Every business needs a financial plan. Your financial plan gives you a way to monitor and review your cash flow, make adjustments to your spending, and anticipate any upcoming financial issues. It can also make you more prepared to request funding or find investors so you can bring more money into your business.
Although many business owners are aware that financial planning is important, it is often overlooked. Without a financial plan, however, you could find your business doesn’t make the money you expected it to—or you could wind up with unanticipated expenses and no way of paying for them.
Here are some steps to take to build an effective financial plan for your business.
You need to know where your business is now and where you want it to be so you can develop a financial strategy to move forward. At least once a year, ask yourself important questions so you can plan for what’s to come. Among the questions to ask:
- Do I need to expand or grow my business (in terms of staff, locations, or goods and services)?
- Do I need to make any large equipment purchases?
- What resources might I need to buy this year?
- How will any purchases or expansions affect my cash flow?
- What adjustments might be needed to address these expenses?
To build an effective financial plan for your business, you must understand your cash flow. Your cash flow is the movement of cash into and out of your business. If you have more money coming in than going out, you have a positive cash flow situation and are able to pay your expenses. If more money is going out than coming in, you are in a negative cash flow situation and need to bring in more money.
Understanding cash flow—including sales cycles—will help you build a plan for your business. If your business is seasonal, for example, it helps to know when sales drop and for how long, so you can plan for those periods. You can also anticipate when sales will be higher and you’ll have extra money to set aside for emergency expenses.
Remember that cash flow and profitability aren’t the same thing. Your business can be profitable, but if none of your clients are paying you on time you won’t have necessary cash flow to stay afloat.
An important part of your plan is your sales projection. This is related to your cash flow forecast, but focuses on your sales. It gives you insight into every segment of your business so you can better understand which of your offerings brings in the highest sales. For example, if you run a gym you might break down your sales forecasts into the different membership types.
When you forecast your sales, make sure you include the cost of goods sold so you can determine your forecasted growth margin. This information will help you determine which of your offerings are most profitable and which should be revised to increase your profits.
It’s not important for you to have all the answers for your business, but you have to be willing to talk to people who have the information you need. Once you know your current situation and what your goals are, talk to an accountant or financial expert to figure out your next steps.
Experts can help you make sense of your financial situation and how to move forward—whether that’s the best use of your profits or getting yourself out of a negative cash flow situation. They can offer you effective solutions you may not have considered, or help you revise your plan so it’s more realistic.
Throughout the year, take a look at your plan and your projections to ensure you’re still on track. If things are progressing as you expected, great. If not, explore how you can address the situation before financial problems become unmanageable.
Creating a financial plan may feel overwhelming, but by having a clear picture of your goals, your current situation, and your progress, you can write an effective financial plan that increases your chances of success.