A simple financial plan outlines your income, expenses and financial goals. It provides a clear picture of where your business stands and what it needs to achieve. This guide will walk you through the key steps in creating an effective financial plan for your business.
Step one – Create a basic strategic plan
Before focusing on numbers, you need to know what you want to achieve. The strategic plan outlines company goals and the resources needed to achieve them. It also assesses the impact these requirements will have on cash flow and other required resources. Strategic goals can be short-term (achieving a certain revenue target in the next quarter) or long-term (expanding operations or reducing debt over the next few years).
Step two – Forecast your revenue
Revenue forecasting is the process of estimating the income your business expects to generate over a set period. Start by reviewing your past sales data and consider future trends from market demand to competition or even seasonality. Estimate the income from different revenue streams including product sales, services or other business activities. If your business is new, base your revenue forecast on industry benchmarks or expected customer demand. Be conservative with your revenue estimates to avoid overestimating your financial capacity. Consider different scenarios like best case, worst case and the most likely outcome.
Step three – Estimate your expenses
Next, calculate the costs associated with running your business. This includes both fixed and variable expenses. Fixed expenses are costs that remain the same each month including rent, salaries and insurance. Variable expenses change with your business activities like raw materials, marketing costs or utilities. A thorough breakdown of expenses helps you understand where your money is going and where you might be able to cut costs.
Step four – Calculate profit margins
Once you have an estimate of your revenue and expenses, you can calculate your profit margins. This is the difference between your revenue and your expenses. Profit margin calculations help you assess how well your business is generating profit relative to its costs. The formula for calculating profit margin is:
Profit Margin = (Revenue−Expenses)/Revenue x 100
A healthy profit margin indicates that your business is efficiently managing its resources and generating sustainable profits. If the margin is too low, you may need to reconsider your pricing strategy or look for ways to reduce costs.
Step five – Create a cash flow statement
A cash flow statement tracks the movement of cash in and out of your business. It helps you understand how much cash you have available at any given time to meet your financial obligations. A cash flow statement includes:
Operating activities: Cash generated from your core business operations, such as sales revenue and payments to suppliers.
Investing activities: Cash spent on long-term investments, such as purchasing equipment or property.
Financing activities: Cash from loans or equity investments and repayments made to creditors.
A positive cash flow means your business has enough liquidity to operate smoothly.
Step six – Prepare an income statement
An income statement, also known as a profit and loss statement, summarises your business’s revenues and expenses over a specific period. It shows whether your business is profitable or incurring losses. The income statement typically includes:
Revenue: The total amount earned from selling goods or services.
Cost of goods sold (COGS): The direct costs related to producing your products or services.
Gross profit: The difference between revenue and COGS.
Operating expenses: Costs like salaries, rent and utilities that are not directly tied to production.
Net profit: The final profit after subtracting all expenses from revenue.
Step seven – Create a budget
A budget helps you plan and allocate your resources effectively. Based on your financial goals, forecasted revenue and estimated expenses, create a monthly or quarterly budget that outlines how much money you will spend in each area of your business. A budget helps you stay within your financial limits and avoid overspending. You should also plan for contingencies should cash dry up or the business takes a sudden dip in sales.
Step eight – Monitor and review your financial plan
Your financial plan is not a one-time task; it requires continuous monitoring. Regularly track your revenue, expenses and profit margins against your goals and budget. Make adjustments when necessary, whether that involves cutting costs, increasing prices or finding new revenue streams.