financial plans in small business

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Making a Risk Management Plan for Your Business

It’s impossible to eliminate all business risk. Therefore, it’s essential for having a plan for its management. You’ll be developing one covering compliance, environmental, financial, operational and reputation risk management. These guidelines are for making a risk management plan for your business.

Developing Your Executive Summary

When you start the risk management plan with an executive summary, you’re breaking apart what it will be compromised of into easy to understand chunks. Even though this summary is the project’s high-level overview, the goal is describing the risk management plan’s approach and scope. In doing so, you’re informing all stakeholders regarding what to expect when they’re reviewing these plans so that they can set their expectations appropriately.

Who Are the Stakeholders and What Potential Problems Need Identifying?

During this phase of making the risk management plan, you’re going to need to have a team meeting. Every member of the team must be vocal regarding what they believe could be potential problems or risks. Stakeholders should also be involved in this meeting as well to help you collect ideas regarding what could become a potential risk. All who are participating should look at past projects, what went wrong, what is going wrong in current projects and what everyone hopes to achieve from what they learned from these experiences. During this session, you’ll be creating a sample risk management plan that begins to outline risk management standards and risk management strategies.

Evaluate the Potential Risks Identified

A myriad of internal and external sources can pose as risks including commercial, management and technical, for example. When you’re identifying what these potential risks are and have your list complete, the next step is organizing it according to importance and likelihood. Categorize each risk according to how it could impact your project. For example, does the risk threaten to throw off timelines or budgets? Using a risk breakdown structure is an effective way to help ensure all potential risks are effectively categorized and considered. Use of this risk management plan template keeps everything organized and paints a clear picture of everything you’re identifying.

Assign Ownership and Create Responses

It’s essential to ensure a team member is overseeing each potential risk. That way, they can jump into action should an issue occur. Those who are assigned a risk, as well as the project manager, should work as a team to develop responses before problems arise. That way, if there are issues, the person overseeing the risk can refer to the response that was predetermined.

Have a System for Monitoring

Having effective risk management companies plans includes having a system for monitoring. It’s not wise to develop a security risk management or compliance risk management plan, for example, without having a system for monitoring. What this means is there’s a system for monitoring in place to ensure risk doesn’t occur until the project is finished. In doing so, you’re ensuring no new risks will potentially surface. If one does, like during the IT risk management process, for example, your team will know how to react.

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4 Steps to Creating a Financial Plan for Your Small Business

When it comes to long-term business success, preparation is the name of the game. And the key to that preparation is a solid financial plan. It helps you pitch investors, anticipate growth and weather cash flow shortages. To get started, you need to learn some of the key elements to financial planning.

What is a Financial Plan?

A financial plan helps determine if an idea is sustainable, and then keeps you on track to financial health as your business matures. It’s an integral part to an overall business plan and is made up of three financial statements—cash flow statement, income statement and balance sheet. In your plan, each of these will include a brief explanation or analysis.

Key Takeaways

• A financial plan helps you know where your business stands and lets you make better informed decisions about resource allocation.
• A financial plan has three major components: a cash flow projection , income statement and balance sheet.
• Your financial plan answers essential questions to set and track progress toward goals.
• Using financial management software gives you the tools to make strategic decisions efficiently.

Why is a Financial Plan Important to Your Small Business?

A well-put-together financial plan can help you achieve greater confidence in your business while generating a better understanding of how to allocate resources. It shows your business is committed to spending wisely and its ability to meet financial obligations. A financial plan helps you determine if choices will impact revenue and which occasions call for dipping into reserve funds.

It’s also an important tool when asking investors to consider your business. Your financial plan shows how your organization manages expenses and generates revenue. It shows where your business stands and how much it needs from sales and investors to meet important financial benchmarks.

Components of a Small Business Financial Plan

Whether you’re modifying your plan or starting from scratch, a financial plan should include:

Income statement: This shows how your business experienced profit or loss over a specific period—usually over three months. Also known as a profit-and-loss statement (P&L) or pro forma income statement, it lists the following:

• Cost of sale or cost of goods (how much does it costs to produce your goods or services?)
• Operating expenses like rent and utilities
• Revenue streams, usually in the form of sales
• Amount of total net profit or loss, also known as a gross margin

Balance sheet: Rather than looking backward or peering into the future, the balance sheet helps you see where you stand right now. What do you own and what do you owe? To figure it out, you’ll need to consider the following:

• Assets: How much cash, goods and resources do you have available?
• Liabilities: What do you owe to suppliers, personnel, landlords, creditors, etc.?

Shareholder equity (the amount of money generated by your business): Use this formula to calculate it:

Shareholder Equity = Assets – Liability

Now that you have these three items, you’re ready to create your balance sheet. And just as the name implies, when complete, you’ll want this to balance out to zero. On one side, list your assets, such as cash on hand. And on the other side list your liabilities and equity (or how much money is generated by the business). The balance sheet is used along the other financial statements in order to calculate business financial ratios, discussed further below.

Balance Sheet

Why have a balance sheet? It can provide insight into your business and show important measures like how much cash you have, what your obligations are and what kind of profit you’re making all at a glance.

Personnel plan: You need the right people to meet goals and retain a healthy cash flow. A personnel plan looks at existing positions and helps you see when it’s time to bring on more team members, and whether they should be full-time, part-time, or work on a contractual basis. It looks at compensations levels, including benefits, and forecasts those costs. By looking at growth and costs you can see if the potential benefits that come with a new employee justify the expense.

Business ratios: Sometimes you need to look at more than just the big picture. You need to drill down to specific aspects of your business and keep an eye on how individual areas are doing. Business ratios are a way to see things like your net profit margin, return on equity, accounts payable turnover, assets to sales, working capital and total debt to total assets. Numbers used to calculate these ratios come from your P&L statement, balance sheet and cash flow statement and are often used to help request funding from a bank or investors.

Sales forecast: How much will you sell in a specific period? A sales forecast needs to be an ongoing part of any planning process since it helps predict cash flow and the organization’s overall health. A forecast needs to be consistent with the sales number within your P&L statement. Organizing and segmenting your sales forecast will depend on how thoroughly you want to track sales and the business you have. For example, if you own a hotel and giftshop, you may want to track separately sales from guests staying the night and sales from the shop.

Cash flow projection: Perhaps one of the most critical aspects of your financial plan is your cash flow statement . Your business runs on cash. Understanding how much cash is coming in and when to expect it shows the difference between your profit and cash position. It should display how much cash you have now, where it’s going, where it will come from and a schedule for each activity.

Income projections: How much money will your company make in a given period, usually a year. Take that and then subtract the anticipated expenses and you’ll have the income projections . In some cases, these are rolled into profit and loss statements.

Assets and liabilities: Both of these elements are part of your balance sheet. Assets are what your company owns, including current and long-term assets. Current assets can be converted into cash within a year. Think of things such as stocks, inventory and accounts receivable. Long-term assets are tangible or fixed assets designed for long-term use like furniture, fixtures, buildings, machinery and vehicles.

Liabilities are business obligations that are divided into current and long-term categories. Examples of current liabilities in a financial plan are accrued payroll, taxes payable, short-term loans and other obligations due within a year. Long-term liabilities include shareholder loans or bank debt that matures more than a year later.

Break-even analysis: Your break-even point—how much you need to sell to cover all your expenses—will guide your sales revenue and volume goals. Start by calculating your contribution margin by subtracting the costs of a good or service from the amount you pay. In the case of a bicycle store, the sale price of a new bike minus what you paid for it and the salary of your bike salesperson, your rent, etc. By understanding your fixed costs, you can then begin to understand how much you’ll need to markup goods and services and what sales and revenue goals to set in order to stay afloat or turn a profit.

Video: How to Build a Financial Plan

Create a strategic plan: Starting with a strategic plan helps you think about what you want your company to accomplish. Before looking at the numbers, think about what you’ll need to achieve these goals. Will you need to buy more equipment or hire more staff? Is there a chance of new goals affecting your cash flow? What other resources will you need?

Determine the impact on your company’s finances and create a list of existing expenses and assets to help with your next steps.

Create financial projections: This should be based on anticipated expenses and sales forecasts . Look at your goals and plug in the costs needed to achieve them. Include different scenarios. Create a range that is optimistic, pessimistic and most likely to happen, so you can anticipate the impact each one will have. If you’re working with an accountant, go over the plan together to understand how to explain it when seeking funding from investors and lenders.

Plan for contingencies: Look at your cash flow statement and assets, and create a plan for when there’s no money coming in or your business has taken an unexpected turn. Consider having cash reserves or a substantial line of credit if you need cash fast. You may also need to plot ways to sell off assets to help break even.

Monitor and compare goals: Look at the actual results in your cash flow statement, income projections and even business ratios as necessary throughout the year to see if you need to modify your plan or if you’re right on target. Regularly checking in helps you spot potential problems before they get worse.

Three Questions Your Financial Plan Should Answer

Once you’ve created your plan, you should have answers to the following questions:

• How will your business make money?
• What does your business need to get off of the ground?
• What is the operating budget ?

Financial plans that can’t answer these questions need more tweaking. Otherwise, you risk starting a new venture without a clear path and leave behind valuable insight.

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Improve Your Financial Planning With Financial Management Software

Using spreadsheets can get the job done when you’re just getting started. However, it’s easy to get overwhelmed, especially if you’re collaborating with others in your organization.

Financial management software is worth the expense because it offers automated capabilities such as analysis, reporting and forecasting. Plus, using cloud-based financial planning tools like NetSuite can help you automatically consolidate data and improve efficiency. Everyone across your organization can access and analyze up-to-date information, which leads to better informed decisions.

Whether you’re looking to secure outside funding or just monitor your business growth, understanding and creating a financial plan is crucial. Once you have an overview of your business’ finances, you can make strategic decisions to ensure its longevity.

Financial Management

Small Business Financial Management: Tips, Importance and Challenges

It is remarkably difficult to start a small business. Only about half stay open for five years, and only a third make it to the 10-year mark. That’s why it’s vital to make every effort to succeed. And one of the most fundamental skills and tools for any small business owner is sound financial management.

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How to Develop a Small Business Financial Plan

By Andy Marker | April 29, 2022

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Financial planning is critical for any successful small business, but the process can be complicated. To help you get started, we’ve created a step-by-step guide and rounded up top tips from experts.

Included on this page, you’ll find what to include in a financial plan , steps to develop one , and a downloadable starter kit .

What Is a Small Business Financial Plan?

A small business financial plan is an outline of the financial status of your business, including income statements, balance sheets, and cash flow information. A financial plan can help guide a small business toward sustainable growth.

Financial plans can aid in business goal setting and metrics tracking, as well as provide proof of profitable ideas. Craig Hewitt, Founder of Castos , shares that “creating a financial plan will show you if your business ideas are sustainable. A financial plan will show you where your business stands and help you make better decisions about resource allocation. It will also help you plan growth, survive cash flow shortages, and pitch to investors.”

Why Is It Important for a Small Business to Have a Financial Plan?

All small businesses should create a financial plan. This allows you to assess your business’s financial needs, recognize areas of opportunity, and project your growth over time. A strong financial plan is also a bonus for potential investors.

Mark Daoust , the President and CEO of Quiet Light Brokerage, Inc., explains why a financial plan is important for small businesses: “It can sometimes be difficult for business owners to evaluate their own progress, especially when starting a new company. A financial plan can be helpful in showing increased revenues, cash flow growth, and overall profit in quantifiable data. It's very encouraging for small business owners who are often working long hours and dealing with so many stressful decisions to know that they are on the right track.”

To learn more about other important considerations for a small business, peruse our list of free startup plan, budget, and cost templates .

What Does a Small Business Financial Plan Include?

All small businesses should include an income statement, a balance sheet, and a cash flow statement in their financial plan. You may also include other documents, such as personnel plans, break-even points, and sales forecasts, depending on the business and industry.

• Balance Sheet: A balance sheet determines the difference between your liabilities and assets to determine your equity. “A balance sheet is a snapshot of a business’s financial position at a particular moment in time,” says Yüzbaşıoğlu. “It adds up everything your business owns and subtracts all debts — the difference reflects the net worth of the business, also referred to as equity .” Yüzbaşıoğlu explains that this statement consists of three parts: assets, liabilities, and equity. “Assets include your money in the bank, accounts receivable, inventories, and more. Liabilities can include your accounts payables, credit card balances, and loan repayments, for example. Equity for most small businesses is just the owner’s equity, but it could also include investors’ shares, retained earnings, or stock proceeds,” he says.
• Cash Flow Statement: A cash flow statement shows where the money is coming from and where it is going. For existing businesses, this will include bank statements that list deposits and expenditures. A new business may not have much cash flow information, but it can include all startup costs and funding sources. “A cash flow statement shows how much cash is generated and used during a given period of time. It documents all the money flowing in and out of your business,” explains Yüzbaşıoğlu.
• Break-Even Analysis: A break-even analysis is a projection of how long it will take you to recoup your investments, such as expenses from startup costs or ongoing projects. In order to perform this analysis, Yüzbaşıoğlu explains, “You need to know the difference between fixed costs and variable costs. Fixed costs are the expenses that stay the same, regardless of how much you sell or don't sell. For example, expenses such as rent, wages, and accounting fees are typically fixed. Variable costs are the expenses that change in accordance with production or sales volume. “In other words, [a break-even analysis] determines the units of products or services you need to sell at least to cover your production costs. Generally, to calculate the break-even point in business, divide fixed costs by the gross profit margin. This produces a dollar figure that a company needs to break even,” Yüzbaşıoğlu shares.
• Personnel Plan: A personnel plan is an outline of various positions or departments that states what they do, why they are necessary, and how much they cost. This document is generally more useful for large businesses, or those that find themselves spending a large percentage of their budget on labor.
• Sales Forecast: A sales forecast can help determine how many sales and how much money you expect to make in a given time period. To learn more about various methods of predicting these figures, check out our guide to sales forecasting .

How to Write a Small Business Financial Plan

Writing a financial plan begins with collecting financial information from your small business. Create income statements, balance sheets, and cash flow statements, and any other documents you need using that information. Then share those documents with relevant stakeholders.

“Creating a financial plan is key to any business and essential for success: It provides protection and an opportunity to grow,” says Yüzbaşıoğlu. “You can use [the financial plan] to make better-informed decisions about things like resource allocation on future projects and to help shape the success of your company.”

1. Create a Plan

Create a strategic business plan that includes your business strategy and goals, and define their financial impact. Your financial plan will inform decisions for every aspect of your business, so it is important to know what is important and what is at stake.

2. Gather Financial Information

Collect all of the available financial information about your business. Organize bank statements, loan information, sales numbers, inventory costs, payroll information, and any other income and expenses your business has incurred. If you have not already started to do so, regularly record all of this information and store it in an easily accessible place.

3. Create an Income Statement

Your income statement should display revenue, expenses, and profit for a given time period. Your revenue minus your expenses equals your profit or loss. Many businesses create a new statement yearly or quarterly, but small businesses with less cash flow may benefit from creating statements for shorter time frames.

4. Create a Balance Sheet

Your balance sheet is a snapshot of your business’s financial status at a particular moment in time. You should update it on the same schedule as your income statement. To determine your equity, calculate all of your assets minus your liabilities.

5. Create a Cash Flow Statement

As mentioned above, the cash flow statement shows all past and projected cash flow for your business. “Your cash flow statement needs to cover three sections: operating activities, investing activities, and financing activities,” suggests Hewitt. “Operating activities are the movement of cash from the sale or purchase of goods or services. Investing activities are the sale or purchase of long-term assets. Financing activities are transactions with creditors and investments.”

6. Create Other Documents as Needed

Depending on the age, size, and industry of your business, you may find it useful to include these other documents in your financial plan as well.

• Sales Forecast: Your sales forecast should reference sales numbers from your past to estimate sales numbers for your future. Sales forecasts may be more useful for established companies with historical numbers to compare to, but small businesses can use forecasts to set goals and break records month over month. “To make future financial projections, start with a sales forecast,” says Yüzbaşıoğlu. “Project your sales over the course of 12 months. After projecting sales, calculate your cost of sales (also called cost of goods or direct costs). This will let you calculate gross margin. Gross margin is sales less the cost of sales, and it's a useful number for comparing with different standard industry ratios.”

7. Save the Plan for Reference and Share as Needed

The most important part of a financial plan is sharing it with stakeholders. You can also use much of the same information in your financial plan to create a budget for your small business.

Additionally, be sure to conduct regular reviews, as things will inevitably change. “My best tip for small businesses when creating a financial plan is to schedule reviews. Once you have your plan in place, it is essential that you review it often and compare how well the strategy fits with the actual monthly expenses. This will help you adjust your plan accordingly and prepare for the year ahead,” suggests Janet Patterson, Loan and Finance Expert at  Highway Title Loans.

Small Business Financial Plan Example

Download Small Business Financial Plan Example Microsoft Excel | Google Sheets

Here is an example of what a completed small business financial plan dashboard might look like. Once you have completed your income statement, balance sheet, and cash flow statements, use a template to create visual graphs to display the information to make it easier to read and share. In this example, this small business plots its income and cash flow statements quarterly, but you may find it valuable to update yours more often.

Small Business Financial Plan Starter Kit

Download Small Business Financial Plan Starter Kit

We’ve created this small business financial plan starter kit to help you get organized and complete your financial plan. In this kit, you will find a fully customizable income statement template, a balance sheet template, a cash flow statement template, and a dashboard template to display results. We have also included templates for break-even analysis, a personnel plan, and sales forecasts to meet your ongoing financial planning needs.

Small Business Income Statement Template 

Download Small Business Income Statement Template Microsoft Excel | Google Sheets

Use this small business income statement template to input your income information and track your growth over time. This template is filled to track by the year, but you can also track by months or quarters. The template is fully customizable to suit your business needs.

Small Business Balance Sheet Template 

Download Small Business Balance Sheet Template Microsoft Excel | Google Sheets

This customizable balance sheet template was created with small businesses in mind. Use it to create a snapshot of your company’s assets, liabilities, and equity quarter over quarter. 

Small Business Cash Flow Statement Template 

Download Small Business Cash Flow Template Microsoft Excel | Google Sheets

Use this customizable cash flow statement template to stay organized when documenting your cash flow. Note the time frame and input all of your financial data in the appropriate cell. With this information, the template will automatically generate your total cash payments, net cash change, and ending cash position.

Break-Even Analysis Template 

Download Break-Even Analysis Template Microsoft Excel | Google Sheets

This powerful template can help you determine the point at which you will break even on product investment. Input the sale price of the product, as well as its various associated costs, and this template will display the number of units needed to break even on your initial costs.

Personnel Plan Template  

Download Personnel Plan Template Microsoft Excel | Google Sheets

Use this simple personnel plan template to help organize and define the monetary cost of the various roles or departments within your company. This template will generate a labor cost total that you can use to compare roles and determine whether you need to make cuts or identify areas for growth.

Sales Forecast Template

Download Sales Forecast Template Microsoft Excel | Google Sheets

Use this customizable template to forecast your sales month over month and determine the percentage changes. You can use this template to set goals and track sales history as well.

Small Business Financial Plan Dashboard Template

Download Small Business Financial Plan Dashboard Template Microsoft Excel | Google Sheets

This dashboard template provides a visual example of a small business financial plan. It presents the information from your income statement, balance sheet, and cash flow statement in a graphical form that is easy to read and share.

Tips for Completing a Financial Plan for a Small Business

You can simplify the development of your small business financial plan in many ways, from outlining your goals to considering where you may need help. We’ve outlined a few tips from our experts below:

• Outline Your Business Goals: Before you create a financial plan, outline your business goals. This will help you determine where money is being well spent to achieve those goals and where it may not be. “Before applying for financing or investment, list the expected business goals for the next three to five years. You can ask a certified public accountant for help in this regard,” says Thé. The U.S. Small Business Administration or a local small business development center can also help you to understand the local market and important factors for business success. For more help, check out our quick how-to guide on writing a business plan .
• Make Sure You Have the Right Permits and Insurance: One of the best ways to keep your financial plan on track is to anticipate large expenditures. Double- and triple-check that you have the permits and insurances you need so that you do not incur any fines or surprise expenses down the line. “If you own your own business, you're no longer able to count on your employer for your insurance needs. It's important to have a plan for how you're going to pay for this additional expense and make sure that you know what specific insurance you need to cover your business,” suggests Daost.
• Separate Personal Goals from Business Goals: Be as unbiased as possible when creating and laying out your business’s financial goals. Your financial and prestige goals as a business owner may be loftier than what your business can currently achieve in the present. Inflating sales forecasts or income numbers will only come back to bite you in the end.
• Consider Hiring Help: You don’t know what you don’t know, but fortunately, many financial experts are ready to help you. “Hiring financial advisors can help you make sound financial decisions for your business and create a financial roadmap to follow. Many businesses fail in the first few years due to poor planning, which leads to costly mistakes. Having a financial advisor can help keep your business alive, make a profit, and thrive,” says Hewitt.
• Include Less Obvious Expenses: No income or expense is too small to consider — it all matters when you are creating your financial plan. “I wish I had known that you’re supposed to incorporate anticipated internal hidden expenses in the plan as well,” Patterson shares. “I formulated my first financial plan myself and didn’t have enough knowledge back then. Hence, I missed out on essential expenses, like office maintenance, that are less common.”

Do Small Business Owners Need a Financial Planner?

Not all small business owners need a designated financial planner, but you should understand the documents and information that make up a financial plan. If you do not hire an advisor, you must be informed about your own finances.

Small business owners tend to wear many hats, but Powell says, “it depends on the organization of the owner and their experience with the financial side of operating businesses.” Hiring a financial advisor can take some tasks off your plate and save you time to focus on the many other details that need your attention. Financial planners are experts in their field and may have more intimate knowledge of market trends and changing tax information that can end up saving you money in the long run. 

Yüzbaşıoğlu adds, “Small business owners can greatly benefit from working with a financial advisor. A successful small business often requires more than just the skills of an entrepreneur; a financial advisor can help the company effectively manage risks and maximize opportunities.”

For more examples of the tasks a financial planner might be able to help with, check through our list of free financial planning templates .

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6 Financial Planning Tips for Small Business Owners

When starting a small business, it’s easy to find yourself swept up in all the excitement of a first sale or a new customer. After all, your first thoughts probably go to growing your business, building an audience, or developing new products and services that can pad your bottom line. In other words, your small business financial plan may not be at the top of your mind.

However, while these are all integral components of a successful business, small business owners must also wrap their heads around their finances. Financial planning for small business owners may seem complicated, but with a few key insights and helpful software tools, it doesn’t have to be.

The basics of financial planning

What is financial planning in business , and how can you leverage it to boost your bottom line? A financial plan maps your current finances and how you want them to grow. It typically includes information about your company’s income, expenses, balance sheets, investments, insurance, etc.

The more prepared you are for your business future, the more successful you will be. Careful financial planning can reduce surprises and help you pursue actionable financial goals. Though these can vary from business to business, six critical elements of any successful small business financial plan exist.

Set data-driven goals

From expense management tools to time tracking and reporting, you can leverage your existing data to set realistic, achievable goals for your business’s financial health. For example, sales data can help service- or project-driven companies determine how to allocate resources while developing timelines and project estimates.

Time tracking can help you allocate your workforce and develop growth plans for your staff and brand. When setting goals for your business finances , ensure you have the appropriate data to back them up.

Allocate your budget based on specific needs

Too often, small business owners develop their budgets based on feelings and intuition instead of specific, realized needs. Unfortunately, this can mean short-changing particular budgets while inflating others, making it difficult to balance your small business financial plan .

Some of the most significant expenses for many businesses are staffing, taxes, and materials. You should use your existing knowledge and incoming information to allocate these portions of your operating budget more accurately. Then, with more robust budgeting in mind, you’re well on your way to achieving your business finance goals.

Reduce unnecessary costs

One of the most critical components of financial planning for small business owners is cutting unnecessary spending. Which services are your most profitable? Which types of projects are dragging down your bottom line? Through careful financial planning, businesses can streamline their processes and eliminate aspects that aren’t pulling their weight.

You can use time-tracking software to see where you’re overspending on labor and adjust your schedules accordingly. You can also review comprehensive expense management tools and detailed reporting to get more precise insights into where you’re spending too much and where you could save money. Reducing unnecessary costs can help you develop a financial safety net if something goes wrong within your operations.

Understand your projections for the future

Specific projects and careful future planning can help you navigate even the roughest bumps in your small business journey. When planning for your brand’s future, you must consider common budgetary hurdles like growth, expansion into new markets, fresh product releases, and increased staffing needs.

At its simplest, your small business financial plan can include some of your data-driven goals alongside a future timeline by which you aim to hit specific milestones. You can also get more detailed and complex with future projections, including expansion goals, funding opportunities, and market launch plans.

Even if you’re not developing a more aggressive growth plan, you should know what your business could look like in six months, a year, and two years. By setting realistic, firm projections for your brand’s future, you can develop a more robust small business financial plan to help you remain agile as you continue growing.

Develop a recovery plan

Every business goes through the occasional hardships, whether it’s a product launch that didn’t take off or a slow sales period. It’s how these businesses bounce back that matters. In these cases, financial planning for business owners must include an effective recovery plan that details how you’ll power through a slump or retool a lackluster product.

One significant component of any recovery plan includes your approach to risk management. While it’s unlikely that you can develop a business finance plan that addresses every potential risk you may face while running your brand, you can identify some of the largest ones and implement safeguards that will help keep you operating. These tasks include understanding how to navigate loss and theft. You may also want to consider a few cash flow contingencies in case of revenue drops, weaker launches, or other financial shortcomings.

Constantly monitor your time utilization with the right tools

Time-tracking software is one of the easiest ways to see where you are and aren’t meeting your financial benchmarks within your business. Are you overstaffing slow periods and spending far too much on labor costs? Are you understaffing your busiest days, negatively impacting customer satisfaction, and missing out on sales opportunities? While we often think of labor scheduling as a way to overspend, it’s always possible to sell yourself and your employees short.

That’s where well-implemented time-tracking software and business analysis tools can play into financial planning for small businesses . With time-tracking tools, you can more accurately see where you’re spending on labor and compare that to economic data to ensure that money is well-spent. By doing this, you can more thoroughly staff key shifts and reduce coverage on days where it might not be as beneficial to have multiple staff members coordinating operations.

Work with Elorus to make small business financial planning more intuitive.

Ready to take control of your small business financial planning ? Elorus is here to help. Elorus provides all-inclusive business software that encompasses time tracking, reporting, and expense management so you can more clearly spot opportunities and risks within your existing business finances .

In a few quick steps, you can use the Elorus platform to price your services more accurately, develop clear time-tracking metrics, and review business reports that give you more granular insight into your overall performance and financial health. The best part is that you can do this all in one place without paying for piecemeal software tools or disconnected platforms.

If you’re looking to save time and money within your small business without sacrificing data, insights, or performance cues, Elorus has you covered. Sign up for free today to learn more about the Elorus platform and get started. We’ll be happy to guide you through our software and help you understand how we can help streamline financial planning for a small business .

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A Financial Plan for a Small Business

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The business financial plan commonly appears in the overall business plan for a small business. However, the financial plan is a self-supporting document intended to support and direct the actions of the business. It explains what your business can afford, how it can afford to do it and what the expected profits will be. For a small business, a well-written business plan can be the difference between you carrying the business or the business carrying you.

Linked Business Statements

A financial plan for small business organizations should include four standard forms that attached documents support. The standard financial documents for small business include the personal financial statement, the balance sheet, the income statement and the cash flow statement, explains Inc. magazine . These forms provide a well-rounded financial view of your business, from your personal finances to the business finances. The forms explain how your business generates income, how it spends the income and whether it can support itself.

The Supporting Documents

The supporting documents of the financial plan are those that place merit into your financial figures. Depending on the information provided in your statements, these documents can include stock documents, life insurance policies, real estate deeds, tax statements, bank statements and register receipts and accounting ledgers. Within the business plan, these supporting documents are included in the document’s appendix and are organized in a fashion that provides easy reference.

Calculating Different Ratios

You can easily go wrong with your financial plan if you simply pull out your documents and fill in the numbers. The financial plan is an analysis of your business that lenders and investors use to determine your business’ viability. The information within this plan helps determine your business’ financial ratios, or scorecards.

Institutions and financial specialists use an array of ratios to identify the information they seek about your business. Some of the most common financial ratios include the liquidity ratios , such as the working capital and acid test, as well as the asset management ratios, such as the debt management ratios like the accounts payable turnover and leverage tests.

Updating With Formulas

The break-even formula is one of the most important aspects of the small business financial plan. This formula uses the information within the income statement to determine the point at which your company begins to generate a profit. The break-even formula is the company’s fixed expenses divided by its margin percentage. The margin percentage is determined by subtracting your business’ total variable expense from its total net sales and then determining what percentage that margin represents.

For instance, if your company has ​ $100,000 ​ in net sales with ​ $50,000 ​ in total variable expenses, the margin would be ​ $50,000 ​, or 50 percent of the net sales. The break-even point of your business with ​ $150,000 ​ in fixed expenses is ​ $75,000 ​. Therefore, all business income you generate above ​ $75,000 ​ is a profit.

Periodic Evaluation Reviews

Once completed, your financial plan will not only display a snapshot of your business’ finances, but also forecast what it expected. As a result, your financial plan will eventually become outdated and require revisions.

Periodic reviews of your financial plan will not only assist you in keeping your small business on track, but it also will help you to identify the areas where you need restrictions and expansions. A quarterly review of the financial plan is an effective schedule that will help to keep you ahead of unexpected financial developments.

• Inc.: Financial Statements
• FI: Liquidity Ratio

Writing professionally since 2004, Charmayne Smith focuses on corporate materials such as training manuals, business plans, grant applications and technical manuals. Smith's articles have appeared in the "Houston Chronicle" and on various websites, drawing on her extensive experience in corporate management and property/casualty insurance.

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6 Elements of a Successful Financial Plan for a Small Business

Table of contents.

Many small businesses lack a full financial plan, even though evidence shows that it is essential to the long-term success and growth of any business. 

For example, a study in the New England Journal of Entrepreneurship found that entrepreneurs with a business plan are more successful than those without one. If you’re not sure how to get started, read on to learn the six key elements of a successful small business financial plan.

What is a business financial plan, and why is it important? 

A business financial plan is an overview of a business’s financial situation and a forward-looking projection for growth. A business financial plan typically has six parts: sales forecasting, expense outlay, a statement of financial position, a cash flow projection, a break-even analysis and an operations plan.

A good financial plan helps you manage cash flow and accounts for months when revenue might be lower than expected. It also helps you budget for daily and monthly expenses and plan for taxes each year.

Importantly, a financial plan helps you focus on the long-term growth of your business. That way, you don’t get so caught up in the day-to-day activities that you lose sight of your goals. Focusing on the long-term vision helps you prioritize your financial resources. 

Financial plans should be created annually at the beginning of the fiscal year as a collaboration of finance, HR, sales and operations leaders.

The 6 components of a successful financial plan for business

1. sales forecasting.

You should have an estimate of your sales revenue for every month, quarter and year. Identifying any patterns in your sales cycles helps you better understand your business, and this knowledge is invaluable as you plan marketing initiatives and growth strategies . 

For instance, a seasonal business can aim to improve sales in the off-season to eventually become a year-round venture. Another business might become better prepared by understanding how upticks and downturns in business relate to factors such as the weather or the economy.

Sales forecasting is also the foundation for setting company growth goals. For instance, you could aim to improve your sales by 10 percent over each previous period.

2. Expense outlay

A full expense plan includes regular expenses, expected future expenses and associated expenses. Regular expenses are the current ongoing costs of your business, including operational costs such as rent, utilities and payroll. 

Regular expenses relate to standard business activities that occur each year, such as conference attendance, advertising and marketing, and the office holiday party. It’s a good idea to distinguish essential expenses from expenses that can be reduced or eliminated if needed.

Expected future expenses are known future costs, such as tax rate increases, minimum wage increases or maintenance needs. Generally, a part of the budget should also be allocated to unexpected future expenses, such as damage to your business caused by fire, flood or other unexpected disasters. Planning for future expenses ensures your business is financially prepared via budget reduction, increases in sales or financial assistance.

Associated expenses are the estimated costs of various initiatives, such as acquiring and training new hires, opening a new store or expanding delivery to a new territory. An accurate estimate of associated expenses helps you properly manage growth and prevents your business from exceeding your cost capabilities. 

As with expected future expenses, understanding how much capital is required to accomplish various growth goals helps you make the right decision about financing options.

3. Statement of financial position (assets and liabilities)

Assets and liabilities are the foundation of your business’s balance sheet and the primary determinants of your business’s net worth. Tracking both allows you to maximize your business’s potential value. 

Small businesses frequently undervalue their assets (such as machinery, property or inventory) and fail to properly account for outstanding bills. Your balance sheet offers a more complete view of your business’s health than a profit-and-loss statement or a cash flow report. 

A profit-and-loss statement shows how the business performed over a specific time period, while a balance sheet shows the financial position of the business on any given day.

4. Cash flow projection

You should be able to predict your cash flow on a monthly, quarterly and annual basis. Projecting cash flow for the full year allows you to get ahead of any financial struggles or challenges. 

It can also help you identify a cash flow problem before it hurts your business. You can set the most appropriate payment terms, such as how much you charge upfront or how many days after invoicing you expect payment .

A cash flow projection gives you a clear look at how much money is expected to be left at the end of each month so you can plan a possible expansion or other investments. It also helps you budget, such as by spending less one month for the anticipated cash needs of another month.

5. Break-even analysis

A break-even analysis evaluates fixed costs relative to the profit earned by each additional unit you produce and sell. This analysis is essential to understanding your business’s revenue and potential costs versus profits of expansion or growth of your output. 

Having your expenses fully fleshed out, as described above, makes your break-even analysis more accurate and useful. A break-even analysis is also the best way to determine your pricing.

In addition, a break-even analysis can tell you how many units you need to sell at various prices to cover your costs. You should aim to set a price that gives you a comfortable margin over your expenses while allowing your business to remain competitive.

6. Operations plan

To run your business as efficiently as possible, craft a detailed overview of your operational needs. Understanding what roles are required for you to operate your business at various volumes of output, how much output or work each employee can handle, and the costs of each stage of your supply chain will aid you in making informed decisions for your business’s growth and efficiency.

It’s important to tightly control expenses, such as payroll or supply chain costs, relative to growth. An operations plan can also make it easier to determine if there is room to optimize your operations or supply chain via automation, new technology or superior supply chain vendors.

For this reason, it is imperative for a business owner to conduct due diligence and become knowledgeable about merchant services before acquiring an account. Once the owner signs a contract, it cannot be changed, unless the business owner breaks the contract and acquires a new account with a new merchant services provider. 

Tips on writing a business financial plan

Business owners should create a financial plan annually to ensure they have a clear and accurate picture of their business’s finances and a realistic view for future growth or expansion. A financial plan helps the business’s leaders make informed decisions about purchases, debt, hiring, expense control and overall operations for the year ahead. 

A business financial plan is essential if a business owner is looking to sell their business, attract investors or enter a partnership with another business. Here are some tips for writing a business financial plan.

Review the previous year’s plan.

It’s a good idea to compare the previous year’s plan against actual performance and finances to see how accurate the previous plan and forecast were. That way, you can address any discrepancies or overlooked elements in next year’s plan.

Collaborate with other departments.

A business owner or other individual charged with creating the business financial plan should collaborate with the finance department, human resources department, sales team , operations leader, and those in charge of machinery, vehicles or other significant business tools. 

Each division should provide the necessary data about projections, value and expenses. All of these elements come together to create a comprehensive financial picture of the business.

Use available resources.

The Small Business Administration (SBA) and SCORE, the SBA’s nonprofit partner, are two excellent resources for learning about financial plans. Both can teach you the elements of a comprehensive plan and how best to work with the different departments in your business to collect the necessary information. Many websites, including business.com , and service providers, such as Intuit, offer advice on this matter. 

If you have questions or encounter challenges while creating your business financial plan, seek advice from your accountant or other small business owners in your network. Your city or state has a small business office that you can contact for help.

Several small business organizations offer free financial plan templates for small business owners. You can find templates for the financial plan components listed here via SCORE .

Business financial plan templates

Many business organizations offer free information that small business owners can use to create their financial plan. For example, the SBA’s Learning Platform offers a course on how to create a business plan. It also offers worksheets and templates to help you get started. You can seek additional help and more personalized service from your local office.

SCORE is the largest volunteer network of business mentors. It began as a group of retired executives (SCORE stands for “Service Corps of Retired Executives”) but has expanded to include business owners and executives from many industries. Advice is free and available online, and there are SBA district offices in every U.S. state. In addition to participating in group or at-home learning, you can be paired with a mentor for individualized help. 

SCORE offers templates and tips for creating a small business financial plan. SCORE is an excellent resource because it addresses different levels of experience and offers individualized help.

Other templates can be found in Microsoft Office’s template library, QuickBooks’ online resources, Shopify’s blog and other places. You can also ask your accountant for guidance, since many accountants provide financial planning services in addition to their usual tax services.

Diana Wertz contributed to the writing and research in this article.

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The Importance of Financial Planning for Small Businesses

A financial plan is the most important thing a small business needs. It’s a road map, a guideline, a reminder of what your goals are–what you are trying to achieve in the short-term and the long-term. It lays out what your possible costs are, and it seeks out to address avenues for how to manage these costs. It is so important that investors, bankers, and creditors won’t even set up a meeting with you if you don’t have a financial plan for your small business.

Your financial plan helps you manage your cash flow. Most businesses have income that varies from season to season. A good financial plan takes these vicissitudes into account so that there aren’t shortages in the long term. Having a cash cushion helps ensure that your business can take a poor season and still come out on top. Planning your taxes, prudishly spending your cash flow, and budgeting carefully can result from careful financial planning. When someone is in the thick of running his/her business, he /she can lose sight of the long term goals that ensure proper growth of your small business. A solid financial plan can be a reminder of all the necessary expenditures to keep your small business growing so as to stay ahead of the competitors in your market. The decisions of the small business owner takes can have positive or negative consequences. A good financial plan can spot positive and negative trends where they may have become lost in a sea of numbers. This will help you better allocate funds to the areas that are making your business money, and avoid expenditures that didn’t yield enough results. Financial planning can also help you prioritize expenditures. In small businesses, conserving financial resources is a must. A well thought out financial plan can help you prioritize what areas need to be funded immediately, and where your expenses can wait until you have a better season. Even the world’s largest corporations go through a process of prioritization of expenditures resulting from careful cost/benefit analysis.

Overall, the financial plan is there to help you measure your progress. How did your season go? What steps have been made in achieving your goals? When a small business owner is knee-deep in the day-to-day operations of running their business, they can often lose sight of what strides they have made to grow their small business. The financial plan helps the small business owner see precisely what is occurring through reviewing and analyzing the hard data. In short, every small business owner must have a methodical business plan that is updated regularly if they want to operate successfully for years to come.

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Financial planning for small businesses: what it is and why it matters, planning is vital for a successful company, especially when it comes to money. learn the ins and outs of financial planning for small businesses..

Thousands of people dream of owning their own business — more than 600,000 new businesses are founded annually in the United States alone. But despite all this enthusiasm and entrepreneurial spirit, many small companies only last about two years .

What’s interfering with their success? For many companies, the problem is a lack of financial planning. Here’s everything you need to know about financial planning for small businesses — and how it can keep your company afloat.  

What’s financial planning?

There are many perks to owning your own business , like being your own boss, following your passions, and building a legacy in your community. But there are also a few drawbacks. For example, many small business owners don’t have financial experts on their staff to help them manage the books. When you’re starting out, handling the money yourself can feel like a cost-saving maneuver — but if you aren’t careful, you could get your business into hot water. 

Financial planning helps prevent trouble for your business in the short and long terms. When you create a financial plan, you assess the business’s financial status (or your own), set long-term goals, and develop a plan to reach them — with short-term milestones along the way. For many businesses, the process involves obtaining a clear picture of expenses, assets, and income and creating a monthly budget. 

The importance of financial planning for small businesses

Financial planning is essential — but why? Perhaps the most obvious reason is this: if your finances are mismanaged, your business won’t last. 

But financial planning isn’t just about keeping your organization from closing its doors. Several day-to-day perks come with good financial hygiene, including:

• Smooth operations: Financial planning ensures a company has the resources to achieve its objectives and operate effectively. You don’t want to overspend in one area and wind up without the resources to support an essential aspect of your business, like investing too much in marketing and winding up with too little capital to pay your supply chain.
• No surprises: A long-term vision helps you identify and plan for potential financial issues in advance. For example, a business selling home goods might experience high sales in December and a steep drop-off in January and February. With this knowledge, an entrepreneur can put aside the necessary funds after Christmas to carry operations through the slower months. Plus, your business is less likely to face a hefty financial blow if you have well-managed funds — in an emergency, you need to have resources to fall back on.
• Reliable cash flow: Good financial planning helps business owners manage their cash flow — how much cash an organization takes in compared to how much it expends. To keep your cash flow positive, you need to have your eye on all income and spending.
• Smart moves: Entrepreneurs can make informed decisions about investments and expenses when they know their business’s financial status. Instead of making important decisions willy-nilly, a financial plan empowers you to anticipate when you can invest in growth and save up ahead of operational expansions.

6 steps to create a successful financial plan 

Effective financial planning can make running a business much easier — and drive your company’s success. But how do you know if you’re managing your finances correctly? Here are a few financial tips for small business owners who want to improve their bookkeeping practices :  

1. Define your business goals

The first step in creating a financial plan is to lay out your goals. These are business goals, not personal ones. For example, a personal goal may include the owner’s five- or ten-year plan for entrepreneurial leadership, while a business goal could be more immediate, like “acquire five new clients by the start of Q2.” Ask yourself the following questions to begin the brainstorming process:

• Where do I hope to see my business grow?
• What is a financial milestone I hope to reach this year?
• Are there any large expenses I anticipate in the near future?
• What’s a financial safety net I’m comfortable with?

2. Assess your current financial status

You can’t have a clear financial plan without looking at your business’s current finances. Gather all the information you have about your expenses, past sales numbers, assets, income, and personnel to see exactly what your business has now. 

3. Identify potential risks and plan for contingencies

The U.S. Small Business Administration (SBA) says most small businesses experience two types of risk: internal and external. Internal risks include theft, equipment failure, and cash flow issues, while external risks include market risks, natural disasters, and changing legislation. Part of your financial plan should be identifying the risks most likely to affect your business and making a plan to mitigate them. This could mean making intelligent investment decisions and creating a pool of savings to fall back on.

4. Develop a budget

This is probably the most essential part of your financial plan. Using the information you’ve gathered in steps two and three, make a budget that accounts for your projected earnings and expenses. The file should include all business expenses, tax costs, and contingencies for risk management. You can also use this budget to identify possible investment opportunities for your business when you forecast an influx of cash. 

5. Monitor and control expenses

Once you have a budget, closely watch your expenses to ensure they align with your business goals. This means putting your foot down on unnecessary expenses and keeping an eye on cash flow. Do everything you can to ensure enough money is coming in each month — this might mean increasing your marketing efforts to attract more customers or offering payment plans to make your product or service more accessible and ensure some incoming cash.  

6. Tweak the plan as needed

Financial planning is sometimes tedious for entrepreneurs — particularly those with a million ideas they want to bring to life. But managing finances is vital to your business’s success, so it needs to be a regular part of your routine. Business owners should closely monitor their financial plans and adjust them as needed, whether the changes are based on profits or losses. And once you have the funds, consider hiring a financial expert to help keep the business on track.  

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FAQs about financial planning

Still have lingering questions about the financial side of entrepreneurship? That’s only natural. Here are the answers to common queries:

What should be included in a small business financial plan?

A small business’s financial plan should include the following components:

• Sales forecast: How much you expect to sell over a given period based on your business type and current sales (if any). If your business has a subscription option, subscription-based sales should have a separate forecast.
• Budget: Your expenses over a certain period. This will help you keep a close eye on cash flow and plan for investments and more future significant expenditures. 
• Personnel costs: All expenses related to your team, including employee salaries, taxes, and benefits.
• Profit and loss statements: How much money you make versus how much you spend over a given period (at least a quarter).
• Balance sheet: A regularly updated document clearly showing your assets, liability, and equity so you can see how your business is doing at a glance. 

How often should a small business review and update its financial plan?

Small business owners should review and update their financial plans at least once a year. However, a quarterly review is ideal for new businesses, as it allows you to monitor your short-term goals more frequently when your organization is still finding its footing. 

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How to write a business plan

• One-page plan
• Executive summary
• Products and services
• Market analysis
• Competition
• Marketing and sales
• Milestones and metrics
• Company and team
• Financial plan

Make a financial plan and starting forecasts

How to Write a Small Business Financial Plan

Creating a financial plan is often the most intimidating part of writing a business plan. It’s also one of the most vital. Businesses with well-structured and accurate financial statements in place are more prepared to pitch to investors, receive funding, and achieve long-term success.

Thankfully, you don’t need an accounting degree to successfully put your budget and forecasts together. Here is everything you need to include in your financial plan along with optional performance metrics, specifics for funding, and free templates.

On this page

Key components of a financial plan

A sound financial plan is made up of six key components that help you easily track and forecast your business financials. They include your:

Sales forecast

What do you expect to sell in a given period? Segment and organize your sales projections with a personalized sales forecast based on your business type.

Subscription sales forecast

While not too different from traditional sales forecasts—there are a few specific terms and calculations you’ll need to know when forecasting sales for a subscription-based business.

Expense budget

Create, review, and revise your expense budget to keep your business on track and more easily predict future expenses.

How to forecast personnel costs

How much do your current, and future, employees’ pay, taxes, and benefits cost your business? Find out by forecasting your personnel costs.

Profit and loss forecast

Track how you make money and how much you spend by listing all of your revenue streams and expenses in your profit and loss statement.

Cash flow forecast

Manage and create projections for the inflow and outflow of cash by building a cash flow statement and forecast.

Balance sheet

Need a snapshot of your business’s financial position? Keep an eye on your assets, liabilities, and equity within the balance sheet.

What to include if you plan to pursue funding

Do you plan to pursue any form of funding or financing? If the answer is yes, then there are a few additional pieces of information that you’ll need to include as part of your financial plan.

Highlight any risks and assumptions

Every entrepreneur takes risks with the biggest being assumptions and guesses about the future. Just be sure to track and address these unknowns in your plan early on.

Plan your exit strategy

Investors will want to know your long-term plans as a business owner. While you don’t need to have all the details, it’s worth taking the time to think through how you eventually plan to leave your business.

Financial ratios and metrics

With all of your financial statements and forecasts in place, you have all the numbers needed to calculate insightful financial ratios. While these metrics are entirely optional to include in your plan, having them easily accessible can be valuable for tracking your performance and overall financial situation.

Common business ratios

Unsure of which business ratios you should be using? Check out this list of key financial ratios that bankers, financial analysts, and investors will want to see.

Break-even analysis

Do you want to know when you’ll become profitable? Find out how much you need to sell to offset your production costs by conducting a break-even analysis.

How to calculate ROI

How much could a business decision be worth? Evaluate the efficiency or profitability by calculating the potential return on investment (ROI).

Financial plan templates and tools

Download and use these free financial templates and calculators to easily create your own financial plan.

Sales forecast template

Download a free detailed sales forecast spreadsheet, with built-in formulas, to easily estimate your first full year of monthly sales.

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Financial Planning for Small Business Owners

Learn the basics of creating a financial plan for small business owners.

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There are many different kinds of small business owners in all stages of their business. Some have just started putting their ideas into action in a startup, while others are in the growth stage or even planning an exit strategy.

No matter which stage your business is in and whether you're a dreamer or more of a pragmatist, there is one thing you can't afford not to do. You need a holistic financial plan that takes into account where your business is now and what the plan is for the future.

For small business owners, establishing a financial plan comes with an added complexity, which is the business. In some ways, the business and personal sides of your financial plan will be mutually exclusive.

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Separate your personal financial goals from your business goals 

Before making any plans, it's critical to understand that you are not your business. Most small business owners have goals for their business, but it's important to also make financial goals for yourself and to keep them separate.

It can be tempting to combine the two, especially for sole proprietors or single-member LLC owners whose business is included on their individual income tax return. However, by not separating your business from your personal financial goals, you could be missing out on some amazing personal achievements.

For example, some personal financial goals might include setting up and contributing to an education fund for your child, boosting your retirement savings, funding and going on a vacation, and buying your first home or downsizing when your children move out of the house.

On the other hand, some financial goals for your business might include increasing sales to a particular amount, finding more customers, or establishing a certain percentage of growth rate.

Consider alternative funding options to diversify your business-related risk 

You may also want to look at other places where you can further separate yourself personally from your business. The easiest place to look is at the many available funding options for your business.

Most small business owners invest in their own businesses using their own money and time, which may be appropriate in certain situations. However, just as you would diversify your investment portfolio, so you may also want to diversify your business-related risks.

Using your own capital, or, in a worst-case scenario, your own credit cards, places you at significant personal financial risk if something happens to the business. In some cases, though, it might make sense to cede some of that risk to another party. After all, today's digital world has brought a wider array of potential funding options that range from venture capital and private equity to crowdfunding, business loans, and even more creative options like a small business incubator or accelerator.

The Small Business Administration is also an excellent resource for business owners, not only for information and guidance but also, in some cases, for low-interest business loans.

Remember to plan for retirement

For small business owners, retirement planning actually sits at the crossroads between personal and business financial planning. It can be tempting to just keep pouring your money back into the business, but that can make it difficult, if not impossible, to save for retirement.

Many small business owners don't save for retirement because they believe they'll be able to sell their business and live off the proceeds of the sale in retirement. However, most overestimate what their business might be worth, especially when looking decades into the future.

Simplified Employee Pension ( SEP ) IRAs and individual 401(k)s both enable small business owners to plan ahead for the days when they finally retire.

Diversify everywhere 

Another important thing small business owners should remember when creating their personal financial plans for themselves and their business is diversification. A small business is a piece of a larger investment portfolio, but many business owners don't recognize this.

Being in business represents a significant risk, even if it seems like you're in a safe industry. As a result, it makes sense for small business owners to target low-risk investments for the rest of their investment portfolio.

Prepare your exit strategies 

Finally, small business owners should prepare their exit strategies — for both their personal legacy and their business. From a personal perspective, business owners can't afford not to have a will and estate plan to ensure the business doesn't fold upon their death. Many also want to leave their business to the next generation, but without a will, ownership succession becomes hazy.

In terms of the business, you should also create a succession plan designating who will take over when you retire or pass. The financial reasons for creating a succession plan are similar to those for creating a will and estate plan, although these plans differ from a practical standpoint. In terms of your personal financial plan, you're designating heirs, while for your business financial plan, you're designating the next CEO or manager. They could be the same person or different people, depending on your situation.

Don't be too busy to plan

These guidelines are only the very basics of what a small business owner needs to consider when creating a financial plan. Some other factors that may play a role in your personal and business financial plans include insurance (property, professional, and otherwise), preparations for growth, planning for disability, and more. No two financial plans are the same, and these other factors may fall under some of the earlier headings.

Unfortunately, many small business owners find themselves tapped out when it comes to financial planning. It takes so much energy and enthusiasm to keep the business going that they sacrifice their personal financial wellbeing. However, your busiest times will be when you need these financial plans the most, and having separate personal and business financial plans will make everything much easier.

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Jacob is the founder and CEO of ValueWalk. What started as a hobby 10 years ago turned into a well-known financial media empire focusing in particular on simplifying the opaque world of the hedge fund world. Before doing ValueWalk full time, Jacob worked as an equity analyst specializing in mid and small-cap stocks. Jacob also worked in business development for hedge funds. He lives with his wife and five children in New Jersey. Full Disclosure: Jacob only invests in broad-based ETFs and mutual funds to avoid any conflict of interest.

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How to write a financial plan for your business

Steer your business on the road to success with a solid financial plan.

A financial plan gives you a snapshot of the overall health of your business. There are 3 key financial statements that make up a business financial plan. Taking the time to prepare these at the start of your business journey can pay off in the long run.

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1. Cash flow statement

Sometimes called cash flow projection, this is one of the most important steps in completing your financial plan. It details your incoming and outgoing cash and helps make sure you have enough money to keep your business running. 

Try this simple cash flow formula:

• Determine the period you want to focus on (e.g. the next 3 or 6 months)
• Start with your opening cash balance
• Estimate your incoming cash and expenses for the period
• Subtract the estimated expenses from your income and add it to the opening balance

How to use your cash flow statement

You can look at your cash flow statement from previous years to determine if you’ll have enough to cover your costs, like wages and rent, over the specified period. It’s important to allow for glitches like late payments when projecting your cash flow.

2. Income statement

Also known as profit and loss statement (P&L), this shows you a clear view of your income and expenses, and how these change over a period of time.

What to include in your income statement

What goes into an income statement depends on the type of business. You should at least cover these key areas:

• Cost of goods or services
• Total profit or loss (revenue minus cost of goods/services)
• Operating costs (e.g. rent)
• General expenses (e.g. marketing, advertising, depreciation)
• Operating income (total profit minus expenses)

How to use your income statement

Estimate your sales and expenses on a monthly, quarterly or yearly basis to see whether you can expect to make a profit or loss for each of these periods. This will help you develop sales targets and find ways to grow your business. 

3. Balance sheet

Unlike your cash flow statement which looks at the future, and your income statements which looks at the past, your balance sheet is a financial snapshot of your business in the present.

Try this simple balance sheet formula:

• In one column list all your assets (e.g. cash, inventory, buildings)
• On the other side list your liabilities (e.g. accounts payable and loans)
• Subtract your total liabilities from your total assets to determine your equity

How to use your balance sheet

Your balance sheet can help you evaluate the financial health of your business, show your profit at a glance and work out if you’ll have enough resources to run your day-to-day operations.

Take your business financial plan to the next level

To enhance your business financial plan, consider preparing a break-even analysis. This shows you the number of sales needed to cover costs – anything above this number can be counted as a profit. 

The break-even point can be useful for analysing the sales, costs and pricing numbers used in your earlier forecasts and judge whether your business idea is feasible. For example, if your break-even point is years away, you may want to revisit your numbers to see if there are any opportunities to make your business more profitable.

Next steps 

Once it’s ready, treat your business plan as a guide to running your business. Remember that it’s a working document, so if your goals and circumstances change, update the plan. If you need help, an accountant could help assess your prospective financial position and ensure you’ve thought through all potential income and expenses.

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