Your Business Financial Plan

If you own or manage a small business, you have to have a business financial plan to be successful in business.

For example, without a plan and regular financial statements related to how you are doing compared to your plan, you can quickly overspend and go out of business.

Personally, one of my least-favorite, business-related, work to do is building a business financial plan (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).

Although I have learned how to read financial statements, particularly when those statements show me how well my business is doing, or will do in the future (a projection or forecast plan).

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 financial plans to succeed in business.

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.

  This is very important to do carefully - many businesses go under because they underestimate 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, profitability, efficiency and solvency.

When you develop your business financial plan, do it online if possible (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 include notes at the end of the plan.

For instance, if you are a small business owner for a marketing services firm, your summary or discussion notes might look like:

• Sample Summary on Projected Net Income: Our revenue projections for the 5 year plan include increases of 4% per year, with the exception of year 1 where we project an increase of 8%, based on a recent service contract we have signed with XYZ Corporation. It is a one year contract, with an option to renew in year 2 at the same price, plus inflation.

  Our cost of sales is 58% of gross revenues in year 1, falling back to 54% of gross revenues in years 2 to 5. Marketing and Sales expenses, which include advertising, promotions, client entertainment, and travel, are 10% on average of net sales.

  Add comments on all projected large expenses (property, computers, etc.)

  Net income is projected to increase from $32,150 to $41,000 in year 1; from $41,000 to $58,000 in year 2; and so on.

• Sample Summary on Cash Flow Projection: The assumption is that the planned growth in year 1 will require additional cash to hire more staff or contract workers to support the sales growth.
  In this summary statement, explain how you will support your cash needs (bank line of credit, shareholder's loan, prepaid contract, etc.).

  From year 2 on, your cash needs should decline since you now have the additional income from the large sales contract in year 1. Year end cash from years 2 onward should have a positive cash balance in your projections.

• And continue your comments on each section of your plan.

Your business financial plan needs to include:

• Cash Flow projections by month; and by year
• Pro forma Balance Sheet, by year
• Business Ratios, by year
• Pro forma Income Statement, by year
• Include a capital expenditure plan if your business has significant capital expenditures in its near-term horizon.

In your financial plan you must include your assumptions: sales revenue; cost of goods and/or services; inflation; impact of foreign currency; impact of any major economic factor - e.g. national elections; impact of large contract/new business, impact of worker shortage; impact of property or tax increases or end of lease during period; bank interest rates; staffing and/or operations impacts (e.g. new hires; employee compensation plans - i.e growth, increases or decreases; new equipment; new software); and so much more.

Typically these assumptions are listed at the end of your business financial 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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