Getting a good handle on your finances is one of your most crucial jobs as an entrepreneur. Yet, many business owners don’t do the basic financial housekeeping that will give them greater control over their company and more peace of mind.
Early warning system
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. Think about what you want to accomplish over the plan’s timeframe. Then, determine the financial impact in the next 12 months, including spending on major projects such as equipment purchases, a move to a new location or a website redesign.
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.
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.
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.
Credit: BDC Canada