When to Set Up a Business Financial Plan

What is a financial plan?

Is a roadmap for your money. It’s a strategy that you create to manage your money effectively, helping you to achieve your financial goals. 

Embarking on a business venture is an exciting journey, filled with opportunities and challenges alike. It’s akin to navigating a ship across uncharted waters, where every decision you make can lead to new discoveries or unforeseen obstacles. In such a scenario, having a reliable map becomes indispensable. In the realm of entrepreneurship, this map is your business plan.

A business plan, however, isn’t complete without its most critical component – a robust financial plan.

This segment of your business plan functions as your fiscal crystal ball, enabling you to predict your business’s financial trajectory, assess potential risks, and make informed decisions that align with your business goals.

Whether it’s the tech giant Apple, the e-commerce behemoth Amazon, or the global coffee chain Starbucks, each of these corporations began their journey with a comprehensive business plan, including a detailed financial blueprint.

This approach isn’t just common sense—it’s also backed by data. A survey conducted by Small Business Trends revealed that businesses with a well-documented plan experienced a 30% faster growth rate than those without one. This finding underscores the fact that a clear, well-articulated plan isn’t just a roadmap—it’s a growth accelerator. It helps entrepreneurs secure funding, measure progress, and adapt their strategies based on real-time feedback.

When Should You Set Up a Financial Plan?

So, let’s address that burning question on your mind: “When should I set up a financial plan for my business?” The answer, quite frankly, is as soon as possible. The sooner you start planning, the better prepared you’ll be for the financial challenges and opportunities that lie ahead.

There are many reasons to set up a financial plan for your business. Here are a few of the most common:

• To track your income and expenses
• To set financial goals
• To make informed decisions about your business
• To attract investors
• To get a loan from a bank
• To apply for government grants
• To comply with regulations
• To improve your business’s overall financial health

Think about setting up your financial plan like packing for a long journey. You wouldn’t wait until the last minute to pack your bags, would you? Similarly, financial planning should start at the inception of your business idea. It’s about preparing for the journey ahead, foreseeing potential financial roadblocks, and charting the best course to reach your destination.

Let’s take Google as an example. The tech giant we know today started as a research project by Larry Page and Sergey Brin in their dorm room at Stanford University. However, even at that early stage, they recognized the importance of a financial plan to secure funding and guide their growth. Today, Google is a multi-billion dollar company, and it all started with a financial plan conceived in a university dorm.

The Essential Role of a Startup Business Plan Template

Now, let’s shift gears and discuss the role of a startup business plan template. Picture this: you’re building your dream house. Before you start construction, you would need a blueprint, right? The same logic applies to your business.

A startup business plan template serves as your blueprint, your guiding star. It outlines your business’s goals, strategies, and most importantly, the financial direction. It’s this direction that helps you navigate through the often turbulent waters of entrepreneurship.

Still skeptical about the importance of a business plan?

A Harvard Business Review study found that entrepreneurs who write formal plans are 16% more likely to achieve business viability than otherwise identical non-planning entrepreneurs. That’s right – the simple act of putting your plans on paper can significantly increase your chances of success!

Take the story of Brian Chesky and Joe Gebbia, the co-founders of Airbnb. They started with an idea to make a few bucks by renting out air mattresses in their living room during a conference. But it was their comprehensive business plan that helped transform this idea into a multi-billion dollar business. The plan included a financial strategy that allowed them to secure funding, scale their business, and achieve profitability.

Basic Business Plan Template Example:

Here’s a closer look at the above business plan template:

• Executive Summary: This is your elevator pitch. In this section, you provide a high-level overview of your business—what you do, what problems you solve, and why your business is necessary.

• Company Description: Here, you go into more detail about your business, explaining what it does, the industry you’re in, and how you’re uniquely positioned. This is where you talk about your mission, values, and the specific problem your business solves.

• Market Analysis: This section involves comprehensive research on your industry and competitors. You’ll delve into your target demographics, the size of your potential market, and the competitive landscape.

• Organization and Management: Here, you describe how your business is structured and who runs it. This includes your business’s legal structure (sole proprietorship, LLC, corporation, etc.), information about the owner(s), and your team management strategy.

• Service or Product Line: In this section, you detail your product or service, focusing on the benefits to potential and current customers. This is where you explain what you sell and how it benefits your customers.

• Marketing and Sales: This is where you explain how you plan to attract and retain customers. You’ll outline your marketing strategy and the sales process that turns prospects into paying customers.

• Funding Request: If you’re seeking funding, this section is where you detail your funding requirements, how you plan to use the funds, and the future financial strategies of your business (like paying off debt or selling your business).

• Financial Projections: This section is where you look forward and predict the financial future of your business. You’ll share sales forecasts and expense budgets, along with other financial metrics.

• Appendix: This is an optional section that can include resumes, permits, leases, or other documents relevant to your business.

Remember, this table is a simplified example of a business plan template. Depending on your specific business and industry, your business plan might need additional sections or more detailed information.

The 3 Golden Rules for Financial Planning

Now that we’ve discussed when to set up a financial plan and the importance of a business plan template, let’s dive into the golden rules of financial planning.

Rule One – Set Clear, Measurable Financial Goals. Just as a ship needs a destination, your business needs clear, measurable financial goals. These goals could be short-term, like increasing sales by 10% in the next quarter, or long-term, like achieving a specific profit margin within five years. The key here is to make your goals SMART – Specific, Measurable, Achievable, Relevant, and Time-bound.

Rule Two – Always Plan for Risks. Every business venture involves some level of risk. It’s essential to anticipate these risks and have a plan to manage them. This could include diversifying your income streams, maintaining an emergency fund, or getting appropriate insurance coverage.

Rule Three – Regularly Review and Update Your Financial Plan. Just as a sailor adjusts the ship’s course based on changing weather and sea conditions, you need to regularly review and update your financial plan based on your business’s changing circumstances. This could be changes in the market, new opportunities, or unexpected challenges.

These rules might sound simple, but they can make a significant difference in your business’s financial health. For instance, Amazon, under the leadership of Jeff Bezos, has always prioritized long-term financial goals. Despite criticism and pressure from shareholders, Bezos maintained his focus on long-term growth rather than short-term profits. Today, Amazon is one of the world’s most valuable companies, proving the effectiveness of this approach.

Understanding Financial Requirements

One of the most critical aspects of financial planning is understanding your business’s financial requirements. This knowledge is crucial because it influences every decision you make, from daily operations to long-term strategic planning. So, how do you determine these financial requirements?

• Start-Up Costs: If you’re just starting, you need to calculate how much it will cost to get your business off the ground. This includes costs for equipment, inventory, branding, location, legal fees, and any other initial expenses. Start-up costs can vary significantly depending on the type and scale of your business.

• Operational Costs: These are the day-to-day costs of running your business. Operational costs include salaries, rent, utilities, marketing, production costs, and more. It’s essential to have a realistic estimate of these costs to avoid cash flow issues.

• Growth and Expansion Costs: If you plan to grow and expand your business, you need to factor in the associated costs. This could include costs for hiring more staff, increasing production, expanding to new locations, or launching new products or services.

• Emergency Funds: Just like personal finance, it’s crucial for businesses to have an emergency fund. This is a reserve of cash that can help your business weather unexpected financial challenges or take advantage of sudden opportunities.

To illustrate, let’s look at a tech startup company. At the onset, their initial financial requirements would include costs for product development, hiring a team, legal fees, and marketing expenses. As they start operating, they’ll incur costs for salaries, office space, utilities, ongoing product development, and customer acquisition. If they plan to expand their product line or enter new markets, they’ll need to factor in these additional costs.

Understanding your financial requirements is like having a roadmap for your journey. It shows you the path to your destination (financial goals) and helps you anticipate the obstacles (financial challenges) along the way.

Methods and strategies for assessing financial needs.

As an entrepreneur, understanding the financial requirements of your business is a critical step. It lays the foundation for your financial plan, helps in decision-making, and, more importantly, it ensures the sustainability and growth of your business.

Let’s explore some methods and strategies to assess your financial needs effectively.

Cash Flow Forecasting: This involves predicting your business’s cash inflows and outflows over a specific period. It helps you understand when and where your business generates cash and where it is spent. Regular cash flow forecasting can help you anticipate periods of cash shortfall or surplus, allowing you to make necessary adjustments.

Break-Even Analysis: This is a calculation that helps you determine the minimum amount of sales your business needs to cover its costs. Knowing your break-even point can help you set pricing, sales targets, and marketing strategies. It also gives you an idea of the viability and profitability of your business.

Budgeting: A budget is a financial plan that outlines your projected income and expenses over a certain period. Budgeting allows you to allocate resources where they are most needed and helps you monitor your business’s financial performance.

Scenario Analysis: This involves creating different financial scenarios based on various assumptions. For example, you could have a ‘best case’, ‘worst case’, and ‘most likely’ scenario. This approach can help you prepare for different possible financial outcomes.

Financial Ratios: Financial ratios, like liquidity ratios and profitability ratios, give you insight into your business’s financial health. They can help you identify areas where you’re doing well and where improvements may be needed.

Let’s consider a quick example: Suppose you run a small cafe. Cash flow forecasting can help you predict your busiest and slowest times, allowing you to manage staffing and inventory accordingly. Break-even analysis can help you decide how much you need to charge for your coffee and pastries to cover your costs. A budget can help you plan for regular expenses like rent and supplies, and scenario analysis can prepare you for situations like a sudden rise in coffee bean prices or a temporary closure due to renovations. Lastly, financial ratios can give you an overall picture of your cafe’s financial health.

Remember, the goal of assessing your financial needs is not just about avoiding financial shortfalls, but also about identifying opportunities for growth and improvement. 

Five Common Reasons for Making a Financial Plan

Financial planning is an essential part of any business, irrespective of its size or industry. It goes beyond just crunching numbers—it’s about setting your business on a path of sustainable growth. Let’s explore five common reasons why businesses make a financial plan:

• Setting Clear Financial Goals: First and foremost, a financial plan helps you set clear, measurable financial goals. Whether it’s increasing your revenue, reducing expenses, or achieving a certain profit margin, having a financial plan can guide your efforts and keep you focused. Remember the 1st golden rule of financial planning? A financial plan helps you put that rule into practice.

• Risk Management: Businesses are fraught with risks—market fluctuations, changing consumer preferences, new competitors, and more. A financial plan helps you anticipate these risks and devise strategies to manage them. It’s like having a safety net that protects your business from unexpected financial blows.

• Cash Flow Management: Cash flow is the lifeblood of any business. A financial plan helps you manage your cash flow effectively, ensuring you have enough cash to cover your operational expenses and invest in growth opportunities.

• Securing Funding: Whether you’re pitching to investors or applying for a loan, having a detailed financial plan can increase your chances of securing funding. It shows potential investors that you have a clear plan for using the funds and a path to profitability.

• Facilitates Decision Making: A financial plan provides a clear picture of your business’s financial health, which can guide your decision-making. Whether you’re considering a new investment, planning a product launch, or deciding to scale up your operations, referring to your financial plan can help you make informed decisions.

The Anatomy of a Financial Plan

A financial plan acts as a roadmap for your business’s financial future. It encompasses everything from your business’s income and expenses, to your financial goals, strategies to achieve those goals, and measures to manage risks. Let’s explore what a financial plan typically includes:

• Income Statement: Also known as a Profit and Loss statement, this shows your business’s revenues, costs, and expenses over a specific period. It helps you understand whether your business is profitable or not.
• Balance Sheet: This provides a snapshot of your business’s financial position at a specific point in time. It lists your assets, liabilities, and owners’ equity. It can help you track your business’s growth and understand its financial health.
• Cash Flow Statement: This shows how changes in the Balance Sheet and Income Statement affect your cash and cash equivalents. It reflects how your business generates cash from operational activities, how it spends cash in investing activities, and how it raises and repays money in financing activities.
• Financial Goals: Your financial plan should outline your short-term and long-term financial goals. These could range from increasing sales and reducing costs, to expanding to new locations or launching a new product.
• Strategies to Achieve Financial Goals: This section outlines the specific strategies you’ll use to achieve your financial goals. For instance, if your goal is to increase sales, your strategies could include boosting your marketing efforts, improving product quality, or offering new products or services.
• Risk Management Measures: No financial plan is complete without considering potential risks. This section outlines the potential financial risks your business could face and how you plan to manage them.
• Budgets: Your financial plan should include detailed budgets for different areas of your business, such as marketing, operations, and human resources. Budgets help you allocate resources effectively and monitor your business’s financial performance.

A well-crafted financial plan is a powerful tool. It not only guides your business’s financial decisions but also communicates your business’s financial health to stakeholders, including investors, lenders, and even your employees. In the next section, we’ll discuss a practical example of a financial plan. Stay tuned!

A Practical Example of a Financial Plan

Now that we’ve covered what a financial plan includes, let’s bring it all together with a practical example. For this, let’s consider the case of a hypothetical startup company, ‘TechEase.’

TechEase is a tech startup aiming to launch an innovative mobile app for easy, on-the-go tech support. They’ve identified a gap in the market for a service that simplifies tech support for non-tech savvy individuals.

1. Income Statement: TechEase anticipates generating revenue from both subscription fees and in-app purchases. The expenses include app development costs, marketing costs, and overhead expenses like office rent and salaries. They forecast a net loss in the first year due to high initial expenses, but expect to turn profitable from the second year as subscriber base grows.
2. Balance Sheet: The assets for TechEase include initial capital, office equipment, and the proprietary app technology. Their liabilities consist of a small business loan they secured for the initial app development. The equity represents the founders’ investment in the business.
3. Cash Flow Statement: TechEase’s cash flow statement reflects the cash spent on initial setup and app development, cash generated from the small business loan and founders’ investment, and the expected cash inflow from customers once the app launches.
4. Financial Goals: TechEase’s short-term goal is to launch the app and acquire 10,000 subscribers in the first year. Their long-term goal is to become the leading mobile tech support app in the market within five years.
5. Strategies to Achieve Financial Goals: TechEase plans to offer free trials to attract initial users and invest in targeted marketing to reach their ideal customers. They also plan to continuously improve the app based on user feedback to retain customers and attract new ones.
6. Risk Management Measures: TechEase identifies several risks, including a slower than expected user acquisition and potential competition. To mitigate these risks, they plan to diversify their marketing strategies and continuously innovate their app offering.
7. Budgets: TechEase has allocated budgets for app development, marketing, and general administration. They plan to monitor these budgets closely and adjust as needed based on their financial performance.

This example illustrates how a financial plan guides the strategic direction of a business and helps manage potential risks. It’s a dynamic tool that should be updated as the business grows and evolves.

Six Steps in the Financial Planning Process for Your Own Business

So, you have a firm grasp on what a financial plan involves and have seen an example in action. But how do you go about creating a financial plan for your own business? The process can be boiled down into six key steps:

Setting Your Financial Objectives: This is where you outline your financial goals, both short-term and long-term. Do you want to achieve a certain level of revenue? Reduce costs by a specific percentage? Expand to new markets? Your financial objectives provide a clear direction for your financial plan.

Gathering Your Financial Information: This involves collecting all relevant financial data about your business. This includes your current income and expenses, assets and liabilities, cash flow, and any other relevant financial information.

Analyzing Your Financial Status: Once you have all your financial information, you need to analyze it to understand your current financial status. Are you making a profit? Do you have a positive cash flow? Are your debts manageable? This analysis will form the basis of your financial plan.

Developing Your Financial Plan: Based on your financial objectives and your analysis of your financial status, you can now develop your financial plan. This involves outlining your strategies for achieving your financial objectives, your budgets, and your measures for managing financial risks.

Implementing Your Financial Plan: Now that you have your financial plan, it’s time to put it into action. This involves executing your strategies, monitoring your budgets, and continuously assessing your financial performance.

Reviewing and Updating Your Financial Plan: Financial planning is not a one-time event, but an ongoing process. You need to regularly review and update your financial plan to reflect changes in your business environment, financial status, and financial objectives.

Let’s illustrate this with an example. Say you own a small boutique clothing store. Your financial objectives could include increasing sales by 20% over the next year, reducing stock waste by 10%, and saving enough to open a second store within three years. You would gather your financial information from your accounting records and sales data, and analyze it to understand your current sales levels, costs, and cash flow. You would then develop a financial plan that outlines strategies to achieve your goals, like launching a new marketing campaign, implementing more efficient inventory management, and setting aside a certain amount of profits each month for your expansion. You would then implement these strategies and monitor their impact on your financial performance. Finally, you would review and update your plan regularly to ensure it stays relevant and effective.

Remember, creating a financial plan can seem daunting, but breaking it down into these steps can make the process more manageable. It’s an essential tool that can guide your business decisions and help ensure your business’s financial health and success.

The Power of Financial Planning

There you have it! We’ve taken a comprehensive journey into the world of financial planning in business. From understanding when to set up a financial plan, discussing the rule of three in financial planning, to digging deep into the reasons for crafting a financial plan, and finally breaking down the process of creating your own – we’ve covered it all.

Financial planning is not just a task to check off your to-do list when starting a business; it’s an ongoing process that continues throughout the life of your business. It’s your roadmap to financial success, helping you navigate the ups and downs of business finances. Whether you’re drafting a startup business plan or adjusting your existing plan to accommodate new growth, financial planning plays a vital role.

Remember the ‘TechEase‘ startup we discussed? By laying out a detailed financial plan, they were able to set clear financial goals, devise strategies to meet those goals, and implement measures to manage risks. That’s the power of financial planning. It provides clarity, direction, and a sense of control over your business’s financial future.

As we conclude, remember the words of renowned businessman and author, Robert Kiyosaki, “Financial freedom is available to those who learn about it and work for it.” So, don’t shy away from financial planning. Embrace it, and use it as a tool to build and grow a financially robust business.