Every entrepreneur knows that integrated planning and preparation are key to achieving business longevity and building a solid financial plan plays a crucial part if you’re aiming to grow your business.
Many people feel overwhelmed when it comes to the financial aspects of a business, but fortunately, there are great financial professionals such as tax accountants that can help you navigate toward success.
A financial plan will allow you to gauge your progress and help you address issues before they become serious.
A financial plan is an integral part of a business plan that will tell you if your idea is sustainable, if your business is in a healthy state, and it will keep you on track as your business matures. Not only will it help you better manage your business, but also make you more attractive to investors and show them that you have a strong plan in place to grow your business.
Below we list some of the best steps to take to help you create a thorough f
Ensure Compliance
Before we dive into the elements of a good financial plan, businesses must make sure to remain compliant in handling finances and follow various requirements. For instance, they must adhere to the SOC 1 compliance requirements, especially if they are responsible for handling a client’s finances, but also other accounting standards, tax obligations, and protections against employee fraud.
When businesses of all sizes comply with necessary federal, state, and local financial regulations, they avoid unforeseen penalties and expenses, which is crucial in maintaining financial stability and confidently managing budgets.
Key Financial Statements
The income statement, the cash flow statement, and the balance sheet are the three statements of financial projections you must make part of your financial plan.
Income Statement
Also known as the profit and loss statement, the income statement provides an insight into the revenue and expenses. Revenue is the money received during a particular accounting period and it’s something that keeps your business alive. If you’re running an online clothing store, your revenue comes from the clothing pieces that you sell.
The expenses, on the other hand, are items that include payroll, business taxes, cost of inventory, business insurance, and loan payments. You take the revenue minus expenses to see if your company is profitable or is expected to become.
Balance Sheet
The balance sheet is described as one of the most crucial financial statements, showing the company’s financial standing. In addition, it reveals what a business owns but also what it owes by breaking down its assets, liabilities, and owner’s equity at a particular point in time. This ultimately helps businesses determine their financial strength and ability.
Cash Flow Statement
The cash flow statement indicates how money is expected to flow in and out of your business and it’s a very important tool for cash flow management as it shows when your expenditures are too high and if you should make a short-term investment to deal with the cash flow surplus.
The cash flow statement shows investors whether your business is a good credit risk and if there’s enough money to make your business a suitable candidate for a line of credit. A recommendation for every business to include cash flow projections for each month over one year in their financial plan.
Sales Forecast
Sales forecasting is the process of determining your future revenue by predicting the number of products or services a sales unit will sell in the upcoming period, whether it is next week, month, quarter, or year.
Although it may sound complex, it’s a key element of every financial plan as, without it, it’s nearly impossible to manage the company’s inventory or its cash flow. It adds significant value across organizations as they rely on forecasts to develop budgets for hiring, quota planning, supply chain with material purchases, and much more.
When a company has a good sales forecast, it will lead to improved decision-making, reduction of the sales pipeline and forecasting risk, reduction of time spent planning territory coverage, and a greater ability to focus the sales team on high-profit sales pipeline opportunities.
Create Expense Budget
Creating an expense budget will help you understand how much costs will be necessary to make the sales you’ve projected.
These operating expenses refer to utilities, rent, payroll, and marketing. To get a better picture and nail down your costs, you can divide them by “fixed costs” like payroll and by “variable costs” like marketing services.
Another great technique that you can use is a financial gap analysis, which will help you establish strategies and figure out the best course of action for your business.
Personnel Plan
You can summarize the personnel plan in just two sentences if you have a small business without employees. The personnel plan is a justification of each team member’s necessity to your company and is important as it tells you how your personnel affects your business.
Include a description of each member of the management team and what they contribute in terms of expertise, training, and overall market or product knowledge. Include job positions you want to have in the future with the specific experience required and compensation information.
Final Words
These are the essential elements a financial plan should include if you want to improve your business’s financial health. Put the plan to work, monitor your progress, and review and update it at least once a year.
