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Your Business Financial Plan
What is Financial Management?
If you own or manage a business, you need a strong business financial plan to be successful. What is financial management? Review a financial statement example and learn about financial ratios, such as profitability and liquidity ratios. Understanding your business financials will help you to better manage your business.
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For example, without a plan and without regular financial statements related to how you are doing compared to your plan, you can quickly overspend, underperform and go out of business.
Personally, one of my least-favorite, business-related, things to work on is building a business financial plan because I like to focus on the sales and operations of the business (however I very much like reading positive financial plans and results!).
I think that's probably true for many small business owners (unless you have a real love for numbers).
What is Financial Management?
Financial management is about creating profit for the business, managing cash, and ensuring an acceptable return on investment. Financial management is accomplished through business financial plans, setting up financial controls, and financial decision making (where to spend capital and is the return worth the risk?).
If you are not comfortable with financial statements, review an industry-related public company (by law, they have to publish their annual reports) and use the statements as your financial statement example or benchmark.
Are you tracking, or not, their growth and success (or failure)? Line item by line item - review their income statements and balance sheets and compare on a relative scale to your own statements.
I have learned how to read financial statements, by comparing my statements to industry financial statement examples. I've found that benchmarking my business to other businesses helps particularly when those statements show me how well my business is doing, or will do in the future (a projection or forecast plan) or show me how badly I'm doing in comparison to other businesses.
Note: I am not an accountant.
I am a business person who has had to gain an understanding of financial statements and learn how to write (and manage) business financial plans to succeed.
Many business owners work with bookkeepers and accountants (rather than do the books themselves) this is a good idea, particularly if that area is not your specialty, but you still need to make sure that you have a good understanding of your business' finances and how to plan and manage them effectively.
In other words, comparing to a financial statement example is a good benchmarking technique for extremes (the good and/or the bad) but not so good for the in-between.
However, whether or not you like them, you have to develop an understanding of financial statements to successfully manage your business. If you haven't already done so (that is, if you're wanting to start up a new business or add a new product or product line, or manage your business growth), you will need to build a business financial plan.
Understanding financial statements, from a cash flow projection, to a balance sheet, to an income statement requires an understanding of what they mean, why they are important to your business, and how to do them.
Even if you personally are not preparing your financial statements (you can have your accountant do that inside your business, or contract that work outside your business), you need to understand how to read financial statements because you need to know which direction your business is headed (up or down).
Your business plan outline needs to include your financial plan; amongst the many other plan components you will need to write and manage.
What does a Business Financial Plan include?
This depends on what you are doing with it. First, if your plan is to obtain financing, typically you will need to do a 5 year projection. If it's for your own small business plan purposes, project at least 2 years forward.
Your financial plan must include:
An actual income statement for the previous year (if applicable, not applicable if you're a startup) and a projection for the period of the plan;
Your balance sheet (a statement of assets and liabilities) - again an actual if applicable, and then a projection for the period of the plan;
Your cash flow actual for the past year, and a cash flow projection for the period under review; some businesses also run a separate working capital management plan - show actual and projected.
This is very important to do carefully - many businesses go under because they under-estimate the cash drain of the business. For example,what happens if a significant number of your customers (your receivables to an accountant) go from paying in 30 days to paying in 60 days? Do you have the cash reserves to handle that possibility?
Your financial ratios: these ratios primarily relate to four areas: liquidity ratios, profitability (such as gross profit margin), efficiency, and solvency.
Document Your Plan:
When you develop your business financial plan, do it online if possible (it is much easier to update) and in a spreadsheet format. Use your existing financials (if you are not a startup) and/or your projected financials as the base year. Include a summary or a discussion on how you arrived at the numbers in your financial plan. And be sure to include notes at the end of the plan. (Note: this documentation helps you to understand your assumptions and helps you to better manage to your plan.)
As a small business owner, learn to build your financial plan, learn to keep it up-to-date, making it part of your overall strategic plan. Then focus on managing your business to your plan.
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Additional Reading:
Return from Justifying Capital Expenditures to Small Business Plan.
Ensure your Business Financial Plan includes a provision for emergencies.
Your Business Exit Strategy needs to include management succession planning.
Or return to More For Small Business Home Page.
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Implement Your Plan: for Results
Once you've built your plan, you need to implement it.
Developing your strategy (in the plan) is the first, necessary, step. You need to know the direction you want to go, and you need the strategy and the plan to help you get there.
But once you've built the plan, you must execute it.
There is no value in building a plan that just gathers dust.
When building your business plan, make sure that you include an action plan for the strategies, techniques and tactics.
The actions need to include who's responsible for doing what; measurements for success (such as deadlines and timelines, targets and goals, costs, etc.); and why you need to take the action (in some cases, one action needs to be accomplished before subsequent ones can be launched).
As you work through the plan, make sure that you build reporting periods into the implementation: you need to know what's going on and why something is working, or not.
Make sure to communicate progress, or lack of it, throughout the organization. And re-visit the plan when and where necessary.
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Focus on Your Plan
Plan for the future: lots of business owners want to get, or keep, moving forward. Planning seems to be more of a passive activity.
However, to ensure that your business goes in the right direction and that it optimizes all its opportunities, and manages its challenges, it is important to plan.
Balance your activities against the plan: make sure that you are investing your time, and money, on the elements of your business that will help you succeed.
Measure what works, and what doesn't work, and keep your focus: use your business plan as a map to guide you in the direction you want to go.
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