A financial plan is the cornerstone of any business. It’s your road map for success, guiding you to long-term security and growth by pinpointing where you are now and where you want to go over the next five years. It also helps you identify potential problems along the way and find solutions to those challenges.
“Consistency is key with a good financial plan,” says Karl Frank, owner of A&I Financial Services LLC in Denver, Colorado. “The more organized and detailed your plan is, the easier it will be to make adjustments as new opportunities arise.”
To guide your small business on the path toward prosperity, follow these six financial planning steps:
1. Assess Your Cash Flow
Cash flow is the amount of money a business has available to spend—or, more importantly, invest in growing the company’s future. To determine your cash flow, take a look at your current balance sheet and income statement (also called profit and loss statements). From there you can forecast how much you’ll need to keep in reserve each month for things like taxes or equipment replacement. “Most businesses should aim for at least 12 months’ worth of reserves,” says Frank. “But what you really want is that 18-month to 24-month range.” When it comes to breaking into that 18-24 month range (typically considered the sweet spot), Karl Frank, CFP®, says the first step is to take a look at your income statements and balance sheets. By comparing these numbers to last year, you can create a simple budget that forecasts how much money your company will bring in over the next 12 months. This will give you an idea of whether or not you’re on target for hitting that 18-24 month target.
2. Determine Expenses and Costs
Once you know how much money is coming in each month, according to Frank, it’s time to set up proper accounting functions—something he says too many small business owners neglect. “It’s vital that businesses maintain accurate bookkeeping practices,” he says. “If entrepreneurs aren’t recording their incomes and expenses appropriately, they don’t know how to set expected income goals or make informed business decisions.”
Once you’ve got your accounting in order, you can start organizing your expenses. “Don’t try to bite off more than you can chew,” Frank says. “You don’t need separate categories for office supplies and marketing materials; that’s like trying to keep track of spending on paper clips and printer ink separately.”
Frank recommends keeping it simple: Create three expense subcategories (i.e., overhead costs, salary costs and marketing). Then use those subcategories as the starting point for all of your future spending plans—including salaries, real estate leases and equipment purchases. Analyze each category carefully before moving on to Step 3.
3. Set Business Goals and Strategies
Once you have a firm grasp on where your company is now and how much money it has coming in each month, you can take the guesswork out of financial planning by setting business goals. “Successful businesses are always thinking about where they want to go—and that starts with having clear objectives for the future,” Frank says.
How detailed should these strategies be? Aim for short-, mid- and long-term plans. Short term, for example, might be one year; mid term would be five years; and long term could be 10 or more years down the road. Once you’ve outlined these strategies, you can move onto Step 4.
4. Develop Your Financial Plan and Forecasts
Start with your monthly cash flow projections, which you determined in Step 1. Then, to gain a big-picture perspective on your company’s financial health (and determine what needs to change), compare this month-by-month projection with the business goals you set in Step 3.
“The ideal scenario is that your monthly cash flow aligns perfectly with your overall plan,” Frank says. “But if there’s a dramatic difference between the two, it might be time for an intervention.” For example, if your projected income doesn’t match up with your mid-term plans (in five years), then you may need to adjust salaries or hiring practices—or both—to get back into alignment. Short of reducing expenses or increasing revenue, though, there are no magic bullets when it comes to closing the gap.
Long-term business success is all about preparation. And the key to that preparation is a solid financial plan. It aids in pitching investors, growth planning, and revenue dips and shortages.
5. Keep It Updated and Revisit Often
“A good financial plan is never finished,” Frank says. “You should revisit it at least annually, or when your business undergoes a major change.” If you are starting up a company, for example, you may need to adjust your early projections to better match reality—and your budget should reflect that. Or if your company takes off faster than expected (a common occurrence in the early stages of development), then you’ll want to update your long-term business goals and strategies to allow for this increase in income growth.
6. Get Feedback From a Pro
Even after all this time and effort, it’s easy to get lost in routine and ignore the bigger picture. That’s why Frank recommends seeking feedback from a financial advisor for small business owners & executives —ideally someone who isn’t afraid to say, “I told you so.”
“The trick is finding one that won’t just tell you what you want to hear,” he says. “Look for an expert that’s as entrepreneurial as you are and pays close attention to market trends.” You can also use this person as a sounding board to tweak your monthly cash flow projections and other financial plans before they go out the door.
With his years of experience in finance and entrepreneurship, Karl Frank has developed a unique perspective on successful business strategies and practices. And unlike many advisors who only focus on the numbers, Karl helps his clients uncover the hidden opportunities that come with growing a small business. “Even if you’re not an accountant or finance whiz, you can use these six steps to create your very own financial plan,” Frank says.
So what are you waiting for? Get started today so you can stop playing guessing games and give your business the jump start it needs!