Fundraising, courting new business partners, collaborating with other vendors in your industry—all of these are stepping stones to growing a small business. In each of these instances, someone will likely ask to see a financial plan to vet your business. Beyond educating others about your company, small business financial planning is essential because it clarifies your long-term vision and guides your overall decision-making.
While crucial, financial planning doesn’t have to be complicated. It comes down to understanding the key elements of a financial plan for small business, and having step-by-step guidance on how to build one.
Small Business Financial Planning Defined, and Why It’s Important To Get It Right
A financial plan is a document ranging from one to 50 pages that provides a financial outline of your business, including your current and projected financial standing, goals, and means of funding and achieving those goals.
It guides your overall decision-making toward your long-term vision and proves to potential lenders, partners and investors that your financial health is sustainable as you take action to accomplish your plans. Founders also use it to determine the viability of business concepts.
A small business financial plan is important for a number of other reasons:
- Optics: A strong financial plan supports every stage of the business lifecycle by clarifying your appeal to stakeholders, whether you’re preparing for a funding round, a merger or an exit.
- Decision-making: It also enhances granular decision-making for shorter-term activities like expansion, debt reduction, budgeting and pricing as well as day-to-day decisions and resource allocation.
- Strategic evaluation: For owners, entrepreneurs and founders who are often caught up in the daily rush of operational oversight, small business financial planning is a refreshing opportunity to define your big picture and realign each part of your business to it.
- Road-mapping and risk: The financial plan, especially within the context of an overall business plan, can serve as a powerful North Star for growth and scale, enabling you to set course, correct as necessary, and manage risk by articulating how you intend to avoid, reduce, transfer or accept it along the way.
Anatomy of a Financial Plan for Small Businesses
A standard financial plan can include any number of the following elements to suit your particular needs:
- Executive summary
- Basic company information, such as:
- Business description
- Product, services and pricing
- Assets and liabilities
- Financial reporting information:
- Income statement, balance sheet, and cash flow management and projections
- Business ratios
- Revenue and expenses, both current and forecasted
- Various business analyses, such as:
- An investment analysis covering growth funding and resource allocation
- A break-even analysis
- A personnel plan if you have employees and contractors
- Risk management and contingency planning
Shortcuts for Building Your Plan
Depending on your reasons for creating a financial plan, you may not need every element listed above. And startups and time-strapped small businesses owners can turn to what’s called a “lean business plan,” which is a much shorter, more visual, one-page version. If you want to get started drafting right away, the Small Business Administration offers templates for both the traditional financial plan and lean financial plan.
A Step-by-Step Guide to Creating a Small Business Financial Plan
Financial plans vary business to business, but you can use this general approach and customize to your audience:
- Outline your business goals and strategy
- Identify and prep supporting financial data
- Make financial projections and analyses
- Establish risk management and contingency plans
- Revisit and revise regularly
Here’s the process in more detail.
Step 1: Outline your business goals and strategy
Your audience wants to know what you’re hoping to achieve. Articulate your short- and long-term goals, then think about the requirements and steps needed to achieve them. What changes will you need to make? What investments or cuts will be necessary? Will you need different equipment or technology? Will you need to hire staff or invest in training? What does timing look like? How does your target audience fit into this vision?
Step 2: Identify and prep supporting financial data
Decide which elements from the list above will complement and round out your plan. Then identify the metrics and data sources you’ll need to create them from across your enterprise.
Make sure your data is accurate and clean. This means assessing the tools, technologies and platforms you use with the goal of reducing information siloes, redundancies and other factors that make data difficult to access. You want to be able to update your financial plan and other reports quickly whenever you need to.
Pro Tip: Avoid putting data management off until later, which has compounding effects on your ability to pull and analyze data in the future as your finances become more complex. Technology like CRMs, ERP systems, KPI dashboards and programs that track operational data will be especially useful in this step.
Step 3: Make financial projections and analyses
Focus your initial forecasts on the most important piece of your business—cash flow management—before adding further complexity. Depending on your needs, you may want to include the entirety of or key information from your income statement, balance sheet and cash flow statement. Forecast your cash flow and other relevant metrics like revenue and expenses, debt or customer behavior. Be sure to address seasonality and cash gap issues that could be aggravated by spikes in the costs of supplies or interest.
Tailor your financial forecasts based on the changes you expect to make to achieve your vision, anticipating any factors or scenarios that could affect your efforts, such as market conditions, policy changes, new entrants or technological disruption.
Pro Tip: Be careful not to overestimate revenue or underestimate expenses. Stay realistic and keep your estimates conservative. Financial planning and analysis (FP&A) software will be especially useful in this process, including fit-for-purpose solutions like Anaplan or Datarails as well as common tools like QuickBooks and NetSuite that include some FP&A capabilities.
Step 4: Establish risk management and contingency plans
Thinking big picture is one of the most energizing aspects of being a small business owner, and that’s what the financial plan is for. But you must have risk management and contingency plans in place to keep the vision alive in a downturn.
Your financial plan should indicate how you intend to mitigate disruption, maintain continuity and restore business-as-usual as soon as possible in a crisis. How will you raise funds if necessary? What kind of access to credit can you procure in advance? What goes on the table for cost-cutting? Planning for the worst keeps the big picture possible when things get tough.
Pro Tip: Don’t just plan for the best-case scenario. Be sure to include worst-case and most-likely scenarios, too.
Step 5: Revisit and revise regularly
Business is dynamic, and your financial plan should be, too. Update it regularly with results and relevant developments. As your financial planning capability matures, you can go back and reference old business plans to see what worked and what didn’t for a given objective, learning over time.
Pro Tip: Be sure to revisit your financial plan after procuring the partner or funding you want.
Finding Reliable Support and Resources
One of the biggest mistakes small business owners make is relying too much on online forums for guidance on tasks that are outside their wheelhouses. Forums can be great brainstorming tools, and while the respondents are often quite knowledgeable, they may not be experts in your particular area or stage of business.
If you find you don’t have the skill or bandwidth to create a solid financial plan for your small business, Paro’s Financial Planning & Analysis services are designed to get you what you need to get to the next step. A Paro expert can be brought in at any point in the small business financial planning process to:
- Lead the creation of the financial plan entirely
- Set you up with the right software to suit your needs and budget
- Ensure your plan adheres to compliance requirements like GAAP or IFRS
- Help you explain or present your plan to stakeholders
Proactive financial planning is a key success driver for small businesses. With the right foundational knowledge, tools and guidance, you can craft a plan that’s just as effective as the ones large businesses create. Get started by booking a consultation today.
