In business, just like in life, simply “winging it” on a hope and a prayer may not be the thing to do. Small business owners can benefit from having a plan. After all, prior planning prevents poor performance.
There are some hard truths in business that can benefit any business regardless of industry, such as having a rock-solid financial plan and having a strategy for reducing your exposure to risk, which may include small business insurance.
For small business owners, a carefully considered financial plan or a carefully developed financial checklist can be critical to the success of your small business, which is to say that a financial plan may be a priority for your business.
Creating an effective business financial plan is not always easy, and the blunt reality of the honest numbers in your financial plan can be intimidating. That notwithstanding, writing a financial plan for your small business is an important step for starting or growing your small business.
What is a financial plan?
A financial plan for your business is a snapshot that shows the financial position of your business and its future growth. A small business financial plan is made up of a number of important financial documents.
You may engage a financial planner to help with developing your financial plan, but keep in mind that creating a business plan also includes other elements that are not necessarily related to your business finances. You will also use your financial plan to guide your business decision-making, as well as to apply for a business loan and to attract investors.
The business benefits of financial planning
Now that we’ve defined what is a financial plan, let’s look at why you may consider creating a financial plan for your small business. Well, a financial plan’s main purpose is to help you with business planning. When accurately created a financial plan for business gives business owners an honest and precise overview of their business finances. This can be a big help when it comes to planning the course forward for your small business.
There are several types of financial planning that your small business may consider, including cash flow planning, insurance planning, and tax planning, all of which can contribute in their own way to the long-term success of your business.
Your small business financial plan can help you to achieve your financial goals because it can be used to analyse your business performance, identify ways to cut costs, and even evaluate the viability of introducing new products or services to your offering. It’s beneficial to investors as well, who want to know how your business is performing and its potential for growth.
The essential components of a small business financial plan
When developing a financial plan for your business, there are five key elements to include in your financial checklist that you will benefit from understanding, as listed below.
Profit and loss statement: A profit and loss statement displays your total revenue and cost of goods, as well as all other business expenses. Ultimately, your profit and loss statement shows the net income for your business.
Balance sheet: Your balance sheet lists all of the assets, liabilities, and equity for your business.
Sales forecast: Your sales forecast will help you to project your cash flow for the financial year. This is an accurate estimate of how much you expect to earn and what sales you believe you will make throughout the financial year.
Personnel plan: While a personnel plan may not be relevant for every small business, if you plan on hiring staff for your business, you will benefit from having a clear idea of the costs involved in bringing on employees and what value the employees can bring to your business.
Break-even analysis: When creating your business plan, in simple terms your break-even analysis determines the amount of profit that you need to make to cover all of your business expenses. Accounting systems can be a great way to gather all of this information for your business.
If you operate an existing business, there’s a good chance that you already have all of this information available to you in your accounting system.
Four steps for calculating your profit and loss
Determining your profit and loss can be a great place to begin if you already have a profit and loss report for your small business. It will give you handy information on your income and expenses. This information can be critical if you intend to invest in any form of business planning, as it will help you to identify areas where you may be able to reduce your costs or increase your revenue.
If yours is a brand new business, you will be required to put some time and considered thought into estimating a large number of projected business figures. You will likely know some of your costs, but market research and industry benchmarks can be your friend when it comes to determining your projected profits and losses.
1. Calculate your cash flow projections
Whichever type of financial planning you use in your business, accurately determining your cash flow projections can be a critical factor in financial planning and achieving your financial goals for a small business. However, it is often overlooked. You can benefit from knowing your monthly incomings and expenses when you are creating a cash-flow projection.
Remember to always have enough cash on hand to run your business. You will use money for rent, wages, and other business expenses. You can do this by analysing previous financial years. You’ll have to make some guesses if this is not possible. Allow for late payments of invoices when projecting your cash flow.
2. Stick to a single method of accounting
Cash accounting and accrual accounting are both options for your small business. Accrual accounting is when you record income and expenses as they occur. Cash accounting, on the other hand, is when you record income and expenses only when money changes hands. Cash accounting can be a handy option for smaller businesses that prefer to accurately predict their cash flow.
If your business take pre-orders you may benefit from using the accrual method, which ensures that your expenses and income are matched for specific events, such as a business that promotes concerts. You could sell all of your tickets in June, but the concert may not be held until October. In this scenario, your income and expenses would not line up if you used cash.
3. Balance your accounts
A balance sheet, as mentioned above, shows your assets and liabilities at any given moment. Consider all the assets you own, such as your inventory, materials, and company vehicles. Also carefully look at your liabilities.
You may have unpaid invoices and business loans. You’ll have to estimate the value of assets and liabilities for a new business based on what you require to get up and running.
4. Run a break-even point analysis
The break-even point is perhaps the most important aspect of any business financial plan. It takes into account your profit and expenses and shows how many sales you have to make to cover your costs. It’s important to get this right because if you don’t, your business won’t be able to turn a profit – which is clearly not ideal.
New business owners who are just starting out in business ownership may make the mistake of trying to manipulate their profit and expenses projections in order to arrive at a favorable break-even point. However, honesty is considered the best policy here; it is in business owners’ interests to always be honest regarding profit margins, because otherwise you may find your business in serious financial strife.
Experience small business insurance done better today!
Just like a well-considered financial plan helps small business owners, so too does having small business insurance.
Explore your business insurance options with BizCover today and discover just how easy buying business insurance can be. Compare competitive business insurance quotes from Australia’s leading insurers online or call the BizCover team on 1300 920 868 and enjoy business insurance done better today.
*This information is general only and does not take into account your objectives, financial situation or needs. It should not be relied upon as advice. As with any insurance, cover will be subject to the terms, conditions and exclusions contained in the policy wording. © 2023 BizCover Pty Limited, all rights reserved. ABN 68 127 707 975; AFSL 501769.