Financial planning is crucial to lead your business into success. As an entrepreneur, it’s vital that you know how to handle your company’s finances well. A business financial plan involves many aspects including projections of income, your anticipated expenses, cash flow, overheads and more. Taking the time to develop a detailed and thorough business plan before you commence your operations makes a lot of sense, as you’ll be able to see whether or not your venture is likely to be commercially viable before you make any significant investment,
While a sound financial plan is pretty much essential for any business, not all entrepreneurs create one, and then still wonder what went wrong in the process. Listed below are tips on how you can make a financial plan to help your business succeed.
1. Ensure that essential elements are present
As an entrepreneur, you need to have a clear understanding of what your business is and what you want to achieve over both the short and long term. Your financial plan must include the various components to keep your finances in check. When you understand the importance of cash flow and managing your incomings and outgoings more effectively, you will be in a stronger position to avoid money issues in the future.
A few of these elements are:
You need to have a workable budget to address your company’s needs and expenses. Frequently visit your budget, especially if the demand for your goods and services are seasonal. This will prevent you from having more debt than you can afford, too.
Statement of cash flow
This document shows how much money has flowed into your business, out of it, and what is left by the end of the month.
Profit and loss statement
This statement shows the profit or loss within a particular time frame and includes the revenue and cost of products sold.
This report tells you how much money you need to have, to at least break even the cost of your sold items. You need to realize that not reaching the “break-even mark” means that the business is losing money and may fall in trouble soon. You can tap into experts like Capstone if you need guidance with financial planning.
Statement of financial position
This document includes your assets and liabilities to maximize the potential value of the business.
This is the estimate of the sales revenue you have for each month, quarter, and year. As you see the patterns of your sales, this will make you better understand your business so that you can allocate resources appropriately.
2. Create financial projections
Using the elements above, you should have a better picture of how your business would perform. Make monthly financial projections by using your sale estimates and anticipated expenses, overhead, and other costs. This is a crucial step because it can serve as a warning when things get shaky, and you can still find ways to remedy it.
Here are some tips:
Use simple spreadsheets or software tools to plot these projections.
If you have a financially-tight business, consider having a weekly financial projection.
Enter sales as cash only when they are already paid so that you won’t spend what isn’t even there yet.
Prepare profit and loss statements with both positive and negative scenarios so that you can anticipate business impacts.
3. Have a contingency plan
Having a contingency plan will lessen your stress in case the business really needs money that you don’t have. It’s always a good idea to have emergency sources of money because you’ll never know when you’ll need it, and it will save you from business failure.
Some ideas are:
Having a cash reserve
Private equity funding
Good credit line
4. Know your tax liability
Not many business owners realize that knowing their tax liability is essential to avoid serious issues from the tax agency. Many financial plans include tax-planning strategies, so this isn’t something that you should neglect. Make sure that you and your accountant know the business activities and can monitor how much tax would cost.
Here are some ways to save on business taxes:
Claim for home office deduction if you work from your house.
Keep all your records organized so that you’ll be prepared for tax filing and avoid penalties.
Be aware of all the business deductions allowed by your taxing agency.
Deduct auto expenses if you use a vehicle for the business.
Donate supplies or inventory that aren’t moving because they can be deductible expenses.
Don’t forget that your startup costs, or expenses before the first sale, can also be tax deductible.
Consider hiring contractors instead of full-time employees when there are times where there isn’t much work.
Know your tax law changes.
Creating a financial plan is vital to help your business thrive. A financial plan isn’t only needed by companies who have tight finances, but even by those which are fully funded, too. Using the tips above and financial tools, you’ll be well on your way to plan for your business.
About the Author
Steven McMeechan is the Marketing and Communications Manager of Capstone Financial Planning.