Finances:Let’s talk Business: Developing a Financial Plan for a Small Business

A financial plan is a forecast of future performance for a business, usually prepared using spreadsheet software. Small businesses can benefit greatly from taking the time to do a financial plan at least annually. The plan helps a small business owner to better manage cash flow by preparing for situations that could result in cash shortages, such as seasonal fluctuations in revenues. The financial plan is normally prepared as part of an overall business planning process, during which goals are set and strategies are chosen to help the business grow in the upcoming year. Step 1: Convert marketing strategies into expenditures. Strategies depict the course of action you want to take. A strategy might be to advertise in local newspapers or sponsor charity events to increase customer awareness. Do a cost estimate for each strategy. There you will be able to view the strategies as expenditures rather than merely actions. Step 2: Create a revenue model. Determine the assumptions you want to use for key variables such as unit sales, number of customers, and prices for your products or services. Calculate month-by-month revenue projections using the assumptions. Build formulas into the spreadsheet that allow you to change the variables, doing “what-if scenarios” until the revenue forecast reflects what you believe is realistically attainable. Step 3: Forecast costs of goods sold Use your historical cost of goods sold percentage as a guide and modify it based on any changes you anticipate in the cost of materials, finished goods, or production costs. Based on the economic trends, you will be able to estimate how much you will spend and earn from goods in the near future. Step 4: Forecast general and administrative expense Project your expected facilities costs, such as rent, utilities, insurance, or recurring legal expenses. Again use prior year numbers as guide but make sure you allow for increases that typically occur. Step 5: Prepare a personnel expense forecast. Include additions to personnel that will be needed to carry out the strategies you devised for the upcoming year. A strategy of improving response time to customer inquiries could require adding customer service personnel, which would raise the amount forecast. Step 6: Forecast business upgrades. Be sure to estimate the costs of any improvements you want to make to the business. These could include equipment purchases and facilities expansion or renovation. If not accounted for in the financial forecast, you risk finding your business operating out of the budget. Step 7: Review and finalize the financial plan. Look at the month-by-month projected results. If cash balances appear low for certain months, shift discretionary expenditures like advertising out of those months and into months where revenues are higher. At the end of this process, you will have a financial plan that takes into consideration your past to project a stable growth for your business. Ends

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Finances:Let’s talk Business: Developing a Financial Plan for a Small Business