Any plan is futuristic. It tells you where you want to be a year, three, or five years from now. It all begins with a realistic goal broken down into small, actionable steps. Suppose you want to go on a road trip. You chart a roadmap with pit stops, prepare a budget, and arrange ample funding for the journey (cash, credit card, net banking, discount coupons). While a road trip is a toy example, its base is like a financial plan.
What is a Financial Plan? Why Do You Need It?
A financial plan is writing down your short- and long-term business objectives on paper, identifying your current financial position, and how you plan to achieve your goal. It is an extension of your business plan as it plugs in monetary value to each step and monitors the financial feasibility of the various options to come up with the most optimum solution.
You may have done the mental math of your financial plan, but putting it on paper helps you communicate it to stakeholders, employees, and other interested parties to ensure everyone is on the same page. A small business with a robust financial plan knows its current economic situation, how to thrive when things go south, and how to use the available resources optimally. It helps build confidence and reduce expensive mistakes from poor business decisions.
How To Prepare a Financial Plan for Your Small Business?
Prepare Strategic Business Objectives and Prioritize Them
When you have your end goal in mind, planning becomes easy. You may have several ambitious goals. You can’t achieve each of these goals in one go. Hence, it is important to prioritize them into ones most urgent and important. Your business goals could be revenue growth, improving profit margins, acquiring new clients, reducing debt, or entering new markets. Each of these goals requires meticulous planning and follow-up.
For instance, John has a significant debt on his balance sheet that is stressing its profits. His short-term strategic goal could be to reduce debt and improve profit margins. Once he achieves a certain leverage ratio and industry-standard profit margin, he might focus on double-digit revenue growth by acquiring new clients in the medium term, followed by business expansion by entering new markets in the long term. Here, John has prioritized his goals and made them more realistic and measurable.
You can prepare your business objectives depending on your current situation. Some may focus on revenue growth over profitability, and some on positive cash flows over expansion.
Prepare an Operations Plan
Once you know the goal you want to achieve, you can break it down into small actionable plans with some milestones. Never prepare an operations plan in isolation. Involve all departments and take their input, as they would be able to come up with creative solutions that are workable on-field.
Suppose the goal is to cut costs and repay debt; HR may help you plan and execute layoffs through voluntary retirement or reduced pay, finance managers may help negotiate debt terms with banks, and the finance team identifies and sells non-core assets.
Financial Projections across Various Scenarios
The financial plan assigns a monetary value to each step by making realistic financial projections. To do that, you must examine your current financial statements to identify your financial standing. From here, you can make realistic projections, considering seasonality, one-time expenses, and expected outcomes.
Income statement: You can make sales projections for the year to make strategic decisions. During the peak season, you can boost your marketing efforts to grow sales and see which sources yielded the best returns. You could also identify areas where you can cut expenses and measure the impact of your actions on the income statement.
Balance Sheet: By examining the assets and liabilities, you can get a fair idea of your financial situation and preparedness for a crisis. You could optimize inventory costs by examining your inventory level and the conversion cycle. Similarly, you could keep a healthy cash balance if you anticipate a downturn. If you are considering selling non-core assets, the valuation of certain balance sheet assets can be useful.
Cash Flow Statement: It is essential to project the cash inflow and outflow to make strategic decisions around working capital requirements like hiring and promotions. Cost-cutting could help you improve your cash flow from operations, and debt reduction could improve your cash flow from financing.
All the above projections should help you achieve some set targets identified through various analyses. For instance, break-even analysis tells you at what price point or volume you recover your cost and break even (no profit, no loss). You can plan your sales growth to reach break-even volume even in the worst-case scenario.
Planning for Contingencies
Even if you are making cautious guidance, it is essential to plan for contingencies since the business world is dynamic. Whatever you plan to do, think of the things that are not in your control and can go wrong. What if a significant client cancels the contract? What if several key employees leave in one go? What if inventory goes obsolete?
Have a contingency plan for the worst-case scenario. It is like having an emergency fund. Look at your retained earnings and cash reserves and how long they could pay for your working capital. Also, keep a line of credit handy for emergencies. Beyond capital, you might also want to have various sources of income. If you lose a significant client, your business does not fall apart and can at least reach break-even.
Monitor the Progress and Review the Financial Plan
When you implement your plan, the actual scenario may differ from projections. Some plans may yield desired results, and some may not. Ensure your financial plan has a measurable performance indicator that can tell you if the plan is feasible.
Plug the actual numbers against the forecast to see the deviation. If the deviation is high, reviewing and revising the plan is time. No plan is perfect. There is always room for improvement.
Contact Glenn Graydon Wright LLP in Oakville to Help You with Business Financial Planning
Whether you are preparing a financial plan for the first time or need to review the plan, a chief financial officer can help you work out the estimates, ratios, and credit lines. At Glenn Graydon Wright LLP, our accountants can provide services such as preparing financial statements, forecasting, and preparing financial plans. To learn more about how Glenn Graydon Wright LLP can provide you with the best accounting and CFO expertise, call us today at 905-845-6633 or connect with us online to schedule an initial consultation.