Every business will need a financial plan. Your financial plan gives you ways to monitor and review your cash flow, anticipate any upcoming financial issues, and make adjustments to your spending. It can also make you more prepared for requesting funding or find investors so you can start to bring more money into your business.
Although most business owners are aware of the need for financial planning, it is often overlooked. Without a financial plan, you could find your business doesn’t make the money you expected it to—or you could wind up with unexpected expenses and no way of paying for them.
Here are steps to take to build an effective financial plan for your business.
Set your goals
You need to know where your business currently is and where you want it to go to develop a financial strategy to move forward. At least once a year, sit down and ask yourself important questions so you can plan for what’s to come. Among the questions to ask:
- Do I need to grow or expand my business (in terms of locations, staff, or goods and services)?
- Will I need to make any large equipment purchases?
- What resources could I need to purchase this year?
- How will any expansions or purchases affect my cash flow?
- What adjustments might be required to address these expenses?
Understand your cash flow
For your business to have an effective financial plan, it’s vital to understand your cash flow. Your cash flow is the movement of cash out of and into your business. You have a negative cash flow situation if more money is going out than coming in and will need to bring in more money. If you have more money coming in than going out, you have a positive cash flow and can pay your expenses.
Understanding cash flow will help you build a good plan for your business. If your business is seasonal, it helps to know when sales will drop and for how long so that you can plan for those periods. You will also be able to anticipate when sales will be higher, and you’ll have extra money to set aside for downtime and emergency expenses.
Remember that profitability and cash flow aren’t the same things. Your business can be profitable, but if a large number of your clients aren’t paying you on time, you won’t have the necessary cash flow to stay afloat.
Create a sales projection
A vital part of your plan is the sales projection. This is related to your cash flow forecast but focuses mainly on your sales. It gives you insight into every aspect of your business to better understand which of your offerings brings in the highest sales. For example, if you run a CrossFit studio, you might break down your sales forecasts into the different membership types.
When you forecast your sales, make sure to include the cost of goods sold to determine your forecasted growth margin. This information can help you determine which of your offerings are the most profitable and which should be revised to increase your profits.
Talk to an expert
You don’t need to have all the answers right now for your business, but you need to be willing to talk to people who have the information you need. Once you know your current situation and goals, speak to an accountant or financial expert to figure out your next steps.
Experts will help you make sense of your financial situation and plan how to move forward—whether that’s getting yourself out of a negative cash flow situation or making the best use of your profits. They can offer you effective solutions that you may not have considered or help you revise your plan, so it’s more realistic.
Monitor your progress
Take a look at your plan and projections to ensure you’re still on track during the year. If things are progressing as you expected, fantastic. If not, look at how you can address the situation before financial problems become out of control.
Final thoughts
Designing a financial plan may feel overwhelming, but by having a clear picture of your goals, current situation, and progress, you can write an effective financial plan that increases your chances of success.
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