Cash flow is the main reason why 82% of businesses close, according to the Small Business Administration.
The average business should have enough cash on hand to handle three to six months of operating expenses. If they don’t have enough, they face financial issues.
Look at what happened when businesses stopped operating during the pandemic. Business owners without enough cash on hand had to take out loans just to get by.
It illustrated the need to have a financial plan for a small business. Another pandemic might not come, but there are natural disasters and other issues that can prevent operations.
Read on to learn the top tips for financial planning and how to get financing for your small business.
In this article
How to Create a Financial Plan
A financial plan is a long-term approach to managing your small business financials. The financial plan takes into account a quarterly or annual review and forecast.
This lets you take into account seasonal trends and consumer trends.
Financial plans are much different from small business budgets. Small business budgets are your monthly income and operations expenses.
Both are important to make financial decisions for your business. For instance, if you know that the busy season is coming up, you can plan to hire seasonal employees.
When you create a financial plan, start with the goals of the business. Keep these separate from your personal goals.
Do you want to get the business to a place where it doesn’t depend on you to function? You can make this a goal and then work backward.
You can figure out how many employees you need and set the revenue targets to make it happen.
Profit and Loss Statements
Profit and loss statements tell you where your business stands. Profit and loss statements cover monthly, quarterly, or annual periods.
This is a line-by-line look at your business income, cost of goods sold, and operating expenses. At the end of the statement, you’ll subtract your income from your expenses to determine your profit (or loss).
This figure is also called the EBITDA, meaning earnings before interest, taxes, depreciation, and amortization.
Your net income is what’s left AFTER operating expenses and interest, taxes, depreciation, and amortization.
Cash Flow Statement
A cash flow statement tells you how much cash you have on hand at the end of each month. If you take your total income and subtract the total amount paid out, hopefully, you’ll be left with a cash balance.
This statement tells you about the overall health of the business. Lenders and investors look at this to see how profitable your business is.
Another part of the financial plan is the balance sheet. This tells you how much money you have at a given time.
Take all of your assets and add them up. This includes money in your bank accounts, inventory, and outstanding invoices.
Make a list of your liabilities, which are loans, credit cards, and accounts payable invoices.
Subtract the liabilities from the assets and you’ll have the total equity in the business. A small business with multiple shareholders will divide the equity between shareholders.
The employee plan describes the current positions in the company. It includes positions that you would like to hire, but haven’t yet.
Start with an organizational chart of your business. Make a list of each position in your small business with a description of each. You’ll see how every employee impacts your business.
You’re likely going to show potential lenders and investors your financial plan. You’ll want to include background information about each manager.
This should give investors confidence that their funds are in good hands.
The sales forecast looks at how much you think you’ll sell in a given time period. This is where small business owners get overly optimistic.
It helps to break down your sales forecasts into segments, such as product types. Each segment has its own COGS which gives you more information about your profitability.
Find Outside Financing for Your Small Business
The business gurus tell you that you have to buck up, work hard, and bootstrap your way to success. That’s a myth that leads to entrepreneur burnout.
Smart small business owners use other people’s money to do more in their small business and in less time. They’re not afraid to hire a new employee because they know the employee brings a return on investment.
They’ll spend more money on marketing rather than wait for repeat and referral clients.
Bootstrapping means that it’s up to you to finance the business. You’re risking your life savings and other assets to fund the business. There are other ways to finance the business. You should include outside financing as part of your financial plan if you want to grow quickly.
The most traditional ways to finance the business are through business loans. These can help you, but you have to include the loan in your liabilities.
The other drawback is collateral. Business loans over a certain amount are secured by collateral, which could be business equipment or personal assets.
There are ways to finance the business that doesn’t involve giving away your company. Small business grants are available from federal and local governments to encourage small business growth.
These grants spur business growth, but it can take months to receive the funding. A Small Business Innovation and Research grant is a good example of a grant that takes months.
In the meantime, you need capital to run your business. You can work with SBIR & STTR Award Financing to get an advance and get the capital you need to run your business.
Writing a Financial Plan For a Small Business
A financial plan for a small business is necessary if you want to avoid cash flow issues. Hopefully, you learned why it’s important and how to create one.
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