The financial plan is the backbone of your business plan. Small business owners need to answer four questions to investors when presenting their financial plan.
How will your business model earn income?
What do you need to get your business off the ground?
What are your costs?
What are your sales and income projections?
You'll need to ensure your plan covers at least these four questions. Here are four steps to creating a basic financial plan for your small business.
#1 Plan Strategically
What will it take financially for your business to get off the ground, and what do you expect to earn if you achieve your business goals? Do you need to buy equipment or hire staff? How will your goals affect your cash flow and vice versa? What resources do you need to achieve your business directives?
#2 Calculate Financial Projections
Calculating financial projections of your sales and expenses is critical for showing investors what they can expect from your company's financial performance.
There are several components of your financial statements that investors and shareholders need to see. However, the two most important parts of the financial statements are the income statement and the balance sheet.
Income statement (P&L Statement)
The income statement is of concern for investors because it shows your companies profit or loss over the quarter or year.
Balance Sheet
This part of the financial statement gives the investor, shareholder, or business owner a 30,000-foot view of the business's financial status as it stands at that moment. It focuses on what you own (your assets) and what you owe (liabilities).
Other important parts of your financial statements to include with your financial plan include the following.
Assets and liabilities
Cash flow projection
Sales forecast
Income projection
Business ratios
Personnel plan
Break-even analysis
#3 Plan for Strategy Contingencies
Plans rarely work out as expected, there will always be some variation to desired results, and investors are aware of this.
Create a plan for scenarios where there's no money coming into the business by looking at your cash flow statement and assets. Consider the level of cash reserves you need to make it through these risks.
#4 Monitor and Compare Results and Goals
After your business launches, adjust your business and financial plan every quarter. Input your results from your cash flow statement and income projections and adjust expectations as necessary. Don't throw the financial or business plan in a drawer and forget about it - it's a critical planning tool for your business strategy.