Some small businesses may find it hard to develop good financial statements, likely because they don’t know where or how to begin. A business’ financial plan is critical to the success and sustainability of a business if it is to overcome challenges and achieve growth.
For practical advice on how to write a meaningful financial plan that will benefit your business, read on.
Understanding the business financial plan
Your business plan is a document that helps you create a growth path for your company. Business owners must be familiar with and follow what’s outlined in the business plan to make strategic business decisions. Take for example a small to medium sized lawn care business. A business plan might detail plans to invest in business management software like Jobber once a specific number of sales have been reached in order to scale the business. Investing in lawn care software is a financially smart move since it can improve operations and increase productivity by automating a lot of administrative tasks.
While the financial section is only a part of your business plan, it is at the core of your operations. An organization can’t run without stable funds. Your financial plan should serve as an overview of your enterprise’s economic situation, helping you determine when, why, and how you plan to earn money.
Tips in writing your business plan’s financial section
The creation of a solid financial projection often requires specific expertise. Still, even those new to business can write a good one with some guidance as follows:
Learn the critical elements of a financial plan
A detailed overview of your organization’s projected and actual financial soundness requires the collation of a few statements and documents:
Profit and loss statement
This table is also known by other names, including income statement, consolidated P&L, or pro forma. It shows your business lost or gained income within a specific period. Main entries include revenue or sales, cost of goods or services sold (COGS), and gross margin—calculated by deducting COGS from your business revenue. Losses represent the costs attributed to your business operations, including recurring and one-time expenses. (1)
There are different approaches to this. But suppose you’re in the house cleaning industry. Knowing how much to charge for every cleaning job you do is the first step in setting your profit margin. Most planners check their income statements before setting the minimum monthly sales quota. No matter how you plan on doing it, separate your forecast for each service tier or product cost. (3)
Cash flow projection
Forecasting how much money will be coming in and going out is challenging for new businesses. To make the process easier, start with an annual projection before coming up with monthly figures. (5)
Doing so can also alert you when to avail of an additional financing boost or implement revenue-increasing strategies ahead of a financial crunch. Companies should establish a collection plan to ensure they won’t run out of funds while waiting for payments. (4)
This document reflects the business’s net worth and includes assets, liabilities, and equity. To determine financial soundness, your net business assets must be the exact figure as your total company assets minus the liabilities or amount you owe. (2)
Break-even point analysis
The break-even point occurs when your business sales amount equals your overall expense costs. This figure is vital in assessing whether your business is profitable and whether the rest of the statistics cited in your business plan projections are viable. It’s best to seek the assistance of an accountant to come up with reasonable figures. (4)
Business experts suggest owners come up with realistic figures in their business plan. A good rule of thumb is to create balance. While being too confident with your projections is discouraged, so is being too pessimistic about your business performance—especially if you’re applying for a loan. (5)
Those who are just starting may not be able to make credible projections. Still, they can regularly review the plan and compare it with actual sales and revenue. Doing so can help them predict outcomes better in the coming months. (5)
Check other resources and templates
Because a good business plan must follow regulatory rules, check whether you need to follow specific standards before creating the financial section. For instance, all businesses must align their documents with the accounting standards set by the Federal Accounting Standards Advisory Board. (4)
You can also look for online resources or check whether your business software has templates for expenses, income or profit, cash flow, a balance sheet, and other vital elements discussed earlier. Don’t hesitate to seek help from a reputable accountant.
The financial section of a business plan is crucial for the management of a company, potential investors, and loan providers. Internally, organizations can plan their activities and strategies better. Externally, the financial section of the business plan can be used to attract more investors or boost funding from lending institutions.
Apart from creating a good plan, it’s crucial to review this section regularly to assess whether your business is on the right track or needs some tweaking. A good financial plan can also help you thrive off-season and avert severe financial troubles.
- “How to Write a Profit and Loss Statement”, Source: https://aofund.org/resource/how-write-profit-loss-statement/
- “Balance Sheet”, Source” https://www.investopedia.com/terms/b/balancesheet.asp
- “How to Create a Sales Forecast”, Source: https://www.thebalancesmb.com/sales-forecasting-2948317
- “Guide to Creating a Business Plan With Template”, Source: https://www.businessnewsdaily.com/5680-simple-business-plan-templates.html
- “How to Write the Financial Section of the Business Plan,” Source: https://www.inc.com/guides/business-plan-financial-section.html