When you dreamed of owning a small business, you probably imagined all of the cool and exciting things you’d be doing—the late-night caffeine-driven breakthroughs, securing that crucial partnership at the last minute, revenue charts soaring up, up, and away… But you probably didn’t fantasize about the nitty-gritty paperwork and planning. Yet, it’s a necessary evil.
Financial planning is essential if you want to experience the many fun and inspiring things your business is destined to accomplish. Sure, some lucky few stumble blindly upon success, but if you want to remove chance from the equation, you’re going to need to follow a strategic formula for success. That formula is your financial plan.
Creating your business’s first financial plan can be dull and tedious or stimulating and rewarding—the choice is yours. Since we’re a merry bunch who like to enjoy the small things in life, we want to make your financial planning as easy, painless, and downright exhilarating as possible. Our formula is simple. Define where you are now (Point A), where you want to be (Point B), and how you’re going to get there (the path). That doesn’t sound so daunting, now does it?
Where You Are Now—Point A
The place to start is where you are now. What are your business’s current assets and liabilities?
- Assets: Your assets include cash, inventory, account receivables, equipment, real estate, and more.
- Liabilities: Your liabilities are the debts and obligations that you owe other individuals or companies. Liabilities could include financing (like a short term loan or credit card) or payments you owe for goods or services.
Subtract your liabilities from your assets to calculate your net worth. Your net worth is a good high-level monitor of the success of your business. If it goes up, then you’re on the right track. If it goes down, you likely need to fix something.
Now that you know where your business stands, it’s time to think about where you want it to go.
Where You Want to Be—Point B
Think of this step as goal setting. Where would you like to see your business in 5, 10, or 15 years? What are your retirement plans? Would you like to sell the business eventually? Answers to questions like these will help inform all of the elements of your business’s financial plan.
Get detailed with your business aspirations. Tired of driving around the ol’ company rust bucket? Make it a goal to upgrade your business’s equipment and vehicles. Annoyed by the noisy neighbors in your co-working space? Set goals around expanding your business and investing in real estate.
It’s helpful to follow the classic SMART goal-setting model. You know it by now—specific, measurable, attainable, relevant (or realistic), and timely. Follow this format to make your goals high-quality, worthwhile, and strategically thought out.
How You’re Going to Get There—The Path
Now that you know where you are and where you’re going, it’s time to plan the path for how you’re going to get from Point A to Point B. This step is where you’ll spend the bulk of your planning time.
First, let’s start with a budget. A budget is the roadmap to your business’s financial success. In a nutshell, your budget will explain how much money you have now, what your financial goals are, and what you’ll need to spend to achieve those goals: revenue, profit (or loss) goal, and expenses. If you’re new to creating a budget, check out How to Create Your First Small Business Budget.
Next, you’ll want to create a cash flow forecast—it’s not the same as a budget. A cash flow forecast is going to help you estimate the timing and amount of all your cash inflows and outflows. It’ll help you understand where all your income is coming from and exactly where it’s going—and when. A budget will indicate you have capital once you’ve invoiced a client, but your cash flow forecast lets you know when that payment has cleared and the cash is actually in your bank account. Fine-tune your cash flow forecasts to make sure your business doesn’t encounter any cash flow gaps.
With a budget and cash flow forecast in hand, you now have a financial plan for how you’re going to grow your business. Your success is no longer left to chance or guesswork—it’s a calculated strategy.
Make sure to revisit your financial plan often to check-in on your progress and reevaluate. Your goals may change with time, or perhaps surprises will alter your budget or cash flow forecasts. When this happens, start the process from scratch. Where is your business now? Do you still want it to go in the same direction? Will the current plan for achieving the transformation still work? By keeping your financial plan up-to-date, you’ll always be in a position to make the best decisions to push your business toward success.