Small Business Owners Profit from Sound Financial Planning

Entrepreneurs manage substantial startup checklists, developing business ideas in to viable operations. Among other things, the process may include market research and product development, as well as staffing and outfitting production facilities and/or retail storefronts. One critical detail calling for their continued attention, astute entrepreneurs do not skimp on financial planning.

A comprehensive financial plan uses available information to project potential profits and losses for your venture. The essential document provides a financial framework for the operation, helping you track what works and enabling you to make financial adjustments when spending doesn’t produce desired results. A solid financial plan also shows creditors you are serious, reinforcing your access to commercial capital. A well-articulated finance forecast can make the difference between loan approval and being passed over for the business funding you need.

Although each business venture has unique requirements, effective financial planning incorporates several key elements. In her December Mediafeed article, April Maguire identifies five features that should be included in your comprehensive financial plan.

Income Statements

Income statements identify revenue, expenses, and profits logged during a given time period. To create an income statement, start by compiling all the costs associated with running your business. Common expenses include customary overhead costs such as rent and utilities, as well as payroll costs, supplies, materials, and other financial obligations.

After listing expenses, the next step is to record revenue, accounting for all the incoming cash flow earned selling goods and services. Subtracting expenses from revenue indicates whether you can expect to profit during a particular period or suffer a business loss.

Income statements for existing business ventures draw financial conclusions from actual sales and expense data, using past financials to gauge income and profitability. Startups must adopt a different approach. Without a long track record of sales and spending to lean on, new businesses must project figures, in order to create income statements. To craft an informed income statement and assess the viability of your business, you may rely on information gleaned from market research and studying similar businesses.

Balance Sheet

A detailed balance sheet highlights an organization’s assets, liabilities, and equity at a particular moment in time. Your balance sheet is important when seeking financing, providing creditors with the up-to-date information needed to approve commercial funding.

To create a balance sheet for your business, you must first account for your assets, which include items such as inventory, receivables, cash on hand, and equipment. Next, you must tally liabilities like payables, loan obligations, and credit card balances, before tabulating equity. Business equity includes such things as investor shares, stock earnings, and owner equity. After listing items and doing the math, your company assets should be equal to your liabilities, combined with business equity.

Cash Flow Projections

Cash flow projections estimate the amount of money regularly flowing in to and out of your commercial enterprise. The simple formula subtracts outgoing cash from money coming in, resulting in a net cash flow figure that identifies the amount of money available at a particular time.

Startups projecting cash flow rely on expert predictions, personal experience, first-hand observations, and industry research to compile accurate figures. Knowing when money is likely to arrive and when it is going out the door provides crucial knowledge for entrepreneurs. In particular, owners managing seasonal and cyclical businesses use financial projections to anticipate irregular cash flow.

In addition to cash flow projections’ value attracting investors, monitoring cash flow also provides clues you can use to improve your business. Cash flow insight includes the timely financial information you need to make adjustments, before small money concerns grow in to full-scale cash flow crises.

Cash flow lagging? Faster inventory turns may provide relief. Receivables slowing your flow? Tightening your billing cycle may be all that’s needed to improve cash flow. These and other examples illustrate how cash flow projections can help you evaluate your company’s financial health and make informed decisions about your organization’s future.

Break-even Point

New business ventures typically require time to become profitable. Establishing your break-even point identifies the stage at which your hard work and investment pay off, propelling you from the red in to the black.

Your break-even point occurs when overall business revenue earned by selling goods and services matches total expenses. Analyzing break-even calculations not only helps you achieve the milestone, but break-even data also guides resource allocation. In order to arrive at an accurate break-even figure, consider factors such as

• variable expenses,
• fixed costs,
• price projections,
• inflation.

Similar to other concerns addressed in your financial plan, break-even analysis shows investors you have what it takes to succeed. Break-even data can also be used to isolate expenses that are too high. Armed with the information, you may choose to source cheaper materials, increase prices, or make other moves to reduce your cost of doing business.

Loan Summary and Financing Schedule

Debt is common among startup ventures; business planning should account for financing obligations. Before offering funds, lenders and investors need assurance you have a plan in place to pay off your existing business debts. A financing schedule outlines the types of loans you’ve taken-on, as well as their interest rates and repayment terms.

Financial planning is a crucial undertaking for entrepreneurs – particularly those launching startups. A sound financial plan presents details about your business, drawn from your operations track record and/or shaped by industry research and market influences. Although each business has unique finance needs, a well-conceived plan typically includes a cash flow forecast, financing schedule, balance sheet, and income statement, among other relevant financial information.