Composing a financial plan is the final step in your overall business plan. A financial plan consists of an overall projection of your business finances, revenues, profits, losses, cash flows and other fiduciary elements for the next three to five years. Essentially, a financial plan is imperative to get an understanding of the financial goals of a business, and to keep track of those same targets.
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In addition to gathering a glimpse into the finances of the business, there are other important aspects for the creation of a financial plan. Here are some of the other reasons for writing a financial plan:
- Variance analysis, or monitor line-by-line budget goals
- Determine feasibility of company
- Forecasting short- to long-term finances
- Applying for and obtaining funding
- Regular reminders of your enterprise’s financial objectives
As busy as they are running their company, business owners have to keep in mind they also are operating the financial engine for achieving long-term goals for themselves, their families and their employees,”
said Martha Kendler, CLU®, ChFC®, director of business markets at Northwestern Mutual, in an interview with Forbes.
Making plans to protect and sustain the enterprise is critical to keeping the business on a positive, long-term course.”
Simply put: if you produce a sound financial plan then you can help your business stay on the right track. If not, then you could very well face bankruptcy and then it’s curtains for your company.
Here are six key steps to your financial planning process as an entrepreneur:
1. Create and Review Your Financial Plan
First and foremost, you have to actually create and review your company’s financial plan, as this is the most important part of creating a business.
This will entail a written set of objectives, strategies, targets and timelines for achieving your business’s aims, whether it’s purchasing a store, instituting a digital marketing strategy, buying a van, hiring additional employees or paying off debts. The financial plan should be written on a pad of paper or on a Microsoft Excel spreadsheet.
It’s important to regularly review your plan to update or adapt to changing financial instances or goals. The financial plan could also be revised due to a drop in the market, new commercial property taxes, spike in utility costs, the death of an associate or the birth of a child.
The financial plan is primarily for your business, but you also have to take into account your personal lifestyle, too.
Finally, do consider tapping key players when it comes to the financial aspect of your business. These advisors will provide suggestions and advice to your small business’s financial security.
2. Keep, Maintain and Update Your Financial Records
Before and during the operation of your small business, you must keep, maintain and update your financial records. These are important not just to measure the success of your business, but to also file your taxes at the end of the year. These financial records include:
- Bank statements
- Tax returns
- Credit card statements
- Insurance policies
- Employment paystubs and costs
One another thing: conduct an inventory of your business possessions. This should be done on a monthly basis. By doing this, you can calculate the value of your business and give a record for your insurance provider in the event of theft, natural disaster or fire.
Place them in a safe and secure place where they can easily be accessed by you. Also, be sure to keep the files together so it’s easier and simpler to evaluate from time to time to determine where your business stands today.
3. Draft Estate Planning Documents
In the event of a devastating event, such as your death or a serious accident, what happens to your business? Well, just like in your personal life, you should maintain a will, a durable power of attorney, a living will and a healthcare durable power of attorney.
These documents should consist of important details regarding the future of your business. Your small business loan could be ended upon your death or your family may take over the company. Whatever the case, be prepared and have the recommended documents.
4. Start a Spending, Savings and Debt Plan
First, start a spending plan. This details where your money comes from (angel investment, bank loans, sales, advertisement revenues, etc.) and then where it goes (taxes, labor, maintenance, inventory, marketing, etc.). There are two important sections: the money inflow will include your salary, sales and other types of income. The outflow will outline just where your revenues are being allocated.
Second, build a savings (or emergency fund) plan. Similar to your personal circumstances, you should set aside between five and ten percent of all revenues into a business savings account. This money can be used to help cover the cost of repairs, provide bonuses to staff members or purchase new equipment.
Third, establish a debt payment plan. Bank loans, merchant cash advances or credit cards should be inserted into this debt repayment initiative. Next to growing your business, paying back this debt should be a high priority for your business. Interest rates are likely to go up so you’ll want to pay back as much as you can.
5. Calculate Your Net Worth
Once you have all of your financial records and projections in order, your next step is to calculate your personal net worth. This allows you to determine what you own less than what you owe. For instance, if your assets surpass your liabilities then you maintain a positive net worth. But if your liabilities exceed your assets then your net worth is in negatives.
One year down the line, you have to conduct the same type of calculation for your business. If your business is in the positives then it’s a successful venture thus far. But if it’s the other way around after three to five years then you may have to reconsider your business model; as this will only get worse in years to come, resulting in a dead-end business.
6. Purchase Adequate Insurance
You will have to acquire adequate insurance for your business. An example of this is commercial property insurance. Of course, there is a long list of insurances small business owners should consider, including:
- General liability insurance
- Business owner’s policy
- Commercial auto insurance
- Worker’s compensation
- Professional liability insurance
As Martha Kendler advised all business owners,
Owning a business is an opportunity to build financial strength for your family, your employees and your local community. With your personal financial success closely tied to your business success, effective planning in both areas will prepare you for the inevitable challenges and changes ahead”
Buying insurance may seem like a waste of money, but anything can happen in the world of business. It becomes a necessity.
The financial plan will ensure that you, as an entrepreneur, someone who is always busy and has a lot on his mind, follow through with your initial fiscal endeavors. Remember, if you’re someone who is just business-minded and not savvy with a calculator, then you should seek out the assistance of a professional accountant. Indeed, it’s an expensive maneuver but it’ll pay dividends in the end as you continue to reach your goals and rake in the revenues.
Do you own a small business? What tips do you recommend to add in a financial plan? Let us know your tips and experiences in the comments section below.