How to Create a Business Financial Plan

Developing a financial plan is crucial for building and running a successful business. Understanding how to create a financial plan, its core components, and how to use it effectively can position your business for long-term success.

 What Is a Business Financial Plan?

A business financial plan is a forward-looking projection of your expected income and expenses over the coming months. It helps in determining cash flow, pinpointing financing needs, and identifying when to launch new initiatives or projects. For new businesses, a financial plan can help validate the viability of the business concept. It also helps monitor financial health, track progress, and prevent potential issues.

A financial plan is a core component of a business plan that outlines your business concept, leadership, market, and competition. It is a key element in securing funding from investors or lenders and helps you understand cash flow to allocate valuable financial resources effectively.

 Elements of a Financial Plan

Creating financial projections can be challenging. This guide will help finance leaders understand the key components and how to get started.

1. Income Statement

   The income statement details your business’s profits and losses over a specific period. Common reporting periods include monthly, quarterly, and annually. Also known as a profit-and-loss statement, it includes:

   – Cost of sales or goods

   – Revenue streams

   – Operating expenses (eg rent, utilities)

   – Gross margin (total net profit or loss)

2. Balance Sheet

   The balance sheet provides a snapshot of your business’s current state, including:

   – Assets (cash, products, resources)

   – Liabilities (amounts owed to suppliers, employees, landlords, creditors)

   – Shareholder equity (assets minus liabilities)

3. Personnel Plan

   For businesses with employees, it’s essential to plan for personnel expenses and needs. This includes forecasting salaries, benefits, training, travel costs, and the potential revenue generated by employees. This analysis helps determine when and where to hire additional staff.

4. Business Ratios

   Business ratios offer clear indications of your business’s performance. Commonly used ratios include:

   – Working capital

   – Quick ratio

   – Inventory turnover

   – Debt-to-worth ratio

   – Return on investment (ROI)

5. Sales Forecasts

   Sales forecasts are critical for projecting cash flow and overall financial health. These forecasts should align with your profit-and-loss statement and segment sales by product or service type.

6. Cash Flow Projections

   Cash flow projections show the movement of cash into and out of your business, detailing current cash on hand, allocation, sources of cash, and scheduled outflows.

7. Income Projections

   Typically done annually, income projections show the business’s earnings minus expected expenses.

8. Assets and Liabilities

   These core elements of the balance sheet include:

   – Assets: Cash, inventory, accounts receivable

   – Liabilities: Financial commitments to creditors, including short-term (payroll, taxes) and long-term (loans) obligations

9. Break-Even Analysis

   The break-even point is a key financial health indicator, showing how much you need to sell to cover your expenses. It helps shape sales volume and revenue goals.

 Key Steps to Create a Financial Plan

Creating a financial plan can seem daunting, but these steps can help you get started:

1. Build a Business Strategic Plan

   A strategic plan frames your business projections by answering core questions about customers, market, and product/service needs. It serves as a roadmap toward your business goals.

2. Create a Marketing Strategy

   A compelling marketing strategy differentiates your products/services and spurs customer action. It helps build a customer base and understand the necessary resources.

3. Understand the Competition

   Knowing your competition helps you plan financially. Understanding their pricing, target customers, and market strategies enables you to position your brand effectively.

4. Be Prepared to Pivot

   Businesses, markets, and customers are constantly changing. A sound financial plan includes forward-looking analysis to spot trends and adjust accordingly.

 Tools for Financial Planning

Using tools like Air Retailer can automate business processes, reduce costs, save money, and improve efficiency. Air Retailer solutions help manage invoices, company expenses, access real-time data, integrate finances with other business systems, and drive business success.