How to Make A Financial Plan for A Business In 14 Steps

A financial plan is a section of your existing business plan. Your financial plan should include financial statements indicating where your company stands currently and where it expects to be in the near future. Smart business owners use a financial plan to determine how much financing their business might need in the future.

Pre-Qualify in Minutes!

A financial plan also helps lenders determine if lending you money is a wise use of their funds and can indicate the net worth of your business at the end of a certain time period.

If you don’t have a business plan yet, look into business planning software. Palo Alto Software is a good place to start.

Here are the elements you should include in your financial plan.

1. 3 Key Financial Statements

The financial section is composed of three statements of financial projections: the income statement, the cash flow statement and the balance sheet, and a brief explanation/analysis of these three statements.

Income Statement

The Income Statement, also called the profit and loss statement or P&L, summarizes revenue and expenses. Revenue keeps your business alive. It’s the money received during a certain accounting period. For example, if you have a landscaping business, revenue is what you earn per hour or per project.

If you have an online boutique, your revenue comes from the products that you sell. Expenses include items like the cost of inventory, payroll, business taxes, business insurance and loan payments. The bottom line is revenue minus expenses, showing if your company is profitable or expects to be soon. For more detailed information, review this post from the SmartBiz blog: How to Prepare an Income Statement.

Balance Sheet

The SBA describes the balance sheet as one of the most important financial statements, showing a snapshot of a company’s financial standing. The balance sheet reveals what a business owns and what it owes by breaking down a company’s assets, liabilities, and owner’s equity at a specific point in time. This helps you determine the financial strength and ability of your business.

Read How to Create a Balance Sheet for Your Business from the SmartBiz blog for the basic balance sheet equation and how to put it all together.

Cash Flow Statement

Simply put, the cash flow statement shows money flowing into and out of a business. Investopedia explains that cash flow statements measure how well a company manages its cash position, meaning how well the company generates cash to pay its debt obligations and fund its operating expenses. For more detailed information and an example, review this post from the Basic Accounting Help blog: Example Statement of Cash Flows.

2. Sales Forecasting

Sales forecasting is a way to determine your future sales and is a key element of any financial plan. Without a solid idea of future sales, it’s almost impossible to manage your inventory and your cash flow.

Sales forecasting may sound complex but one financial professional put it into perspective, saying “If you think sales forecasting is hard, try running a business without a sales forecast. That’s much harder.” The Lean Business Planning Blog has a step-by-step guide to help you forecast: How to Forecast Sales.

3. Create Expense Budget

Your expense budget will help you understand how much it’s going to cost to make the sales you’ve forecasted. Your operating expenses include rent, utilities, marketing, and payroll. You can divide your expenses by “fixed costs” like rent and payroll and by “variable costs” like marketing. Once you’ve nailed down your fixed and variable costs, review this article: A Fast and Easy Way to Build an Expense Budget.

4. Break Even Analysis

A break-even analysis is a financial calculation to help you determine when your business (or new product or service) will be profitable. Done correctly, it should show the number of products or services you need to sell to cover your costs.

When you break even, you’re not making or losing money, but all your costs are covered. Your break-even point is equal to your fixed costs, divided by your average price, minus variable costs.

5. Personnel Plan

If you operate without employees, you can summarize this section with one or two sentences. If you have labor costs, this is where you determine how payroll affects your overall business.

Your personnel plan should justify the necessity of each member of your team. Start by describing each employee and outlining their training, expertise and knowledge pertaining to your business. You’ll also include positions that you want to hire in the future with experience required and compensation information.

6. Review Strategic Plan

Do you have a strategic plan for the future? Taking the time to formulate a strategic plan is one of the best ways to reach short- and long-term goals. SmartBiz Loans CEO Evan Singer has over 20 years of business experience. He recently wrote an article for Forbes about the benefits of long-term planning.

Take a look at the article here to use as a guide as you review your plan: How To Create A Long-Term Plan For Your Small Business.

7. Plan For Taxes

Your company’s gross income inaccurately depicts your financial standing if you don’t factor in taxes. Corporations pay a 21 percent federal tax rate, and state corporate tax rates can be as high as 11.5 percent. Given these rates, your company could potentially pay taxes equal to nearly a third of its income – an amount more than substantial enough to ensure is reflected when creating a financial plan.


8. Build an Emergency Fund

The Small Business Administration has found that 90 percent of small businesses fail within two years of a disaster that impacts their business. You can minimize your company’s chances of becoming a statistic by creating a budget that includes an emergency fund. This way, when an unexpected catastrophe sidelines your business, you have enough cash to withstand your revenue disruptions.

9. Get the Right Insurance

Business insurance is just as important for emergency management as is an emergency fund. Plans ranging from property insurance to business interruption insurance can help keep your company afloat in the wake of a disaster or perhaps a lawsuit. Learn more via the SmartBiz Loans guide to small business insurance.

10. Manage Your Debt

While your goal with loans will always be to eventually pay off your debts, the reality is that debt repayments take time. Lengthy repayment periods for expensive loans with high interest rates can prove especially burdensome, so you should know how much debt you can handle in the first place. You should also know how you’ll use your loans to boost your income. Learn more via the SmartBiz Loans guide to small business debt management.

11. Watch Your Earning and Spending

Even if your company is earning huge amounts of revenue, your business might be in hot water if it lacks cash flow. That’s why you should track all your earning and spending, ideally using accounting software. If you see overspending in certain areas, pull back and hold onto your savings. With these savings, you can more easily repay your debts or prepare for emergencies.

12. Reassess and Revise

Perhaps you’ve planned a way to save money that, in execution, hampers your ability to provide your services. If so, you should review your financial plan and revise it accordingly. Short-term savings are rarely worth the long-term harm that production declines could present for your financial situation.

13. Stick To Your Plan

Don’t deviate from the plan once you’ve developed one that’s sound and comprehensive. Strive not to spend outside the limits you’ve set, and if you do spend outside these limits, take note of the occasion and record why the spend was necessary. This way, you might know how to reel yourself back in should you deviate from your guidelines. The result is a greater chance of financial success.

14. Finally, Keep Your Financial Plan Handy!

Many business owners spend lots of time crafting a financial plan only to tuck it away and not reference it again. Make sure you regularly review your financial plan and make adjustments when needed.

A complete and up-to-date financial plan is one business document lenders will want to review. Make sure it’s an accurate reflection of where you are and where you want to go. If you lack the expertise to put together this type of plan, your accountant or another financial professional can help.

How to frequently review your financial plan

When you’re figuring out how to make a financial plan, regular reviews should be part and parcel of your process. To ensure that you’re reviewing your plan often enough, take the following steps:

  • Set a date . Determine a date every month when you’ll review your plan. Add this date as a recurring event on your business calendar app.
  • Know your goals . Business goals change over time. If you know you’ll soon need more money to embark on a new business venture, cut your spending accordingly. If you’ve planned your budget based on outdated goals, readjust it as needed.
  • Revisit your insurance plans . As your business needs evolve, your insurance plans may become outdated and not cover your new offerings in their entirety. Similarly, you may find that you are paying for unnecessary services or are paying too much for your plan. Regular review ensures that your policies are adequate.
  • Reconcile all your balances . It’s one thing to pay a bill. It’s another for the money with which you’re paying to actually leave your bank account. You should regularly check that all payments you make are credited on one account and debited on another. This way, no dollars get lost in the process of managing your business.
  • Check your automated payments . If you’ve set up auto-pay on a credit card from a checking or savings account low on cash, you could find yourself unwittingly facing overdraft fees. The result isn’t just another cost – it could also be a dent in your credit score.
  • Determine your net worth . Perhaps more than any other metric, your company’s net worth best attests to its financial health. To calculate it, simply subtract your liabilities from your assets. Ideally, you’ll see a positive value – and if not, then try moving through the above steps again. In time, business success might result.