Do you know how to make a financial plan for your small business? The process can be daunting, especially if you’re just starting out and don’t know where to begin. The Business Services Division at Diamond Credit Union has compiled a list of some best practices for small business financial plans. Many financial institutions require these types of documents when businesses apply for a commercial loan, so let’s take a closer look at each of these items.
Write Effective Product and/or Service Descriptions
You’ll want to start your small business financial plan by creating detailed product and/or service descriptions. These should provide in-depth information on each of your offerings. Be sure to include your brand’s unique selling points and clearly define what sets you apart from the competition.
Select the Right Pricing and Distribution Methods
The small business planning process also involves selecting pricing and distribution methods that work best for you.
Pricing your products and services can be difficult. You don’t want to undersell yourself, but you also don’t want to overcharge and miss out on sales. Choose prices that will maximize your profits, but don’t forget about consumer demand and potential market restrictions.
Distribution refers to the places where you offer or sell your product or service. When done well, it helps you expand your reach and grow your revenue. Distribution channels include (but aren’t limited to) resellers, catalogs, eCommerce, wholesalers, and inside/outside sales.
Identify Competitors and Write a Market Description
Identifying your competitors is one of the most important parts of any small business financial plan. Understanding what they have to offer is the best way to stand out, and ultimately, beat them. Pay attention to how your direct and indirect competitors position themselves within the industry. Learn from their strengths and weaknesses by emulating what they do well and avoiding their mistakes.
Writing a market description helps you uncover your potential customers and determine what they’re looking for. It also makes it easier for you to identify your competitors. Your market description should include an overview of your business, information on your intended customer base, and a snapshot of your competitors.
Create a Sales Forecast
If you’re wondering how to make a financial plan for your small business, be sure to include a sales forecast. This contains estimates of what you expect your company’s sales to be in the future, whether that’s monthly, quarterly, or annually. Thinking ahead gives you the information you need to make informed decisions about your business. It also makes it easier to manage your cash flow and plan for future growth.
Compile a Business Expenses Budget
You’ll also want to compile a business expenses budget that considers costs incurred over the course of running your company. Business expenses include things like:
- Employee payroll
- Retirement plans
- Mortgage / rent
Making a business expenses budget helps you keep your personal finances separate from your business finances makes it easier for you to determine whether your company is turning a profit.
Create a Cash Flow Statement
Your cash flow statement summarizes the amount of cash (or cash equivalents) that are currently entering and leaving your business. A cash flow statement helps gauge how well you’re generating cash to pay your debts and fund your day-to-day expenses. You’ll be able to show investors that you’re in sound financial shape, and creditors will be able to determine your liquidity for repaying debts.
Calculate Your Income Projections
Make sure your business planning process includes income projections, which are also known as profit and loss statements. Income projections look at the money your business will gain over a certain period (typically a year) minus your anticipated expenses for that same period. Once you’ve reached the end of that period, you can compare your income projections against what actually happened.
Identify Your Assets and Liabilities
Your small business financial planning process should also include an appraisal of your assets and liabilities.
These are things your business owns which can provide economic benefits in the future. Assets include things like cash, inventory, accounts receivable, land, property, and equipment. Successful businesses typically have more assets than liabilities because they have the resources to fulfill their financial obligations.
These are monies that must be repaid or services that must be performed in repayment. They include things like credit card debt, mortgage debt, accounts payable, wages owed, and taxes owed.
Perform a Break-even Analysis
Finally, you’ll want to perform a break-even analysis for your business. Your break-even point is when your total revenue is equal to your total expenses. Determining your break-even point helps you determine when you should be able to cover all of your expenses and start turning a profit. It also pinpoints the lower limit of profit, which is necessary when you’re determining your margins. Be sure to consider both fixed and variable costs when you’re performing your break-even analysis.