by Scott K. Schmidt, Chief Financial Officer, U.S. Money Reserve
Financial business plans are like disaster plans for your company. Here’s how to create a sound financial business plan.
Everyone knows that it’s vital to have a business plan when starting out, but did you know that you should also have a financial business plan? A financial business plan helps you get an idea of where you are, where you want to be, and where you might have some issues down the line when it comes to your company’s finances. It can act as your first-line warning system should things start to trend down, it can help you identify the right time to borrow or save, and it can help you determine when to invest.
Here’s how to build a financial plan for your business and ensure that your company lasts well into the future, no matter what happens in the broader economy.
What Is a Financial Business Plan?
A financial business plan is typically separate from and in addition to your standard business plan. I’ve written extensively about why you need a business plan (and how best to create one), but it turns out, financial business plans are a bit less frequently discussed. While business plans are essential to have (and refresh regularly), it’s even more critical to build and maintain a financial business plan to ensure your company’s financial security.
A financial business plan takes a look at your current books and then forecasts them forward so that you can adequately plan for any investments, expansions, loans, or growth you might want to take on. It also helps you prepare for potential downturns in the market, your business, or the broader world economy.
There are generally five elements that you’ll need to address in a financial business plan:
- Sales Forecasting
- Business Expenses
- Assets and Liabilities (Balance Sheets)
- Cash Flow Projection
- Break-Even Analysis
We’ll discuss each of these sections in depth below, but it’s important to consider hiring a financial expert to help you create your financial business plan, especially if you don’t have a savvy financial expert on your staff already or if you don’t happen to be a financial whiz. A financial expert, accountant, or financial business planner can help you get a better handle on the state of your financial affairs as they currently stand and help you plan for the future.
Breaking Down a Financial Business Plan
A financial business plan is a little bit like a disaster plan and a growth plan wrapped into one. It can help you plan for future income and growth while also helping you protect your business investment from potential losses and downturns.
To create a successful financial business plan, you need to get a comprehensive idea of where you currently stand, where you think you are going, and how you will get there. A financial business plan can offer a really clear road map for growth. As I mentioned above, there are five critical elements to a financial business plan. We walk through each and describe what they are, what they do, why they are necessary, and how to create them below.
Do you have a seasonal business? Have you noticed that clients start to pull back on spending in the fourth quarter of every year? Have you seen a surge of orders around August or September? These are all-important high-level questions and observations that the sales forecasting portion of the financial business plan helps you see and assess. Sales forecasts help you get a handle on what could be just around the corner for your business.
Sales forecasts use past data and information about sales to forecast what the future might look like. One thing to remember about sales forecasts is that they are not set in stone — they are merely educated guesses at what the future could hold for you and your business.
Your sales forecast should include monthly, quarterly, and yearly outlooks for your business based on your past accounting and experience. These projections will help you better understand what’s actually happening in your business and plan time for growth, expansion, purchases, and investment in your company. Say, for example, your business appears to boom during the back-to-school season, but sales drop off around November. If you’d like to stabilize your income more throughout the year, it could pay to offer deals at certain times to drive business or create new products that will help even out your sales year-round. Without a sales forecast, there’s no way of knowing what business lever you might need to pull in order to make that happen. Sales forecasts can also help you plan for the right time to grow, too. These tools help you set goals to beat or meet the next month, quarter, or year, and they can set a clear path forward for your business.
Business Expenses (Both Current and Future)
When crafting your financial business plan, you should look closely at your past expenses and projected future costs to know just how much money or investment you might need, at what time, in order to keep your business running smoothly. When creating this portion of the financial business plan, you should include your current regular expenses and your future expected expenses.
Say, for example, you need to invest in a new piece of equipment in order to produce a new good that will help make your business more robust year-round. There is the associated cost of that equipment and any loans or financing you might take out to purchase it, but there are also associated maintenance costs that might need to be taken care of once you own it. Perhaps you need to hire an additional full-time or part-time employee to maintain or run the equipment. Maybe you need to train an existing employee to maintain the equipment. These are all associated business expenses that you’d take into account in your financial business plan, and they all fall into the business expenses category.
The expected business expenses section of your financial business plan should also include things like future tax increases, fees and dues for various professional groups, increased minimum wage or employment taxes, and other required dues and fees that you’ll need to pay in order to keep your business in good standing with the various government entities you’re required by law to pay.
You should also include any savings you might have or would like to have for things like fire, water, or catastrophic damage to your business. Given the way 2020 has shaken out, it’s probably a good idea to set aside a cushion for pandemic disasters, too.
In addition to these elements, you should also include any costs associated with expansion and growth. Depending on the type of business, these costs can look very different from one company to another. Still, it’s vital to financially plan for your future growth so that you don’t overexpand and stretch your company too thin. This section of the financial business plan can help you focus on your priorities and get a good idea of what really matters to you and your business as it grows.
Assets and Liabilities (A Current State of Affairs)
It’s common to see the terms assets and liabilities on your balance sheet when looking at your business’s financials. These items give you a good idea of the outstanding debts and assets you have that determine your overall net worth. Assets (in general) are physical or intellectual “items” you own that can be sold on the market for a set price. Liabilities are items like liens, debts, and other financial responsibilities you have.
Most small business owners tend to underestimate both the value of their assets and the amount of their debts, often putting them in a precarious position. Taking a look at your assets and liabilities and getting a reasonable, precise estimate can make a world of difference in determining the timing for expansion, hiring, or growth. It can also give you a realistic idea of how your business is actually doing.
For this portion of the financial business plan, you should take a look at your complete balance sheet, rather than just a profit and loss (P&L) statement or a cash flow report. A balance sheet can give you a snapshot of how your business is doing on any given day, while a P&L statement generally only gives you an idea of how your business is doing across a specific time period. You can use your balance sheet as a guide to figure out when to invest in your business and when to save. You can also use your balance sheet as a way to get a good, overarching idea of where you stand financially at any given moment.
The assets and liabilities section mostly focuses on the current time period, but you should also create a balance sheet that is forward-looking. This forward-looking version should imagine what your business will look like in each quarter and each year. If you do decide to go to the market and find investors for your business, this will be a vital part of that work. It will help you secure financing (if you decide to pursue it) because it will give investors a good idea of what you think your business might be able to accomplish financially in the future.
Cash Flow Projections
If you forecast what you are planning to outlay, you should also forecast what you plan to take in. This is where cash flow projections come in. Are you anticipating a big payday from a new client? Are you in the throes of negotiation on an acquisition that could earn you significant money? How much money will you have left over at the end of a month, quarter, or year? How do you plan to invest or spend it? A cash flow projection can help you figure out the best payment terms (so you can continue to grow and invest in your business), and it can help you plan for seasonal contractions or fluctuations.
You should be able to predict what your future business cash flow should look like on a monthly, quarterly, and yearly basis. You can manage your finances more comprehensively by knowing when you might need to save and when it will be the right time to spend.
At some point in the future, you will break even when sales of goods or items will equal your expenses. This point is a crucial element to calculate since it gives you a good idea of what prices you should set for your items or services and at what point you can anticipate a profit.
Elements that go into a break-even analysis include fixed costs, variable costs, and the average price. Keeping a break-even point in mind when examining your books is crucial because it can help you gauge if you are over- or under-performing and whether you should anticipate a lean or fat year, quarter, or month. You should use a break-even analysis when you want to figure out how much you need to sell in order to make a profit.
“Break-even” is a key point in your financial business plan since it will tell you a lot about your company’s health. Using all the items you worked on before, you can tell a lot about what your break-even point is and what it means for your company both in the current environment and in the future.
How Often Should You Revisit Your Financial Business Plan?
Since the economy on both the global and local scales is so uncertain thanks to the global pandemic, it makes sense to keep a close watch on your business’s financial state. In normal times, you could probably (depending on how volatile your business is and how much you want to invest in growth) get away with checking in with your financial business plan every quarter. However, in the current environment, it could be extremely beneficial to pay closer attention to your financial plan and check in with it every month.
The more volatile the economy becomes, the more it makes sense to keep a close watch on your business and its finances. Additionally, the more you understand what is happening with your cash flow, your debts, and your assets, the better you can handle whatever may come your way as the economy evolves during these uncertain times. By putting together a comprehensive financial business plan, you ensure that your business, its employees, and your company’s future continue to thrive in the new and continually evolving business landscape.