Table of Contents Hide
- What is a Financial Plan
- Financial Plan in a Business Plan
- How to Make a Financial Plan for a Business
- #1. Sales Prediction
- #2. Make an Expense Budget
- #3. Cost-Benefit Analysis
- #4. Personnel Strategy
- #5. Build an Emergency Fund
- #6. Get the Right Insurance
- #7. Organize your debt
- #8. Keep a Close Eye on Your Earnings and Spending
- #9. Reevaluate and Revise
- #10. Follow Through on Your Plans
- #11. Finally, keep your financial plan close at hand!
- Related Articles
- FAQs On Financial Plan
- What Is The Purpose Of Financial Plan?
- What Are The 5 Componets Of a Financial Plan?
- What Is a Financial Plan Called?
- What Are Three Types Of financial Plan?
- What Is The Basic Rule Of Finance?
Every business owner’s desire is to have a plan that properly directs their business to the promised land. As such, a sound financial plan is a well-known example of how to efficiently move your business from the startup stage through the achievement of your ultimate financial goals.
Interestingly, you can secure financial success for your firm, whether it is a startup or an existing one, by developing a plan.
In this post, we utilized a specific example to demonstrate how you might create a financial plan for your startup business to reach the promised land. Come with me!
What is a Financial Plan
A financial plan is an element of your existing business strategy. Your financial plan should include financial statements reflecting where your business stands presently and where it plans to be in the future. Business owners, for example, utilize a financial plan to determine how much finance their startup might need in the future.
Furthermore, a financial plan assists lenders in determining how lending you money is a sensible use of their finances and can reflect your company’s net worth after a specific period.
Read Also…Personal Financial Plan
Financial Plan in a Business Plan
The financial aspect of a business plan is split into 2 parts: historical data and prospective data. Since you don’t have any previous financial information about the business as a startup, many lenders will want to see your financial plan instead, or in addition, your business finances.
In creating a startup financial plan, indicate for example, how much money you intend to invest in the business, as well as specifics about the assets you intend to use. If you’re looking for financing, you will most likely be required to provide personal income tax returns for the last few years.
Also, prepare documentation for the last three to five years, with respect to the length of time you’ve been in business. Balance sheets, income statements, cash flow statements, and tax returns are all necessary.
#1. Balance sheets
Balance sheets detail the nature and value of all of your company’s assets and liabilities, as well as ownership stake (who owns what in the company, and how much). Cash at hand, accounts receivable, inventory, equipment, and property owned will all be considered assets. Whereas, accounts payable and long-term debt are examples of liabilities.
For the most part, the balance sheet compares what you own to what you owe and provides a snapshot of your company’s financial position at the time it is prepared.
#2. Income Statements
Income statements show how much money you’ve taken in for the business, where it came from, what your expenses were, and your net income. Even more, how much you ended up with after deducting all your expenses. The statements are typically prepared quarterly and will show whether the company is profitable or losing money at a glance.
#3. Statement of Cashflow
This shows all of the money that comes in and goes out of your business. Whether it’s a direct result of your operations or a result of any outside investments you’ve made.
#5. Returns on Taxes
The tax forms you must file with the Internal Revenue Service each year will depend on how your business is structured. So, these could be a personal tax return with a Schedule attachment, or separate corporate tax returns.
If you’re looking for a loan as part of a financial plan for your business, you’ll almost certainly need to demonstrate the worth of any collateral you’re offering to guarantee payments. For example, real estate, vehicles, inventory, stocks and bonds, and equipment.
Everyone knows you don’t have a time machine and can’t predict what will happen in the next five years, but there’s a point to compiling the steps. Thus, lenders and investors want to see that you’ve thought things through and deemed all of the possible outcomes as your business grows. They also want to know how you arrived at your numbers and why you made the assumptions you did.
This means you’d need to do a lot of planning before you sit down to work on your projections, critically thinking through various scenarios. Again, the research you’ve already done for previous sections of your business financial plan will be immensely helpful here in making the assumptions required to put together your projections.
Whether you have a new or existing business, there is a good chance you will be asked for personal financial information, so include it in your business plan. Your credit history or a copy of a recent credit report can be included too in the appendix, along with copies of your tax returns and any other information that a lender may require.
Additionally, include projected income statements, balance sheets, and cash flow statements, as well as a capital expenditure budget, as described before.
#1. Budget for capital expenditure
A capital expense is a tangible, physical asset such as real estate, buildings, or machinery. This budget is your financial plan covering how much you’ll spend to purchase or upgrade these assets, such as new machinery or repairing your HVAC system.
Notably, if your business is still in its early stages, make sure to factor in any startup costs. Some may be industry-specific, such as specific types of equipment, tools, or store fixtures. Others, such as professional fees for lawyers or accountants, licensing and incorporation fees, security deposits and rent, and computers, are fairly common across the board.
How to Make a Financial Plan for a Business
Consider the following elements when creating a financial plan for your business
#1. Sales Prediction
Sales prediction is a method of forecasting future sales and is an essential component of any financial plan. It is nearly impossible to manage your inventory and cash flow without a solid idea of future sales.
Perhaps, sales prediction may appear rather 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.”
#2. Make an Expense Budget
Your spending budget will assist you to understand how to make a financial plan for your business and how much it will cost to make the projected sales. Hence, you can divide your spending into “fixed costs,” like rent and salaries, and “variable costs,” such as marketing.
#3. Cost-Benefit Analysis
A break-even analysis is a financial calculation that can assist you in determining when your business (or new product or service) will become profitable. Moreover, it shows the number of products or services you need to sell to cover your costs if done correctly.
When you break even, you are neither making nor losing money, but all of your expenses are met. Your break-even point is calculated by dividing your fixed costs by your average price, minus your variable costs.
#4. Personnel Strategy
If you don’t have any employees, you can sum up this section in one or two sentences. However, if you have labour costs, this is where you’ll figure out how payroll affects your overall business financial plan.
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 will also include positions that you want to hire in the future, as well as the required experience and compensation information.
#5. Build an Emergency Fund
This is the one point you must not miss when making a financial plan for your business. SBA has found that 90 per cent of small businesses fail within two years of a disaster that impacts their business.
Notwithstanding, you can minimize your company’s chances of becoming a statistic by creating a budget that includes an emergency fund. In this manner, when sudden tragedy hits your firm, you’d have enough cash to overcome your revenue interruptions.
#6. Get the Right Insurance
Business insurance is just as crucial for emergency management as is an emergency reserve. Property insurance and business interruption insurance, for example, can help keep your company afloat in the aftermath of a disaster or a lawsuit.
#7. Organize your debt
While your ultimate goal with loans is to pay off your debts, the fact is that debt repayment takes time. Long payback terms for expensive loans with high-interest rates can be very stressful, so you should first determine how much debt you can take.
Furthermore, determine how you want to use your loans to supplement your business financial income.
#8. Keep a Close Eye on Your Earnings and Spending
Even if your firm generates a large amount of income, it may be in trouble if it lacks cash flow. That is why you should keep track of everything you make and spend, ideally with accounting software.
Pull back and hang onto your savings if you notice overpaying in particular areas. You can more readily repay your debts or plan for emergencies if you have these savings.
#9. Reevaluate and Revise
Perhaps you’ve devised a method of saving money that, when put into action, impairs your ability to supply your services. If this is the case, you should know how to review and adjust your business financial plan. Short-term savings are rarely worth the long-term financial harm that output decreases could cause.
#10. Follow Through on Your Plans
Once you’ve come up with a solid and comprehensive plan, don’t veer from it. Strive not to go beyond the boundaries you’ve set, and if you do, make a note of the event and explain why the spend was essential. This way, if you break from your guidelines, you’ll know how to reel yourself back in. As a result, your business chances of financial success improve.
#11. Finally, keep your financial plan close at hand!
Many business owners spend a significant amount of time developing a financial plan only to file it away and never refer to it again. Therefore, make sure to examine your financial plan frequently and make improvements as needed.
In closing, we all need to plan our finances at some point in our life. You will acquire a roadmap and tactics that will help you achieve your life’s essential financial goals if you do detailed but rigorous financial planning and analysis.
Furthermore, if you can effectively complete personal financial planning, you will be able to avoid financial risk, money-related uncertainties of future demands, and maintain strong and steady financial health.
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FAQs On Financial Plan
What Is The Purpose Of Financial Plan?
Financial planning is a step-by-step approach to meet one’s life goals. A financial plan acts as a guide as you go through life’s journey. Essentially, it helps you be in control of your income, expenses and investments such that you can manage your money and achieve your goals.
What Are The 5 Componets Of a Financial Plan?
- Define your financial plan goals. …
- Make rough cash flow projections. …
- Assess your risks. …
- Define an investment strategy based on the factors above. …
- Review and refine your plan regularly.
What Is a Financial Plan Called?
A financial plan is sometimes referred to as an investment plan, although in personal finance, a financial plan can focus on other specific areas such as risk management, estates, college, or retirement.
What Are Three Types Of financial Plan?
- Short-term financial plan is prepared for maximum one year. This plan looks after the working capital needs of the company.
- Medium-term financial plan is prepared for a period of one to five years. …
- Long-term financial plan is prepared for a period of more than five years.
What Is The Basic Rule Of Finance?
Spend less than you make. Spend way less than you make, and save the rest. Earn more money. Make your money earn more money