- Educational Resources
- Business Solutions Articles
4 Steps to Creating a Financial Plan for Your Small Business
When it comes to long-term business success, preparation is the name of the game. And the key to that preparation is a solid financial plan. It helps you pitch investors, anticipate growth and weather cash flow shortages. To get started, you need to learn some of the key elements to financial planning.
What is a Financial Plan?
A financial plan helps determine if an idea is sustainable, and then keeps you on track to financial health as your business matures. It’s an integral part to an overall business plan and is made up of three financial statements—cash flow statement, income statement and balance sheet. In your plan, each of these will include a brief explanation or analysis.
- A financial plan helps you know where your business stands and lets you make better informed decisions about resource allocation.
- A financial plan has three major components: a cash flow projection , income statement and balance sheet.
- Your financial plan answers essential questions to set and track progress toward goals.
- Using financial management software gives you the tools to make strategic decisions efficiently.
Why is a Financial Plan Important to Your Small Business?
A well-put-together financial plan can help you achieve greater confidence in your business while generating a better understanding of how to allocate resources. It shows your business is committed to spending wisely and its ability to meet financial obligations. A financial plan helps you determine if choices will impact revenue and which occasions call for dipping into reserve funds.
It’s also an important tool when asking investors to consider your business. Your financial plan shows how your organization manages expenses and generates revenue. It shows where your business stands and how much it needs from sales and investors to meet important financial benchmarks.
Components of a Small Business Financial Plan
Whether you’re modifying your plan or starting from scratch, a financial plan should include:
Income statement: This shows how your business experienced profit or loss over a specific period—usually over three months. Also known as a profit-and-loss statement (P&L) or pro forma income statement, it lists the following:
- Cost of sale or cost of goods (how much does it costs to produce your goods or services?)
- Operating expenses like rent and utilities
- Revenue streams, usually in the form of sales
- Amount of total net profit or loss, also known as a gross margin
Balance sheet: Rather than looking backward or peering into the future, the balance sheet helps you see where you stand right now. What do you own and what do you owe? To figure it out, you’ll need to consider the following:
- Assets: How much cash, goods and resources do you have available?
- Liabilities: What do you owe to suppliers, personnel, landlords, creditors, etc.?
Shareholder equity (the amount of money generated by your business): Use this formula to calculate it:
Shareholder Equity = Assets – Liability
Now that you have these three items, you’re ready to create your balance sheet. And just as the name implies, when complete, you’ll want this to balance out to zero. On one side, list your assets, such as cash on hand. And on the other side list your liabilities and equity (or how much money is generated by the business). The balance sheet is used along the other financial statements in order to calculate business financial ratios, discussed further below.
Why have a balance sheet? It can provide insight into your business and show important measures like how much cash you have, what your obligations are and what kind of profit you’re making all at a glance.
Personnel plan: You need the right people to meet goals and retain a healthy cash flow. A personnel plan looks at existing positions and helps you see when it’s time to bring on more team members, and whether they should be full-time, part-time, or work on a contractual basis. It looks at compensations levels, including benefits, and forecasts those costs. By looking at growth and costs you can see if the potential benefits that come with a new employee justify the expense.
Business ratios: Sometimes you need to look at more than just the big picture. You need to drill down to specific aspects of your business and keep an eye on how individual areas are doing. Business ratios are a way to see things like your net profit margin, return on equity, accounts payable turnover, assets to sales, working capital and total debt to total assets. Numbers used to calculate these ratios come from your P&L statement, balance sheet and cash flow statement and are often used to help request funding from a bank or investors.
Sales forecast: How much will you sell in a specific period? A sales forecast needs to be an ongoing part of any planning process since it helps predict cash flow and the organization’s overall health. A forecast needs to be consistent with the sales number within your P&L statement. Organizing and segmenting your sales forecast will depend on how thoroughly you want to track sales and the business you have. For example, if you own a hotel and giftshop, you may want to track separately sales from guests staying the night and sales from the shop.
Cash flow projection: Perhaps one of the most critical aspects of your financial plan is your cash flow statement . Your business runs on cash. Understanding how much cash is coming in and when to expect it shows the difference between your profit and cash position. It should display how much cash you have now, where it’s going, where it will come from and a schedule for each activity.
Income projections: How much money will your company make in a given period, usually a year. Take that and then subtract the anticipated expenses and you’ll have the income projections . In some cases, these are rolled into profit and loss statements.
Assets and liabilities: Both of these elements are part of your balance sheet. Assets are what your company owns, including current and long-term assets. Current assets can be converted into cash within a year. Think of things such as stocks, inventory and accounts receivable. Long-term assets are tangible or fixed assets designed for long-term use like furniture, fixtures, buildings, machinery and vehicles.
Liabilities are business obligations that are divided into current and long-term categories. Examples of current liabilities in a financial plan are accrued payroll, taxes payable, short-term loans and other obligations due within a year. Long-term liabilities include shareholder loans or bank debt that matures more than a year later.
Break-even analysis: Your break-even point—how much you need to sell to cover all your expenses—will guide your sales revenue and volume goals. Start by calculating your contribution margin by subtracting the costs of a good or service from the amount you pay. In the case of a bicycle store, the sale price of a new bike minus what you paid for it and the salary of your bike salesperson, your rent, etc. By understanding your fixed costs, you can then begin to understand how much you’ll need to markup goods and services and what sales and revenue goals to set in order to stay afloat or turn a profit.
Create a strategic plan: Starting with a strategic plan helps you think about what you want your company to accomplish. Before looking at the numbers, think about what you’ll need to achieve these goals. Will you need to buy more equipment or hire more staff? Is there a chance of new goals affecting your cash flow? What other resources will you need?
Determine the impact on your company’s finances and create a list of existing expenses and assets to help with your next steps.
Create financial projections: This should be based on anticipated expenses and sales forecasts . Look at your goals and plug in the costs needed to achieve them. Include different scenarios. Create a range that is optimistic, pessimistic and most likely to happen, so you can anticipate the impact each one will have. If you’re working with an accountant, go over the plan together to understand how to explain it when seeking funding from investors and lenders.
Plan for contingencies: Look at your cash flow statement and assets, and create a plan for when there’s no money coming in or your business has taken an unexpected turn. Consider having cash reserves or a substantial line of credit if you need cash fast. You may also need to plot ways to sell off assets to help break even.
Monitor and compare goals: Look at the actual results in your cash flow statement, income projections and even business ratios as necessary throughout the year to see if you need to modify your plan or if you’re right on target. Regularly checking in helps you spot potential problems before they get worse.
Three Questions Your Financial Plan Should Answer
Once you’ve created your plan, you should have answers to the following questions:
- How will your business make money?
- What does your business need to get off of the ground?
- What is the operating budget ?
Financial plans that can’t answer these questions need more tweaking. Otherwise, you risk starting a new venture without a clear path and leave behind valuable insight.
#1 Cloud Accounting Software
Improve Your Financial Planning With Financial Management Software
Using spreadsheets can get the job done when you’re just getting started. However, it’s easy to get overwhelmed, especially if you’re collaborating with others in your organization.
Financial management software is worth the expense because it offers automated capabilities such as analysis, reporting and forecasting. Plus, using cloud-based financial planning tools like NetSuite can help you automatically consolidate data and improve efficiency. Everyone across your organization can access and analyze up-to-date information, which leads to better informed decisions.
Whether you’re looking to secure outside funding or just monitor your business growth, understanding and creating a financial plan is crucial. Once you have an overview of your business’ finances, you can make strategic decisions to ensure its longevity.
Small Business Financial Management: Tips, Importance and Challenges
It is remarkably difficult to start a small business. Only about half stay open for five years, and only a third make it to the 10-year mark. That’s why it’s vital to make every effort to succeed. And one of the most fundamental skills and tools for any small business owner is sound financial management.
Learn How NetSuite Can Streamline Your Business
NetSuite has packaged the experience gained from tens of thousands of worldwide deployments over two decades into a set of leading practices that pave a clear path to success and are proven to deliver rapid business value. With NetSuite, you go live in a predictable timeframe — smart, stepped implementations begin with sales and span the entire customer lifecycle, so there’s continuity from sales to services to support.
How is your business adapting to change?
Before you go...
Discover the products that + customers depend on to fuel their growth.
How to Write a Financial Plan for Your Small Business — 2022 Guide
Building a financial plan can be the most intimidating part of writing your business plan . It’s also one of the most vital. Businesses that have a full financial plan in place more prepared to pitch to investors, receive funding, and achieve long-term success.
Thankfully, you don’t need an accounting degree to successfully put one together. All you need to know is the key elements and what goes into them. Read on for the six components that need to go into your financial plan and successfully launch your business.
What is a financial plan?
A financial plan is simply an overview of your current business financials and projections for growth. Think of any documents that represent your current monetary situation as a snapshot of the health of your business and the projections being your future expectations.
Why is a financial plan important for your business?
As said before, the financial plan is a snapshot of the current state of your business. The projections, inform your short and long-term financial goals and gives you a starting point for developing a strategy.
It helps you, as a business owner, set realistic expectations regarding the success of your business. You’re less likely to be surprised by your current financial state and more prepared to manage a crisis or incredible growth, simply because you know your financials inside and out.
And aside from helping you better manage your business, a thorough financial plan also makes you more attractive to investors. It makes you less of a risk and shows that you have a firm plan and track record in place to grow your business.
Components of a successful financial plan
All business plans, whether you’re just starting a business or building an expansion plan for an existing business, should include the following:
- Profit and loss statement
- Cash flow statement
- Balance sheet
- Sales forecast
- Personnel plan
- Business ratios and break-even analysis
Even if you’re in the very beginning stages, these financial statements can still work for you.
How to write a financial plan for your small business
The good news is that they don’t have to be difficult to create or hard to understand. With just a few educated guesses about how much you might sell and what your expenses will be, you’ll be well on your way to creating a complete financial plan.
1. Profit and loss statement
This is a financial statement that goes by a few different names—profit and loss statement, income statement, pro forma income statement, P&L (short for “profit and loss”)— and is essentially an explanation of how your business made a profit (or incur a loss) over a certain period of time.
It’s a table that lists all of your revenue streams and all of your expenses—typically over a three-month period—and lists at the very bottom the total amount of net profit or loss.
There are different formats for profit and loss statements, depending on the type of business you’re in and the structure of your business (nonprofit, LLC, C-Corp, etc.).
What to include in your profit and loss statement
- Your revenue (also called sales)
- Your “cost of sale” or “cost of goods sold” (COGS)—keep in mind, some types of companies, such as a services firm, may not have COGS
- Your gross margin, which is your revenue less your COGS
These three components (revenue, COGS, and gross margin) are the backbone of your business model — i.e., how you make money.
You’ll also list your operating expenses, which are the expenses associated with running your business that isn’t directly associated with making a sale. They’re the fixed expenses that don’t fluctuate depending on the strength or weakness of your revenue in a given month—think rent, utilities, and insurance.
How to find operating income
To find your operating income with the P&L statement you’ll take the gross margin less your operating expenses:
Gross Margin – Operating Expenses = Operating Income
Depending on how you classify some of your expenses, your operating income will typically be equivalent to your “earnings before interest, taxes, depreciation, and amortization” (EBITDA). This is basically, how much money you made in profit before you take your accounting and tax obligations into consideration. It may also be called your “profit before interest and taxes,” gross profit, and “contribution to overhead”—many names, but they all refer to the same number.
How to find net income
Your so-called “bottom line”—officially, your net income, which is found at the very end (or, bottom line) of your profit and loss statement—is your EBITDA less the “ITDA.” Just subtract your expenses for interest, taxes, depreciation, and amortization from your EBITDA, and you have your net income:
Operating Income – Interest, Taxes, Depreciation, and Amortization Expenses = Net Income
For further reading on profit and loss statements (a.k.a., income statements), including an example of what a profit and loss statement actually looks like, check out “ How to Read and Analyze an Income Statement.” And if you want to start building your own, download our free Profit and Loss Statement Template .
2. Cash flow statement
Your cash flow statement is just as important as your profit and loss statement. Businesses run on cash —there are no two ways around it. A cash flow statement is an explanation of how much cash your business brought in, how much cash it paid out, and what its ending cash balance was, typically per-month.
Without a thorough understanding of how much cash you have, where your cash is coming from, where it’s going, and on what schedule, you’re going to have a hard time running a healthy business . And without the cash flow statement, which lays that information out neatly for lenders and investors, you’re not going to be able to raise funds.
The cash flow statement helps you understand the difference between what your profit and loss statement reports as income—your profit—and what your actual cash position is.
It is possible to be extremely profitable and still not have enough cash to pay your expenses and keep your business afloat. It is also possible to be unprofitable but still have enough cash on hand to keep the doors open for several months and buy yourself time to turn things around —that’s why this financial statement is so important to understand.
Cash versus accrual accounting
There are two methods of accounting—the cash method and the accrual method.
The accrual method means that you account for your sales and expenses at the same time—if you got a big preorder for a new product, for example, you’d wait to account for all of your preorder sales revenue until you’d actually started manufacturing and delivering the product. Matching revenue with the related expenses is what’s referred to as “the matching principle,” and is the basis of accrual accounting.
The cash method means that you just account for your sales and expenses as they happen, without worrying about matching up the expenses that are related to a particular sale or vice versa.
If you use the cash method, your cash flow statement isn’t going to be very different from what you see in your profit and loss statement. That might seem like it makes things simpler, but I actually advise against it.
I think that the accrual method of accounting gives you the best sense of how your business operates and that you should consider switching to it if you aren’t using it already.
Why you should use accrual accounting for cash flow
For the best sense of how your business operates, you should consider switching to accrual accounting if you aren’t using it already.
Here’s why: Let’s say you operate a summer camp business. You might receive payment from a camper in March, several months before camp actually starts in July—using the accrual method, you wouldn’t recognize the revenue until you’ve performed the service, so both the revenue and the expenses for the camp would be accounted for in the month of July.
With the cash method, you would have recognized the revenue back in March, but all of the expenses in July, which would have made it look like you were profitable in all of the months leading up to the camp, but unprofitable during the month that camp actually took place.
Cash accounting can get a little unwieldy when it comes time to evaluate how profitable an event or product was, and can make it harder to really understand the ins and outs of your business operations. For the best look at how your business works, accrual accounting is the way to go.
3. Balance sheet
Your balance sheet is a snapshot of your business’s financial position—at a particular moment in time, how are you doing? How much cash do you have in the bank, how much do your customers owe you, and how much do you owe your vendors?
What to include in your balance sheet
- Assets: Your accounts receivable, money in the bank, inventory, etc.
- Liabilities: Your accounts payable, credit card balances, loan repayments, etc.
- Equity: For most small businesses, this is just the owner’s equity, but it could include investors’ shares, retained earnings, stock proceeds, etc.
It’s called a balance sheet because it’s an equation that needs to balance out:
Assets = Liabilities + Equity
The total of your liabilities plus your total equity always equals the total of your assets.
At the end of the accounting year, your total profit or loss adds to or subtracts from your retained earnings (a component of your equity). That makes your retained earnings your business’s cumulative profit and loss since the business’s inception.
However, if you are a sole proprietor or other pass-through tax entity, “retained earnings” doesn’t really apply to you—your retained earnings will always equal zero, as all profits and losses are passed through to the owners and not rolled over or retained like they are in a corporation.
If you’d like more help creating your balance sheet, check out our free downloadable Balance Sheet Template .
4. Sales forecast
The sales forecast is exactly what it sounds like: your projections, or forecast, of what you think you will sell in a given period. Your sales forecast is an incredibly important part of your business plan, especially when lenders or investors are involved, and should be an ongoing part of your business planning process.
Your sales forecast should be an ongoing part of your business planning process.
You should create a forecast that is consistent with the sales number you use in your profit and loss statement. In fact, in our business planning software, LivePlan , the sales forecast auto-fills the profit and loss statement.
There isn’t a one-size-fits-all kind of sales forecast—every business will have different needs. How you segment and organize your forecast depends on what kind of business you have and how thoroughly you want to track your sales.
Generally, you’ll want to break down your sales forecast into segments that are helpful to you for planning and marketing purposes.
If you own a restaurant, for example, you’ll want to separate your forecasts for dinner and lunch sales. But a gym owner may find it helpful to differentiate between the membership types. If you want to get really specific, you might even break your forecast down by product, with a separate line for every product you sell.
Along with each segment of forecasted sales, you’ll want to include that segment’s “cost of goods sold” (COGS). The difference between your forecasted revenue and your forecasted COGS is your forecasted gross margin.
5. Personnel plan
Think of the personnel plan as a justification of each team member’s necessity to the business.
The overall importance of the personnel plan depends largely on the type of business you have. If you are a sole proprietor with no employees, this might not be that important and could be summarized in a sentence of two. But if you are a larger business with high labor costs, you should spend the time necessary to figure out how your personnel affects your business.
If you opt to create a full personnel plan, it should include a description of each member of your management team, and what they bring to the table in terms of training, expertise, and product or market knowledge. Think of this as a justification of each team member’s necessity to the business, and a justification of their salary (and/or equity share, if applicable). This would fall in the company overview section of your business plan.
You can also choose to use this section to list entire departments if that is a better fit for your business and the intentions you have for your business plan . There’s no rule that says you have to list only individual members of the management team.
This is also where you would list team members or departments that you’ve budgeted for but haven’t hired yet. Describe who your ideal candidate(s) is/re, and justify your budgeted salary range(s).
6. Business ratios and break-even analysis
Business ratios explained.
If you have your profit and loss statement, your cash flow statement, and your balance sheet, you have all the numbers you need to calculate the standard business ratios . These ratios aren’t necessary to include in a business plan—especially for an internal plan—but knowing some key ratios is always a good idea.
Common profitability ratios include:
- Gross margin
- Return on sales
- Return on assets
- Return on investment
Common liquidity ratios include:
- Current ratio
- Working capital
Of these, the most common ratios used by business owners and requested by bankers are probably gross margin, return on investment (ROI), and debt-to-equity.
Break-even analysis explained
Your break-even analysis is a calculation of how much you will need to sell in order to “break-even” i.e. cover all of your expenses.
In determining your break-even point, you’ll need to figure out the contribution margin of what you’re selling. In the case of a restaurant, the contribution margin will be the price of the meal less any associated costs. For example, the customer pays $50 for the meal. The food costs are $10 and the wages paid to prepare and serve the meal are $15. Your contribution margin is $25 ($50 – $10 – $15 = $25).
Using this model you can determine how high your sales revenue needs to be in order for you to break even. If your monthly fixed costs are $5,000 and you average a 50 percent contribution margin (like in our example with the restaurant), you’ll need to have sales of $10,000 in order to break even.
Make financial planning a recurring part of your business
Your financial plan might feel overwhelming when you get started, but the truth is that this section of your business plan is absolutely essential to understand.
Even if you end up outsourcing your bookkeeping and regular financial analysis to an accounting firm, you—the business owner—should be able to read and understand these documents and make decisions based on what you learn from them. Using a business dashboard tool like LivePlan can help simplify this process, so you’re not wading through spreadsheets to input and alter every single detail.
If you create and present financial statements that all work together to tell the story of your business, and if you can answer questions about where your numbers are coming from, your chances of securing funding from investors or lenders are much higher.
Additional small business financial resources
Ready to develop your own financial plan? Check out the following resources for more insights into creating an effective financial plan for your small business.
- Balance Sheet Template [Free Download]
- Profit and Loss Template [Free Download]
- How to Do a Sales Forecast
- How to Build a Profit and Loss Statement (Income Statement)
- How to Forecast Cash Flow
- Building Your Balance Sheet
- The Difference Between Cash and Profits
Trevor is the CFO of Palo Alto Software, where he is responsible for leading the company’s accounting and finance efforts.
Starting or Growing a Business? Check out these Offerings.
Exclusive Offers on Must-Haves for New and Growing Businesses
$100+ in savings
All the Insights You Need to Help Your Business Succeed
Works with QBO & XERO
Business Plan Writers
Investor-Ready Business Plans Written In No Time
100% Free Quote
One-Page Business Pitch
Write A Winning Business Pitch In Just 60 Minutes
Start for $20/mo
Plan, fund, and grow.
Easily write a business plan, secure funding, and gain insights.
Achieve your business funding goals with a proven plan format.
Skip to main content Skip to navigation
- Starting your business
- First steps for setting up your business
This information is provided by netherlands chamber of commerce financing desk, kvk.
It's good to know in advance whether your business is going to be profitable. A financial plan can help you make things clearer for yourself. Also when you applying for a loan, your bank or financier will want to see you financial plan.
The financial plan
A financial plan is a useful tool for determining whether your business idea is viable. It will demonstrate the costs and what is needed to finance them. And it is useful for convincing financiers to lend you money, and therefore forms the basis for your financial pitch.
Creating a financial plan does not have to be complicated. Base it on your business plan and keep it simple. Targeted market research and a sound marketing plan should be part of your business plan. These will help you create a solid basis for your figures.
It is important that you work out as much of your financial plan as possible yourself. Discussing it with an expert, such as your accountant, can also help you prepare for the next step – approaching financiers or investors for money.
What should a financial plan include?
A financial plan consists of five budgets that detail the minimum requirements for starting your business, the investments you will need to make and how you plan to finance them. This allows you to determine whether your business idea is viable. What turnover do you expect to generate? And will your business be profitable, or not? It also forces you to examine cash flow and whether you will have enough money each month. Answering all these questions in your business plan is the key to your success.
Your investment budget should include a list of the investments you will need to start your business and those that can wait until a later stage. This is an indicator of the minimum amount of money you will need to get started.
Your financial budget should detail how you intend to finance your investment budget. Options include personal capital (equity capital) or loans, e.g. from a bank (borrowed capital), or even a combination of the two.
Your operating budget should show that your business is profitable. This will allow you to estimate your turnover. You can then analyse the costs to keep your business running. Combining these, you can determine whether you will make a profit or a loss.
Cash flow budget
Income and expenditure can fluctuate greatly over a year. Your cash flow forecast should include all income and expenditure over a given period, e.g. per month or per quarter. This will highlight when you will have surplus cash and when you will need extra funds.
Personal expense budget
One option is to determine how much personal capital you have and then base your financial plan on your personal situation. This involves calculating how much money you will need for you and your family, how much you will have to pay in tax and what your operational costs will be. This allows you to work out your minimum turnover to make ends meet.
SME financing institution Qredits has free tools , including templates for a business plan and financial plan.
What do financiers look for?
Financiers look at both 'hard' and 'soft' factors when they analyse a credit application. Hard factors relate directly to your business and the basis upon which you plan to build it. Soft factors relate to you and your qualities as a business owner.
Prepare a good presentation that demonstrates you've familiarised yourself with the financier's use of language and information requirements. Financiers will examine your application based on the following points:
- Business owner assessment. Who is the credit applicant?
- Business owner's qualities and experience
- Quality of the business plan and its financial basis
- Company history, e.g. turnover, gross profit, cash flow, etc.
- Industry or sector. What trends and developments exist within this sector or industry?
- Type of loan. Loan size and duration
- Purpose. What will the lended money be used for?
- Strict budget and financial obligations. Do you have a clear picture of the revenues required to meet both your financial obligations – business and personal alike?
- Cost structure. Do you have a clear picture of your business's costs?
- Repayment capacity. Will you be able to meet your repayment obligations without jeopardising your business?
- Return potential. Do you have a clear picture for your business's future growth?
- Financial structure
- Personal expenditure
- Market analysis by an independent body
- Market research and industry information
- Security. What security can you offer to ensure that you'll be able to repay your financier?
How to write a financial plan
When using the financial plan to convince investors to finance your company, this is where you make your first impression. Prepare a good presentation that demonstrates you have familiarised yourself with the financier's use of language and information requirements. Start with an intro, use tables and visuals and also think of the graphic design.
- Use your own equity to finance the business as well, if you can, as this will help convince financiers and other parties.
- Negotiate the terms and conditions of your financing package. Repayment terms can be just as important as the financing package itself.
- Improve your chances of success by supporting your application with a pitch.
- Determine what financing options exist.
- Financing your business
- Webinar: Financing your business in the Netherlands
- Startup Box for innovative startups
6 Elements of a Successful Financial Plan for a Small Business
Improve your chances of growth by covering these bases in your plan.
Many small businesses lack a full financial plan, even though evidence shows that it is essential to the long-term success and growth of any business.
For example, a study in the New England Journal of Entrepreneurship found that entrepreneurs with a business plan are more successful than those without one. If you’re not sure how to get started, read on to learn the six key elements of a successful small business financial plan.
What is a business financial plan, and why is it important?
A business financial plan is an overview of a business’s financial situation and a forward-looking projection for growth. A business financial plan typically has six parts: sales forecasting, expense outlay, a statement of financial position, a cash flow projection, a break-even analysis and an operations plan.
A good financial plan helps you manage cash flow and accounts for months when revenue might be lower than expected. It also helps you budget for daily and monthly expenses and plan for taxes each year.
Importantly, a financial plan helps you focus on the long-term growth of your business. That way, you don’t get so caught up in the day-to-day activities that you lose sight of your goals. Focusing on the long-term vision helps you prioritize your financial resources.
Financial plans should be created annually at the beginning of the fiscal year as a collaboration of finance, HR, sales and operations leaders.
The 6 components of a successful financial plan for business
1. sales forecasting.
You should have an estimate of your sales revenue for every month, quarter and year. Identifying any patterns in your sales cycles helps you better understand your business, and this knowledge is invaluable as you plan marketing initiatives and growth strategies .
For instance, a seasonal business can aim to improve sales in the off-season to eventually become a year-round venture. Another business might become better prepared by understanding how upticks and downturns in business relate to factors such as the weather or the economy.
Sales forecasting is also the foundation for setting company growth goals. For instance, you could aim to improve your sales by 10 percent over each previous period.
2. Expense outlay
A full expense plan includes regular expenses, expected future expenses and associated expenses. Regular expenses are the current ongoing costs of your business, including operational costs such as rent, utilities and payroll.
Regular expenses relate to standard business activities that occur each year, such as conference attendance, advertising and marketing, and the office holiday party. It’s a good idea to distinguish essential expenses from expenses that can be reduced or eliminated if needed.
Expected future expenses are known future costs, such as tax rate increases, minimum wage increases or maintenance needs. Generally, a part of the budget should also be allocated to unexpected future expenses, such as damage to your business caused by fire, flood or other unexpected disasters. Planning for future expenses ensures your business is financially prepared via budget reduction, increases in sales or financial assistance.
Associated expenses are the estimated costs of various initiatives, such as acquiring and training new hires, opening a new store or expanding delivery to a new territory. An accurate estimate of associated expenses helps you properly manage growth and prevents your business from exceeding your cost capabilities.
As with expected future expenses, understanding how much capital is required to accomplish various growth goals helps you make the right decision about financing options.
3. Statement of financial position (assets and liabilities)
Assets and liabilities are the foundation of your business’s balance sheet and the primary determinants of your business’s net worth. Tracking both allows you to maximize your business’s potential value.
Small businesses frequently undervalue their assets (such as machinery, property or inventory) and fail to properly account for outstanding bills. Your balance sheet offers a more complete view of your business’s health than a profit-and-loss statement or a cash flow report.
A profit-and-loss statement shows how the business performed over a specific time period, while a balance sheet shows the financial position of the business on any given day.
4. Cash flow projection
You should be able to predict your cash flow on a monthly, quarterly and annual basis. Projecting cash flow for the full year allows you to get ahead of any financial struggles or challenges.
It can also help you identify a cash flow problem before it hurts your business. You can set the most appropriate payment terms, such as how much you charge upfront or how many days after invoicing you expect payment .
A cash flow projection gives you a clear look at how much money is expected to be left at the end of each month so you can plan a possible expansion or other investments. It also helps you budget, such as by spending less one month for the anticipated cash needs of another month.
5. Break-even analysis
A break-even analysis evaluates fixed costs relative to the profit earned by each additional unit you produce and sell. This analysis is essential to understanding your business’s revenue and potential costs versus profits of expansion or growth of your output.
Having your expenses fully fleshed out, as described above, makes your break-even analysis more accurate and useful. A break-even analysis is also the best way to determine your pricing.
In addition, a break-even analysis can tell you how many units you need to sell at various prices to cover your costs. You should aim to set a price that gives you a comfortable margin over your expenses while allowing your business to remain competitive.
6. Operations plan
To run your business as efficiently as possible, craft a detailed overview of your operational needs. Understanding what roles are required for you to operate your business at various volumes of output, how much output or work each employee can handle, and the costs of each stage of your supply chain will aid you in making informed decisions for your business’s growth and efficiency.
It’s important to tightly control expenses, such as payroll or supply chain costs, relative to growth. An operations plan can also make it easier to determine if there is room to optimize your operations or supply chain via automation, new technology or superior supply chain vendors.
For this reason, it is imperative for a business owner to conduct due diligence and become knowledgeable about merchant services before acquiring an account. Once the owner signs a contract, it cannot be changed, unless the business owner breaks the contract and acquires a new account with a new merchant services provider.
Tips on writing a business financial plan
Business owners should create a financial plan annually to ensure they have a clear and accurate picture of their business’s finances and a realistic view for future growth or expansion. A financial plan helps the business’s leaders make informed decisions about purchases, debt, hiring, expense control and overall operations for the year ahead.
A business financial plan is essential if a business owner is looking to sell their business, attract investors or enter a partnership with another business. Here are some tips for writing a business financial plan.
Review the previous year’s plan.
It’s a good idea to compare the previous year’s plan against actual performance and finances to see how accurate the previous plan and forecast were. That way, you can address any discrepancies or overlooked elements in next year’s plan.
Collaborate with other departments.
A business owner or other individual charged with creating the business financial plan should collaborate with the finance department, human resources department, sales team , operations leader, and those in charge of machinery, vehicles or other significant business tools.
Each division should provide the necessary data about projections, value and expenses. All of these elements come together to create a comprehensive financial picture of the business.
Use available resources.
The Small Business Administration (SBA) and SCORE, the SBA’s nonprofit partner, are two excellent resources for learning about financial plans. Both can teach you the elements of a comprehensive plan and how best to work with the different departments in your business to collect the necessary information. Many websites, including business.com , and service providers, such as Intuit, offer advice on this matter.
If you have questions or encounter challenges while creating your business financial plan, seek advice from your accountant or other small business owners in your network. Your city or state has a small business office that you can contact for help.
Several small business organizations offer free financial plan templates for small business owners. You can find templates for the financial plan components listed here via SCORE .
Business financial plan templates
Many business organizations offer free information that small business owners can use to create their financial plan. For example, the SBA’s Learning Platform offers a course on how to create a business plan. It also offers worksheets and templates to help you get started. You can seek additional help and more personalized service from your local office.
SCORE is the largest volunteer network of business mentors. It began as a group of retired executives (SCORE stands for “Service Corps of Retired Executives”) but has expanded to include business owners and executives from many industries. Advice is free and available online, and there are SBA district offices in every U.S. state. In addition to participating in group or at-home learning, you can be paired with a mentor for individualized help.
SCORE offers templates and tips for creating a small business financial plan. SCORE is an excellent resource because it addresses different levels of experience and offers individualized help.
Other templates can be found in Microsoft Office’s template library, QuickBooks’ online resources, Shopify’s blog and other places. You can also ask your accountant for guidance, since many accountants provide financial planning services in addition to their usual tax services.
Diana Wertz contributed to the writing and research in this article.
Our mission is to help you take your team, your business and your career to the next level. Whether you're here for product recommendations, research or career advice, we're happy you're here!
- Articles and tools
- Money and finance
- Manage your finances
6 steps to create your company’s financial plan
A financial plan is different from your financial statements.
Instead of looking at what’s already happened, you make projections for the coming months, forecasting income and outlays. Your projections will act as an early warning system, helping you to plan for cash flow dips, identify financing needs and pinpoint the best timing for projects.
It also gives you a tool for monitoring your finances, allowing you to gauge your progress and quickly head off trouble. Here are six steps to create your financial plan.
1. Review your strategic plan
Financial planning should start with your company’s strategic plan . You should think about what you want to accomplish at the start of a new year and ask yourself a series of questions:
- Do I need to expand?
- Do I need more equipment?
- Do I need to hire more staff?
- Do I need other new resources?
- How will my plan affect my cash flow?
- Will I need financing? If yes, how much?
Then, determine the financial impact in the next 12 months, including spending on major projects.
2. Develop financial projections
Create monthly financial projections by recording your anticipated income based on sales forecasts and anticipated expenses for labour, supplies , overhead, etc.. (Businesses with very tight cash flow may want to make weekly projections.) Now, plug in the costs for the projects you identified in the previous step.
For this job, you can use simple spreadsheet software or tools available in your accounting software . Don’t assume sales will convert to cash right away. Enter them as cash only when you expect to get paid based on prior experience.
Also prepare a projected income (profit and loss) statement and a balance sheet projection. It can be useful to include various scenarios—most likely, optimistic and pessimistic—for your projections to help you to anticipate the impacts of each one.
It may be a good idea to seek advice from your accountant when developing your financial projections. Be sure to go over the plan together, as it is you, and not your accountant, who will be seeking financing and who will be explaining the plan to your banker and investor.
3. Arrange financing
Use your financial projections to determine your financing needs. Approach your financial partners ahead of time to discuss your options. Well-prepared projections will help reassure bankers that your financial management is solid.
4. Plan for contingencies
What would you do if your finances suddenly deteriorated? It’s a good idea to have emergency sources of money before you need them. Possibilities include maintaining a cash reserve or keeping lots of room on your line of credit.
Through the year, compare actual results with your projections to see if you’re on target or need to adjust. Monitoring helps you spot financial problems before they get out of hand.
6. Get help
If you lack expertise, consider hiring an expert to help you put together your financial plan.
Download our free financial plan template to start building your financial plan now.
- What is strategic planning?
- Strategic planning: Realize your company's potential
- 2 valuable business planning tools: Management dashboard and benchmarking
- Taking Control of Your Cash Flow
- Business plan template
- Apply online for a flexible small business loan up to $100k
- Protect your cash flow with a working capital loan
- Improve your financial management to stay profitable
- Develop a strategic plan to guide your company's success
- Search Search Please fill out this field.
- Building Your Business
- Becoming an Owner
- Business Plans
How to Write the Financial Section of a Business Plan
Susan Ward wrote about small businesses for The Balance for 18 years. She has run an IT consulting firm and designed and presented courses on how to promote small businesses.
Taking Stock of Expenses
The income statement, the cash flow projection, the balance sheet.
The financial section of your business plan determines whether or not your business idea is viable and will be the focus of any investors who may be attracted to your business idea. The financial section is composed of four financial statements: the income statement, the cash flow projection, the balance sheet, and the statement of shareholders' equity. It also should include a brief explanation and analysis of these four statements.
Think of your business expenses as two cost categories: your start-up expenses and your operating expenses. All the costs of getting your business up and running should be considered start-up expenses. These may include:
- Business registration fees
- Business licensing and permits
- Starting inventory
- Rent deposits
- Down payments on a property
- Down payments on equipment
- Utility setup fees
Your own list will expand as soon as you start to itemize them.
Operating expenses are the costs of keeping your business running . Think of these as your monthly expenses. Your list of operating expenses may include:
- Salaries (including your own)
- Rent or mortgage payments
- Telecommunication expenses
- Raw materials
- Loan payments
- Office supplies
Once you have listed all of your operating expenses, the total will reflect the monthly cost of operating your business. Multiply this number by six, and you have a six-month estimate of your operating expenses. Adding this amount to your total startup expenses list, and you have a ballpark figure for your complete start-up costs.
Now you can begin to put together your financial statements for your business plan starting with the income statement.
The income statement shows your revenues, expenses, and profit for a particular period—a snapshot of your business that shows whether or not your business is profitable. Subtract expenses from your revenue to determine your profit or loss.
While established businesses normally produce an income statement each fiscal quarter or once each fiscal year, for the purposes of the business plan, an income statement should be generated monthly for the first year.
Not all of the categories in this income statement will apply to your business. Eliminate those that do not apply, and add categories where necessary to adapt this template to your business.
If you have a product-based business, the revenue section of the income statement will look different. Revenue will be called sales, and you should account for any inventory.
The cash flow projection shows how cash is expected to flow in and out of your business. It is an important tool for cash flow management because it indicates when your expenditures are too high or if you might need a short-term investment to deal with a cash flow surplus. As part of your business plan, the cash flow projection will show how much capital investment your business idea needs.
For investors, the cash flow projection shows whether your business is a good credit risk and if there is enough cash on hand to make your business a good candidate for a line of credit, a short-term loan , or a longer-term investment. You should include cash flow projections for each month over one year in the financial section of your business plan.
Do not confuse the cash flow projection with the cash flow statement. The cash flow statement shows the flow of cash in and out of your business. In other words, it describes the cash flow that has occurred in the past. The cash flow projection shows the cash that is anticipated to be generated or expended over a chosen period in the future.
There are three parts to the cash flow projection:
- Cash revenues: Enter your estimated sales figures for each month. Only enter the sales that are collectible in cash during each month you are detailing.
- Cash disbursements: Take the various expense categories from your ledger and list the cash expenditures you actually expect to pay for each month.
- Reconciliation of cash revenues to cash disbursements: This section shows an opening balance, which is the carryover from the previous month's operations. The current month's revenues are added to this balance, the current month's disbursements are subtracted, and the adjusted cash flow balance is carried over to the next month.
The balance sheet reports your business's net worth at a particular point in time. It summarizes all the financial data about your business in three categories:
- Assets : Tangible objects of financial value that are owned by the company.
- Liabilities: Debt owed to a creditor of the company.
- Equity: The net difference when the total liabilities are subtracted from the total assets.
The relationship between these elements of financial data is expressed with the equation: Assets = Liabilities + Equity .
For your business plan , you should create a pro forma balance sheet that summarizes the information in the income statement and cash flow projections. A business typically prepares a balance sheet once a year.
Once your balance sheet is complete, write a brief analysis for each of the three financial statements. The analysis should be short with highlights rather than in-depth analysis. The financial statements themselves should be placed in your business plan's appendices.
By clicking “Accept All Cookies”, you agree to the storing of cookies on your device to enhance site navigation, analyze site usage, and assist in our marketing efforts.
Financial Plans: Meaning, Purpose, and Key Components
- Search Search Please fill out this field.
What Is a Financial Plan?
Understanding a financial plan.
- When to Create It
- How to Create It
- Financial Plan FAQs
The Bottom Line
Liz Manning has researched, written, and edited trading, investing, and personal finance content for years, following her time working in institutional sales, commercial banking, retail investing, hedging strategies, futures, and day trading.
Gordon Scott has been an active investor and technical analyst or 20+ years. He is a Chartered Market Technician (CMT).
Ariel Courage is an experienced editor, researcher, and former fact-checker. She has performed editing and fact-checking work for several leading finance publications, including The Motley Fool and Passport to Wall Street.
A financial plan is a document that details a person’s current financial circumstances and their short- and long-term monetary goals. It includes strategies to achieve those goals.
A financial plan can help you to establish and plan for fundamental needs, such as managing life's risks (e.g., those involving health or disability), income and spending, and debt reduction.
It can provide financial guidance so that you're prepared to meet your obligations and objectives. It can also help you track your progress throughout the years toward financial well-being.
Financial planning involves a thorough evaluation of one’s money situation (income, spending, debt, and saving) and expectations for the future. It can be created independently or with the help of a certified financial planner .
- A financial plan documents an individual’s short- and long-term financial goals and includes a strategy to achieve them.
- The plan should be comprehensive and highly customized.
- It should reflect an individual’s personal and family financial needs, investment risk tolerance, and plan for saving and investing.
- Planning in finance starts with a calculation of one’s current net worth and cash flow.
- A solid financial plan provides guidance over time and serves as a way to track progress toward your goals.
The Fundamentals of Financial Plans
Whether you’re going it alone or with a financial planner, the first step in creating a financial plan is to understand how important it can be to your financial future. It can provide the guidance that assures your financial success.
Start your planning effort by gathering information from your various financial accounts into a document or spreadsheet.
Then make some basic calculations that establish where you stand financially.
You may complete the following steps as an individual or a couple:
Calculate Net Worth
To calculate your current net worth , subtract the total for your liabilities from the total for your assets. Begin by listing and adding up all of the following:
- Your assets : An asset is property of value that you own. Assets may include a home, a car, cash in the bank, money invested in a 401(k) plan , and other investments accounts.
- Your liabilities : A liability is something you owe. Liabilities may include outstanding bills, credit card debt, student debt, a mortgage, and a car loan.
Determine Cash Flow
Cash flow is the money you take in measured against the money you spend. To create a financial plan, you must know your income as well as how and when your money is spent.
Documenting your personal cash flow will help you determine how much you need every month for necessities, how much is available for saving and investing, and where you can cut back on spending.
One way to get this done is to review your checking account and credit card statements. Collectively, they should provide a fairly complete history of your income and spending in a wide range of spending categories.
For example, document how much you’ve paid during the year for housing expenses like rent or mortgage payments, utilities, and credit card interest.
Other categories include food, household (including clothing), transportation, medical insurance, and non-covered medical expenses. Still others can include your spending on miscellaneous entertainment, dining out, and vacation travel.
Once you add up all these numbers for a year and divide by 12, you’ll know what your monthly cash flow has been (and where you can improve it).
When establishing your cash flow history, don’t overlook cash withdrawals that may have been used on sundries, from take-out, to shampoo, to sodas. ATM withdrawals can also highlight where you might cut unnecessary spending.
Establish Your Goals
A major part of a financial plan is a person’s clearly defined goals. These may include funding a college education for the children, buying a larger home, starting a business, retiring on time, or leaving a legacy.
No one can tell you how to prioritize these goals. However, a professional financial planner should be able to help finalize a detailed savings plan and specific investing that can help you reach them off, one by one.
The main elements of a financial plan include a retirement strategy, a risk management plan, a long-term investment plan, a tax reduction strategy, and an estate plan.
Benefits of a Financial Plan
- A financial plan involves a thorough examination of your income and spending.
- It can improve your understanding of your financial circumstances at all times.
- It establishes important short- and long-term financial goals.
- It clarifies the actions required of you to achieve your various financial goals.
- A financial plan can focus your attention on important immediate steps, such as reducing debt and building your savings for emergencies.
- It enhances the probability that you'll achieve financial milestones and overall financial success (however you define it).
- It can guide your efforts over time and provide a means to monitor your progress.
- It can keep you out of financial trouble and reduce the stress and worry you may have experienced in the past.
Reasons for a Financial Plan
Financial planning is a smart way to keep your financial house in order. It's a money tool for everyone, regardless of age, earnings, net worth, or financial dreams. It offers individuals a way to document their personal goals and corresponding financial goals. It can keep people on track to meet ongoing financial needs and major financial goals.
When to Create a Financial Plan
A financial plan is always an advantage for those who want to make sure that they manage their finances in ways that are best-suited for them. You can create one at any time, whether you've just joined the workforce or have been working for years.
Beyond that, here are some particular instances that call for the creation and use of a financial plan. They can also serve as signals to adjust existing plans.
- A new job that results in added income, new expenses, or new opportunities
- An income change that can affect your ability to pay expenses, pay off debt, or save
- Major life events such as marriage, children, or divorce that can change financial objectives and spending needs
- Health adversities that result in re-directing income and spending away from existing goals
- An income windfall, such as an inheritance or insurance payment, that can affect efforts to reach your financial goals (such as providing more money for investing and debt reduction)
How to Create a Financial Plan
Certain steps are needed to create a financial plan. In addition to calculating your net worth, determining your cash flow, and establishing financial goals, as outlined above, here are additional plan elements/steps to include.
Do It Yourself or Get Professional Help
Decide whether you'll create your financial plan on your own or with the help of a licensed financial planner . While you can certainly build a financial plan, a financial pro can help ensure that your plan covers all the essentials.
Build an Emergency Cash Fund
Based on what your cash flow allows, start setting aside enough money in a liquid account to cover all your expenses for at least 6 months (preferably, for twelve) if you find yourself without income due to unexpected events.
Plan to Reduce Debt and Manage Expenses
If you have debt, the faster and more effectively that you can eliminate it, the better for the growth of your savings, your standard of living, and the achievement of specific financial objectives.
Make it a habit to cut expenses whenever possible so that you can add to your savings. In addition, stay on top of expenses that you know you'll have, such as taxes, so you always meet those obligations on time.
Manage Potential Risks
Your financial well-being can be affected when accidents, health problems, or the death of loved ones strike. Plan to put into place the appropriate insurance coverage that will protect your financial security at such times. This coverage can include home, property , health, auto, disability , personal liability , and life insurance.
Plan to Invest
Take part in a retirement plan at work that automatically deducts contributions from your paycheck. And plan to maximize your tax-advantaged investing with a personal IRA if and when your income allows.
Also, consider how you might allocate any other available income to a taxable investment account that can add to your net worth over time. Your plan for investing should take into account your investment risk tolerance and future income needs.
Include a Tax Strategy
Address the goal of reducing your income taxes with tax deductions, tax credits, tax loss harvesting, and any other opportunities that are legally available to taxpayers.
Consider an Estate Plan
It's important to make arrangements for the benefit and protection of your heirs with an estate plan . The details will depend on your stage in life and whether you're married, have children, or have other legacy goals.
Monitor and Adjust Your Financial Plan
Revisit your plan at least yearly (on your own or with a financial professional) and more often if a change in circumstances affects your financial situation. Keep it working efficiently and effectively by adjusting it as needed.
What Is the Purpose of a Financial Plan?
A financial plan should help you make the best use of your money and achieve long-term financial goals, such as sending your children to college, buying a bigger home, leaving a legacy, or enjoying a comfortable retirement.
How Do I Write a Financial Plan?
You can write a financial plan yourself or enlist the help of a professional financial planner. The first step is to calculate your net worth and identify your spending habits. Once this has been documented, you need to consider longer-term objectives and decide on the ways to achieve them.
What Are the Key Components of a Financial Plan?
Financial plans aren't one-size-fits-all, although the good ones tend to focus on the same things. After calculating your net worth and spending habits, you’ll explore your financial goals and ways to achieve them. Usually, this involves some form of budgeting, saving, and investing each month. To ensure that you live comfortably and financially stress-free for the rest of your life, the areas to focus on include an emergency savings plan, a retirement plan, risk management, a long-term investment strategy, and a tax minimization plan.
A financial plan is an essential planning tool for your financial well-being, now and into the future. It involves setting down the current state of your finances, your various financial goals, and methods that can help you achieve them.
It's never too early or late to create a financial plan. And no matter the amount of money that you have, a financial plan can help you to determine the best way to put it to work so that you can meet your financial needs through all of your life stages.
- Financial Plans: Meaning, Purpose, and Key Components 1 of 15
- How To Conduct a Financial Checkup 2 of 15
- How to Manage Lifestyle Inflation 3 of 15
- Your Annual Financial Planning Checklist 4 of 15
- How to Cut Financial Advisor Expenses 5 of 15
- Financial Planning: Can You Do It Yourself? 6 of 15
- The Importance of Making an Annual Financial Plan 7 of 15
- What Is Retirement Planning? Steps, Stages, and What to Consider 8 of 15
- 10 Steps to Financial Security Before Age 30 9 of 15
- 10 Steps to Retire as a Millionaire 10 of 15
- Why Should I Pay Myself First? 11 of 15
- How Can I Budget for Short-Term Expenses and Long-Term Goals? 12 of 15
- How To Adjust and Renew Your Portfolio 13 of 15
- Financial New Year's Resolutions You Can Keep 14 of 15
- How to Conduct a Financial Intervention 15 of 15
- Editorial Policy
- Do Not Sell My Personal Information
By clicking “Accept All Cookies”, you agree to the storing of cookies on your device to enhance site navigation, analyze site usage, and assist in our marketing efforts.
We're sorry, this computer has been flagged for suspicious activity.
If you are a member, we ask that you confirm your identity by entering in your email.
You will then be sent a link via email to verify your account.
If you are not a member or are having any other problems, please contact customer support.
Thank you for your cooperation
It's an integral part to an overall business plan and is made up of three financial statements—cash flow statement, income statement and balance
Components of a successful financial plan · Profit and loss statement · Cash flow statement · Balance sheet · Sales forecast · Personnel plan · Business ratios and
What should a financial plan include? ... A financial plan consists of five budgets that detail the minimum requirements for starting your business, the
A business financial plan is an overview of a business's financial situation and a forward-looking projection for growth. A business financial
1. Review your strategic plan. Financial planning should start with your company's strategic plan. · 2. Develop financial projections · 3. Arrange financing · 4.
The financial section is composed of four financial statements: the income statement, the cash flow projection, the balance sheet, and the
A financial plan is a document that details a person's current financial circumstances and their short- and long-term monetary goals. It includes strategies
It is the process of estimating or forecasting the capital required and creating the financial policies needed in an enterprise, in relation to
The process of financial planning in business is designed to forecast future financial results and determine how best to use the company's financial