As a small business owner, you’re in charge of everything from driving sales to developing your product or service. With so many responsibilities to juggle, it can be easy to lose sight of one of the most important factors in your business’s success: your financial plan.
A key component of your overall strategy, a financial plan can be the difference between fast, sustainable growth and business closure. It gives you a complete picture of the past and present state of your finances, so you can better prepare for the future through informed decision-making.
Every small business can benefit from a financial plan, but creating one isn’t always simple. To help you get started, we break down the three key components your plan needs to include.
Looking Backward: Income Statements
Whether you call it an income statement or a profit and loss statement, this financial document gives you a clear view of your business’s revenue, expenses, and profits or losses over a specific period of time. More specifically, the statement should cover:
- The costs of producing your good or service
- Your revenue (or sales)
- Your operating expenses, such as rent and utilities
- General or administrative expenses, such as marketing or advertising costs
- Your gross margin (your total net profit or loss)
Why you need it: Income statements support your small business in a variety of ways. For one, they provide essential insight into your financial performance, so you can make better decisions regarding your expenditure. Additionally, because income statements gauge company profitability, they’re often an essential document for securing funding.
Looking Ahead: Cash Flow Statements
While income statements tell you how much you’ve spent and earned independent of when money actually enters or leaves your bank account, a cash flow statement tells you how much cash you have (or may have) at any given time. These statements usually include three core components:
- Operating activities: Cash flow that supports the delivery of your good or service, such as
- rent, manufacturing costs, and cash received from sales
- Investing activities: Cash flow from the purchases and sales of long-term investments
- Financing activities: Cash flow from debt and equity transactions, such as company stock purchases,
- dividend payments, and debt repayments
Why you need it: Cash flow statements are valuable tools for projecting future cash flows and getting ahead of potential financial challenges. It gives you a clear look at how much liquidity or cash you’ll have available to fund a variety of needs, from long-term expansion opportunities to short-term operating expenses.
For the Here and Now: Balance Sheets
To pay for what your business owns (your assets), you’ll need to borrow money (liabilities) or take value from investors (equities).
- Assets: Accounts receivable, cash, inventory, etc.
- Liabilities: Accounts payable, loan repayments, etc.
- Equity: The owner’s equity as well as investor shares and retained earnings
A balance sheet helps business owners ensure all of these items stay in balance by adhering to the equation: Assets = Liabilities + Equities
Let’s say you take out a $5,000 loan. Your assets and liabilities will both increase by $5,000. If you take $10,000 from investors, the assets and equities will increase by that amount. In other words, your equation should always be equal on both sides. If not, you may have an error in your data, calculations, or inventory.
Why you need it: Balance sheets are often described as a “snapshot” of your company’s current financial position, and give you multiple levels of insight. Looking at your liability-to-equity ratio can indicate whether you’ve over-relied on borrowing. Similarly, comparing your current assets and liabilities can tell you if you have enough funding for your short-term obligations. You can also compare your current balance sheet with prior ones to get a look at how you’re performing over time.
Putting It All Together
Your financial statements make up the lion’s share of your financial plan, but there are additional steps you can (and should) take to set your business up for financial success.
Review your company strategy
Whether you’re just starting up or already own a small business, your financial plan starts with your overall business plan. Where do you want your business to be in the future? Will you expand into new products or services? Map out your goals, the steps you’ll take to achieve them, and their financial impact.
Prepare your financial statements
Your income statement, cash flow statement, and balance sheet are the heart of your financial plan. Together, these documents give you a holistic view of your business’s finances and inform your budgeting, funding, and other key financial decisions.
Develop a tax plan
From claiming qualified business income deductions to taking out low- or no-interest loans, there are a number of strategies that can potentially lower your tax bill and give you more money to put back into your business.
Have an exit strategy
Do you have a plan for what will happen to your company when it’s time to pass the torch? A succession plan is important to protect the business you’ve worked hard to build (as well as stakeholder interests).
Take the Guesswork Out of the Planning Process
We know you wear many hats as a small business owner, and creating a solid financial plan may not be one of your immediate priorities. That’s where we come in. Our financial advisors are here to help you put together all of the pieces of your financial planning puzzle, from new business setup to continuation and succession planning. Connect with us today to learn about how we help support your business’s long-term success.
