Developing a Financial Plan for a Small Business

Developing a financial plan for a small business is a critical step to ensure stability, growth, and long-term success. Here's a step-by-step guide to creating a comprehensive financial plan:

1. Understand Your Business Goals

Before diving into the financial details, clarify your business's short-term and long-term goals. These objectives will drive your financial strategy and determine your financial priorities.

• Short-term goals might include increasing sales or cutting costs.
• Long-term goals could involve expansion, new product launches, or opening new locations.
  

2. Develop Financial Projections

Financial projections are the core of any business plan. They give you a view of how your business is expected to perform in the future. The main projections include:

• Sales Forecast: Estimate future sales by analyzing past sales data, market trends, and customer demand.
• Expense Budget: List all fixed and variable costs like rent, utilities, payroll, marketing, and supplies.
• Cash Flow Projection: Understand how cash will move in and out of your business. This projection ensures you have enough cash on hand to cover day-to-day operations.
• Income Statement (Profit and Loss Statement aka P&L): Summarize revenues, costs, and profits over a specific period.
• Balance Sheet: A snapshot of your business’s financial position, showing assets, liabilities, and equity.
  

3. Break Even Analysis

This is the point where your revenues equal your expenses, and you start making a profit. Conducting a break-even analysis helps you understand how much you need to sell to cover costs, and it can guide pricing strategies.

Formula:

Break-even point= Fixed Costs / Sales Price per Unit−Variable Cost per Unit

4. Assess Financing Needs

Determine how much capital your business needs to operate and grow. Consider the following:

• Startup Costs: If you're in the early stages, list the costs associated with starting the business (e.g., equipment, licenses, legal fees).
• Working Capital: The funds needed for day-to-day operations, like paying suppliers and managing payroll.
• Growth Funding: If you're planning to expand, calculate how much funding is necessary and how you'll finance it (loans, equity, or retained earnings).

5. Track Financial Ratios

Monitor your financial health with key financial ratios:

• Liquidity Ratios (e.g., Current Ratio): Measure your ability to meet short-term obligations.
• Profitability Ratios (e.g., Net Profit Margin): Evaluate how profitable your business is.
• Leverage Ratios (e.g., Debt-to-Equity): Assess how much of your business is financed through debt versus equity.
• Efficiency Ratios (e.g., Inventory Turnover): Indicate how well you're managing your assets.

6. Plan for Taxes

7. Monitor and Adjust Regularly

Financial plans should be reviewed and adjusted regularly, especially when business conditions change. Set up periodic financial reviews (monthly, quarterly) to assess performance against your projections, and make necessary adjustments to stay on track.

8. Risk Management

Incorporate contingency planning in your financial plan. Consider risks like market fluctuations, economic downturns, or unexpected expenses. A good financial plan includes an emergency fund or backup financing sources.

9. Technology and Tools

Leverage financial software and tools like QuickBooks, Xero, or Excel to automate tracking and reporting. These tools can help generate accurate financial reports and forecasts, making it easier to manage your finances efficiently.

10. Seek Professional Advice

Consult with a financial advisor, accountant, or business consultant to get expert input. They can help refine your financial plan, ensure it aligns with your goals, and suggest strategies to optimize your finances.

A well-crafted financial plan will help your small business navigate challenges, seize opportunities, and grow sustainably over time.

Curious about how to keep track of your small business’ finances as easily as possible? Check out these strategies:

Think about developing a relationship with one of the Shore United Bank’s Business Banking Relationship Managers early in the process to help ensure your business’ finances are on the correct path. These individuals are here to help and can assist in giving advice for additional advisors like CPA, Insurance Agency, Wealth Management, and so much more.

CONTACT A BUSINESS BANKER TODAY