ongoing process. Find trusted advisers who can offer advice and help you develop actionable steps. Successful small business financial planning is an ongoing process, and done successfully, these strategies will optimize performance and show customers and employees that you’re looking out for their welfare.
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