How To Make a Financial Plan For Your Business . A financial plan is a document containing a person’s current money situation and long-term monetary goals, as well as strategies to achieve those goals. A financial plan begins with a thorough evaluation of the person’s current financial state and future expectations and may be created independently or with the help of a certified financial planner. A financial plan also assists lenders in determining whether lending you money is a wise use of their funds and can indicate your company’s net worth at the end of a specific time period.
Why Make a Financial Plan
So what do you stand to benefit form a financial plan? The benefits of financial planning are actually endless some of which are listed below.
Clear company goals
This is the foundation of your entire financial plan. What is the company’s goal for the next quarter, year, three years, and so on?
Early on, you’ll want to demonstrate that there is a genuine need for your product or service and that your company meets that need. This is also referred to as “product/market fit.” For many startups, the first few years may be spent developing a product and determining product/market fit. As a result, this would be your main one-to-two-year goal, with smaller checkpoints along the way.
Importantly, if this is your primary goal, you will not set lofty sales targets or massive marketing KPIs. What’s the point of investing in new customer sales and marketing if the product isn’t ready to sell?
Sensible cash flow management
Your financial plan should also include clear expectations for cash flow – the amount of money coming in and going out of the business. Of course, at first, you will spend more than you earn. But what is a reasonable level of spending, and how will you stay on track?
You must also figure out how to easily measure cash flow as part of this plan. Can you accurately and efficiently keep track of where your money is going if you don’t have seasoned finance experts on your team?
Necessary cost reductions
Aside from determining how much you can afford to spend (and on what), a financial plan allows you to identify potential savings ahead of time. If you’ve been in business for a while, creating a financial plan entails first looking back at what you’ve already spent and how quickly you’re currently growing.
As you plan your budget(s) for the coming year, you’ll look back at previous spending to identify unnecessary or exorbitant costs. The budget for the following year is simply adjusted accordingly.
Risk reduction
The finance team’s role is critical in assisting companies in avoiding and navigating risk, which can range from financial fraud to economic crisis. And, while many risks are difficult to predict or even avoid, others can be seen coming.
Your financial plan should account for certain business insurance costs, losses due to risky inefficiencies, and possibly set aside funds for unexpected expenses. You may, in fact, create several financial forecasts that show different outcomes for the business, particularly during turbulent times: one where revenue is easy to come by, and one or two others where times are harder.
Steps for Making A Financial Plan
Listed below are the steps for making a financial plan
3 Essential Financial Statements
The financial section includes three financial projection statements: the income statement, cash flow statement, and balance sheet, as well as a brief explanation/analysis of these three statements.
Income Statement
The income statement, also known as the profit and loss statement or P&L, is a summary of revenue and expenses. Revenue is what keeps your company going. It is the amount of money received during a specific accounting period. For example, if you own a landscaping company, revenue is the amount of money you make per hour or per project.
Your revenue as an online boutique owner comes from the products you sell. Expenses include inventory costs, payroll, business taxes, business insurance, and loan payments. The bottom line is revenue minus expenses, which indicates whether or not your company is profitable or expects to be soon.
Balance Sheet
The SBA considers the balance sheet to be one of the most important financial statements because it provides a snapshot of a company’s financial situation. By breaking down a company’s assets, liabilities, and owner’s equity at a specific point in time, the balance sheet reveals what a business owns and what it owes. This assists you in determining your company’s financial strength and capability.
Cash Flow Statement
A cash flow statement is a financial statement that provides aggregate data regarding all cash inflows a company receives from its ongoing operations and external investment sources. It also includes all cash outflows that pay for business activities and investments during a given period.
Sales Forecasting
Sales forecasting is a method of predicting future sales and is an essential component of any financial plan. It’s nearly impossible to manage your inventory and cash flow without a solid idea of future sales.
Sales forecasting may appear complex, but as one financial professional put it, “If you think sales forecasting is difficult, try running a business without a sales forecast.” That is much more difficult.”
Have Expense Budget
Your expense budget will help you understand how much it will cost to make the projected sales. Rent, utilities, marketing, and payroll are all part of your operating expenses. You can divide your expenses into “fixed costs,” such as rent and payroll, and “variable costs,” such as marketing.
Personnel Plan
If you don’t have any employees, you can sum up this section in one or two sentences. If you have labor costs, this is where you can figure out how payroll affects your overall business.
Each member of your team should be justified in your personnel plan. Begin by describing each employee and outlining their training, expertise, and knowledge of your company. You’ll also include positions that you want to hire in the future, as well as the required experience and compensation.
Plan For Taxes
If you don’t factor in taxes, your company’s gross income is an inaccurate representation of your financial situation. Corporations pay a federal tax rate of 21%, and state corporate tax rates can reach 11.5 percent. Given these rates, your company could potentially pay taxes equal to nearly a third of its income – an amount significant enough to consider when developing a financial plan.
Watch Your Earning and Spending
Even if your company generates enormous amounts of revenue, it may be in trouble if it lacks cash flow. That is why you should keep track of everything you earn and spend, ideally with accounting software. Pull back and hold onto your savings if you notice overspending in certain areas. You can more easily repay your debts or prepare for emergencies with these savings.
Stick To Your Plan
Once you’ve created a solid and comprehensive plan, don’t stray from it. Strive not to exceed the spending limits you’ve established, and if you do, make a note of the occasion and record why the expenditure was necessary. This way, if you deviate from your guidelines, you’ll know how to reel yourself back in. As a result, your chances of financial success improve.
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