Imagine you’re handed a credit card and a few thousand dollars worth of funding and told, “Okay, go run your business.” Without a strict plan for how to use that money and credit line, you’d probably be out of cash in no time.
That’s because every successful business needs to manage its money according to a financial plan. With so much riding on that plan—your ability to maintain a steady cash flow, pay your bills, and grow your business—you have to make sure you cover all your bases.
Here’s everything you need to know about the financial planning process, what to include in your plan, and some costly mistakes to avoid.
The Importance of Establishing a Financial Plan
Your financial plan does more than just detail your company’s finances and outline your business’s goals, strategies, and financial projections.
The benefits of financial planning are nothing to scoff at. Properly following the financial planning and analysis (FP&A) process—and keeping to the strategy you and your financial planner develop— gives you:
- Clear business goals
- Accurate spend management
- Better risk management
- More effective fundraising tactics
You might be thinking, “I can figure all of that out without building a formal plan,” and, you know what, maybe you can. Let’s look at two options.
Option 1: You can haphazardly account for all the right components of the financial plan, keep a mental checklist of everything you want to achieve, and hope everything runs smoothly and nothing bad ever happens.
Option 2: You can sit down with your financial advisor, take an honest look at your finances, and develop a financial plan that gives you a roadmap to accomplish every goal you have for your small business.
Say it with us! Option 2 does a way better job of managing your finances and protecting your company.
How to create a financial plan
Your financial plan will be unique to your small business. Still, the steps you’ll follow to build a plan that accounts for your financial situation and supports your business objectives will apply across the board.
1. Figure out your goals
Before you can put together a plan to meet company objectives, you have to decide what those objectives are. Are you looking to expand your small business to another location? Do you hope to hire more staff to scale your startup?
Whatever you decide will be your guiding light for your larger financial plan.
2. Gather your financial documents
There are a lot of components that go into financial planning, a big chunk of which are your various financial statements.
Grab your past and current:
- Balance sheets
- Income sheets
- Cash flow projections
- Sales forecasts
- Break-even analyses
You’ll need all of these documents to build out other sections of your financial plan, like your operation plan, risk management plan, and funding plan.
(If you don’t have any of those financial reports readily available—or don’t know how to read them—you might want to find someone who can help.)
3. Be honest about your finances
This one can be tough, especially if you’re not as financially stable as you’d like to be.
Whether you’re twice as profitable as you thought you’d be at this point or you’re slowly increasing your losses, seeing how you’re running your business now makes a big difference in building your financial plan for the future.
Are your current financial operations and management tactics going well to support your business, or do you need to change the way you do things to see success?
4. Figure out your financing
Use your cash flow projections and other forecasts to determine if, when, and where you’ll need financing help.
Your numbers might show you won’t need to finance any more expenses for a while so you can limit your liabilities and debt. They could also show you’ll run out of cash sooner than you anticipated and will require another funding round or loan to stay operational.
Your financial plan will include a strategy to manage your financing either way.
5. Monitor your numbers
Keep track of how well you’re sticking to your plan. Are you on target to reach the goals you set? Have surprise debts or other situations forced you to fall off course? You need to track these things to see what is and isn’t working.
6. Update your plan
Just like business conditions can adjust, so should your financial plan. If a strategy is working better than you expected or you need to pivot to account for any changes to your business, you should make changes to your plan accordingly.
Common mistakes in financial planning
As you’re going through this process, there are a few things you’ll want to do to prevent skewing your strategy.
Making the mistake of ordering too much inventory is one thing. But making a mistake that impacts your money is infuriating. Let’s keep your blood pressure low and avoid a few common slip-ups.
1. Making your plan too complex
You shouldn’t need an advanced accounting degree to interpret your financial plan. Don’t overcomplicate things and get too into the weeds. Keep your goals and the strategy you’ll use to achieve them relatively simple.
2. Not investing in the right talent
Having the right people on your side can make or break your business. As soon as you can, start building a team that has the expertise needed to manage your financial data and support your goals.
3. Consistently going over budget
As a small business or startup just getting off the ground, it’s understandable that you’d have to spend a little more than you planned to get things up and running.
But repeatedly going over your budget—or not having a budget in the first place— is a sign of poor financial plan and health. Once you establish a budget, stick to it.
4. Waiting too long to invest in a data setup
The longer you run your business and the more you grow, the more complex your financial and operating data becomes.
Don’t wait until you’re piled high with numbers you can’t make sense of to invest in a way to organize, interpret, and manage your data and use it to inform your business decisions.
Five tips for successful financial planning for SMBs
Now that you know what mistakes to avoid, let’s go through a few things you can do to build the best financial plan for your small business.
As you establish a financial plan to support your business goals, there are a few things you’ll want to account for and keep in mind.
1. Make the right investments early
You don’t want to wait to make certain investments, like employees and technology. Invest in these early on so they help set you up for success from the get-go.
2. Plan for taxes
You own a business. You’re going to owe taxes on it. Throughout the FP&A process, make sure you account for various tax payments and plan how you’ll reserve that money so you stay buddies with the IRS.
3. Revise your plan regularly
You need to update your financial plan as your business or circumstances change. Most small businesses will revisit their financial plans and make adjustments on a yearly basis, but your accountant can advise you on the best strategy for your needs.
4. Plan for contingencies
You always want to have a rainy day fund. Things happen, and expenses you never expected can hit you like a brick. Have a contingency plan and reserve funds to keep your business safe in the event of unforeseen circumstances.
5. Consider outsourcing
If you’re trying to handle all your finances on your own or your small finance team has more on their plate than they can handle, consider getting outside help. Outsourced accounting services offer the same benefits as someone in-house (sometimes more) at a fraction of the cost.
Get a partner in financial planning
Obviously, there’s a lot that goes into creating a solid financial plan. And with everything else on your plate, you might be sitting there, sweating, thinking, “When am I going to find the time to do all this?”
Hiline is here for you. We partner with you to create a clear financial strategy that aligns with your vision and goals. We’ll focus on your finances so you can focus on running your small business.
Let’s talk about building your financial roadmap.
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