9 Elements of a Successful Financial Plan for a Small Business

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

A business financial plan is an overview of an organization’s financial situation and a forward-looking growth projection. It can help you manage cash flow and accounts for months when revenue might be lower than expected. It also helps you plan for taxes and create a business budget that accounts for daily and monthly expenses.

A financial plan helps business leaders make informed decisions about purchases, debt, hiring, expense control and overall operations for the year ahead. It’s particularly important if a business owner is looking to sell, attract investors or enter a partnership with another business.

However, perhaps the most crucial benefit of a financial plan is helping you focus on your business’s long-term growth. It allows you to look beyond your company’s day-to-day activities and avoid losing sight of your goals. Focusing on your long-term vision ensures you prioritize your financial resources.

9 components of a successful financial plan for business

Your unique business financial plan may differ by industry and business type. However, all businesses should include the following nine components.

1. Sales forecasting.

Sales forecasting is a crucial element of your business financial plan. A sales forecast estimates how much of a product or service a business will sell in the next week, month, quarter or year.

Sales forecasting can help you identify patterns in your sales cycles and better understand — and improve — your business. For example, a seasonal business can use sales forecasting to inform strategies for improving off-season sales and becoming a year-round venture. Another business might use sales forecasting to understand how factors like the weather or the economy influence sales fluctuations and prepare more effectively.

This knowledge is invaluable as you plan marketing initiatives. Additionally, sales forecasting can be the foundation of your business growth plan and goals. For instance, you could aim to improve your sales by 10 percent over each previous period.

2. Expense outlay.

Your financial plan should include an accounting of all regular expenses, expected future expenses and associated expenses.

• Regular expenses: Regular expenses are your business’s current ongoing costs; this includes operational and overhead costs such as rent, utilities and payroll. They also include standard yearly business activities, such as conference attendance, advertising and marketing, and the office holiday party. It’s advisable to distinguish essential expenses from expenses that can be reduced or eliminated if needed.
• Expected future expenses: Expected future expenses are known future costs, such as tax rate increases, minimum wage increases or maintenance needs. You should also consider unexpected future expenses, such as damage to your business caused by fire, flood or other unexpected disasters (and costs for disaster preparedness).
• Associated expenses: Associated expenses are the estimated costs of various initiatives, such as hiring new employees, investing in employee training, expanding your delivery area and opening another business location. 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).

Business assets and liabilities are the foundation of your company’s balance sheet and the primary determinants of your business’s net worth. Tracking assets and liabilities 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 deeper view of your business’s health than does a profit-and-loss statement or a cash flow report.

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 entire year allows you to anticipate financial struggles or challenges. It can also help you identify a cash flow problem before it harms your business. You can set the most appropriate payment terms — such as how much you charge a customer upfront or how many days after invoicing you expect payment.

A cash flow projection reveals how much money will remain at the end of each month, allowing you to plan for expansion or other investments. It also helps you budget. For example, you can spend less during one month to meet 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 vs. profits of expansion or growth.

Having your expenses fully fleshed out, as described above, makes your break-even analysis even more accurate and useful, allowing you to:

• Determine pricing (set a price that gives you a comfortable margin over your expenses while allowing your business to remain competitive).
• Understand how many units you must sell at specific prices to cover costs.

6. Operations plan.

To run your business efficiently, you must craft a detailed overview of your operational needs. You can make more informed decisions for your business’s growth and efficiency when you:

• Understand what roles are required to operate your business at various output volumes.
• How much output or work each employee can handle.
• The costs of each stage of your supply chain.

Tightly controlling expenses — such as payroll or supply chain costs — relative to growth is essential. An operations plan can also help determine if there is room to optimize operations or supply chains through automation, new technology or superior vendors.

Focusing on profit margins is also essential for many businesses. For example, credit card processing fees can take a big bite out of your bottom line. Managing these costs can make the difference between turning a profit or going into the red.

7. Funding plan.

Your financial plan will include a funding plan. While some business owners bootstrap their companies out of their own pockets, many others will require funding. In your funding plan, you must consider whether to use debt or equity financing and outline the reasons for your decision. If you decide to take on debt, ensure you understand the process of applying for a business loan. U.S. Small Business Administration (SBA) loans are especially prized for their low interest rates and long repayment periods.

Equity financing involves finding business investors. In exchange for funding your company, investors will take an ownership stake in the business. It’s crucial to know how to present your idea to investors to maximize your chances of a successful pitch.

8. Investment analysis.

An investment analysis looks at industry trends, investment opportunities, and resource allocation to ensure funds are spent wisely and effectively. For instance, determining which projects will yield the highest return on investment (ROI) is crucial for long-term success. Acquiring customers is especially important for growing your business. So, for example, it’s essential to measure the ROI of digital marketing campaigns to maximize limited investment funds. By incorporating investment analysis into your financial plan, you can make informed decisions that drive growth and profitability.

9. Risk management plan.

While it’s essential to plan for success, it’s also crucial to identify financial risks and develop mitigation strategies. Does your industry tend to move through cycles of boom and bust? Is there an elevated risk of litigation? Does your business face potential disruption from weather-related events? Ensure you create contingency plans for potential financial setbacks and secure appropriate insurance.

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 of future growth or expansion. Here are some tips for writing a comprehensive business financial plan.

1. Review the previous year’s financial plan.

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

2. Collaborate with other departments.

The individual charged with creating the business financial plan should collaborate — mainly 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. These elements combine to create a comprehensive financial picture of the business.

3. Use available resources and financial plan templates.

Business owners don’t have to go it alone to create their financial plans. Numerous resources exist to provide guidance and even templates. Consider the following options:

• SBA: The SBA is an excellent resource for learning about financial plans. This knowledge includes the necessary elements and how best to work with the different departments in your business to collect the required information. Additionally, the SBA’s Learning Platform offers a course on how to create a business plan; this involves financial planning elements as well as worksheets and templates to help you get started. You can seek additional help and more personalized service from your local SBA office.
• SCORE: SCORE (Service Corps of Retired Executives), the SBA’s nonprofit partner, is the largest volunteer network of business mentors. It began as a group of retired executives but has expanded to include business owners and executives from many industries. SCORE provides free advice, group and online learning, and mentoring resources. SCORE’s business plan and finance templates are excellent resources for small business owners.
• Accountants and financial professionals: You can ask your business accountant for financial plan guidance; many accountants provide financial planning services in addition to their usual tax and finance services.
• Microsoft 365: Microsoft 365 offers numerous financial management templates, business budget templates and other resources.
• QuickBooks: QuickBooks has several resources, including business plan templates and budgeting tools.
• Additional templates: BDC’s free business financial plan template, Hubspot’s financial planning templates and JotForm’s financial plan template.

Mike Berner contributed to this article.