importance of financials in a business plan

• CFO Services Overview
• CFO Services Packages
• Accounting & Audit Support
• Business Analysis & Cost Structuring
• Business Valuations
• Cash Flow Budgeting & Management
• Entrepreneurship Programmes
• Financial Decision-Making
• Financial Forecasts and Projections
• Financial Gap Analysis
• Financial Technology & Automation
• Fundraising Services
• Implementing Management Accounts
• Post-Investment Financial Management
• Profit Maximization & Dividends
• Risk Mitigation & Internal Controls
• Working Capital Cycle Improvements
• Cloud Accounting Overview
• Cloud Accounting Packages
• Annual Financial Statements
• Business Tax Services
• Independent Reviews of Financial Statements
• Monthly Bookkeeping & Reporting
• Payroll Services
• VAT Registration, Recon & Submissions
• Xero Cloud Accounting
• Automation Overview
• Business Systems Integration
• Custom Workflow Creation
• Systems Gap Analysis
• Tech Stack for Tourism
• Zoho CRM Development
• About Outsourced CFO
• Company Snapshot

The Importance of Financial Planning for your Businesses 

When you’re starting out and putting in the hours to turn that business dream into a functioning reality, it can be difficult to think of next week – never mind next year. However, it always pays to plan ahead, especially when it comes to the financial future of your business.

Business Financial Planning:

Financial planning for your business helps you to forecast future financial results and decide how best to use your company’s current financial resources in order to realise both your short-term and long-term plans. Because planning involves looking well into the future, it is a highly creative thinking process as well as an analytical one, and you might need to call in the experts to help you juggle both these aspects of your financial roadmap.

How can financial planning help me achieve my company goals?

Having a strong financial plan for your business is probably the most important single thing that you can do to help yourself succeed.  It’s your roadmap, your guideline, a reminder of what your goals are–what you are trying to achieve in the short term and the long term. It is so important that possible investors, bankers, and creditors won’t even set up a meeting with you if you don’t have a financial plan in place. We cannot state this clearly enough – get your business’s financial function set up effectively from the start, and the rest will follow. 

Here are 5 benefits of financial planning for your business:

Financial planning can help you:

• Manage your cash flow properly: Good financial planning allows you to set clear expectations regarding your cash flow so that you know where you can spend and where you need to cut back. This is especially important after the initial startup expenditures.
• Allocate your budget: Financial planning for businesses makes for clever budget allocation and allows all players within your company to understand where and how money will be spent, ensuring less friction. 
• Set realistic goals: If you don’t know how much you have to work with, you can’t set realistic financial goals that work within your budget. Your vision might be lofty, but it pays to be realistic.
• Mitigate your risk: A good financial plan should prepare for unexpected expenses, as well as times of lower income. That way you can ride out the bad times, but keep your doors open.
• Plan a roadmap for the future: Financial planning helps you clarify your company goals and communicate them to your employees and other stakeholders. This makes it easier for the business owners and top management to make more good decisions when planning to scale.

Most people have some idea of what they would like to achieve financially, but they don’t always know how to go about setting realistic goals. Companies that put in the time and effort to work out an effective and strategic financial plan , will be able to allocate their time and resources effectively, allowing them to expand while ensuring good cash flow and healthy accounts.

Does my business need a financial plan?

In short – yes. If money is the lifeblood of your business, then you cannot afford NOT to have a sound financial plan in place. A good financial plan that you refer back to, will allow you to spot anomalies and positive or negative trends in your finances so that you can take the necessary corrective action. This means that you can make your money work for you – spending when and where it’s needed for growth, and cutting back on those outgoings that are becoming a financial black hole. 

We have found that business owners and entrepreneurs are often so involved in the day-to-day running of their businesses, that they don’t have the time and energy to think of long-term financial planning and strategy. This is where we recommend a financial consultant or CFO with the expertise to see what you might miss.  Many entrepreneurs are making use of the services of a virtual CFO instead of hiring full-time, as this allows them access to expertise without the cost of a permanent hire.

What should be included in a business financial plan?

All business financial plans , whether you’re just starting a business or building an expansion plan, should include at least the following:

• Revenue or income – what money is actually coming into your business.
• Your basic fixed operating costs such as rent and utilities.
• General monthly expenses such as marketing etc.
• Costing of your goods or services – take the time to note every cent and every minute that you put into producing your product or service.
• Total profit or loss – the formula for this is income minus cost of goods or services.
• Actual operating income (total profit minus expenses).

After you have these basics down and feel that you have at least an overview of the financial health of your business, it is important to remember that ‘big-picture’ higher-order financial planning and strategizing  are also necessary for the long-term viability of your business. Finance is complex and the finance function is often one of the last frontiers to get fortified by the leadership team. It is also one that becomes increasingly more important as you head towards further expansion, possible fundraises and potential acquisitions. Getting the numbers right is critical. So is developing the right strategy based on analysis, forecasts , and smart financial management . This is where you need the advice of an expert CFO or the assistance of a virtual ‘CFO-as service’ company like Outsourced CFO.

At Outsourced CFO we can assist with getting your financial planning off to a solid start,  in order to help you with building long-term profitability for your business. Reach out to us and let’s get your business ready for growth.

Share This Post

Have any questions let's chat..

We love meeting founders and executives! Jump on a call with our team to answer any questions you may have.

GET IN TOUCH

5th floor Vunani Chambers

33 Church Street

Cape Town City Centre

[email protected]

+27 (0) 21 201 2260 (SA)

+1 646 814 0918 (USA)

CFO SERVICES

Cloud accounting.

• Monthly Bookkeeping
• Zoho ERP Development

Start typing and press enter to search

Privacy overview.

How to Write a Small Business Financial Plan

Noah Parsons

3 min. read

Updated January 3, 2024

Creating a financial plan is often the most intimidating part of writing a business plan. It’s also one of the most vital. Businesses with well-structured and accurate financial statements in place are more prepared to pitch to investors, receive funding, and achieve long-term success.

Thankfully, you don’t need an accounting degree to successfully put your budget and forecasts together. Here is everything you need to include in your financial plan along with optional performance metrics, specifics for funding, and free templates.

• Key components of a financial plan

A sound financial plan is made up of six key components that help you easily track and forecast your business financials. They include your:

Sales forecast

What do you expect to sell in a given period? Segment and organize your sales projections with a personalized sales forecast based on your business type.

Subscription sales forecast

While not too different from traditional sales forecasts—there are a few specific terms and calculations you’ll need to know when forecasting sales for a subscription-based business.

Expense budget

Create, review, and revise your expense budget to keep your business on track and more easily predict future expenses.

How to forecast personnel costs

How much do your current, and future, employees’ pay, taxes, and benefits cost your business? Find out by forecasting your personnel costs.

Profit and loss forecast

Track how you make money and how much you spend by listing all of your revenue streams and expenses in your profit and loss statement.

Cash flow forecast

Manage and create projections for the inflow and outflow of cash by building a cash flow statement and forecast.

Balance sheet

Need a snapshot of your business’s financial position? Keep an eye on your assets, liabilities, and equity within the balance sheet.

What to include if you plan to pursue funding

Do you plan to pursue any form of funding or financing? If the answer is yes, then there are a few additional pieces of information that you’ll need to include as part of your financial plan.

Highlight any risks and assumptions

Every entrepreneur takes risks with the biggest being assumptions and guesses about the future. Just be sure to track and address these unknowns in your plan early on.

Plan your exit strategy

Investors will want to know your long-term plans as a business owner. While you don’t need to have all the details, it’s worth taking the time to think through how you eventually plan to leave your business.

• Financial ratios and metrics

With all of your financial statements and forecasts in place, you have all the numbers needed to calculate insightful financial ratios. While these metrics are entirely optional to include in your plan, having them easily accessible can be valuable for tracking your performance and overall financial situation.

Common business ratios

Unsure of which business ratios you should be using? Check out this list of key financial ratios that bankers, financial analysts, and investors will want to see.

Break-even analysis

Do you want to know when you’ll become profitable? Find out how much you need to sell to offset your production costs by conducting a break-even analysis.

How to calculate ROI

How much could a business decision be worth? Evaluate the efficiency or profitability by calculating the potential return on investment (ROI).

• Financial plan templates and tools

Download and use these free financial templates and calculators to easily create your own financial plan.

Sales forecast template

Download a free detailed sales forecast spreadsheet, with built-in formulas, to easily estimate your first full year of monthly sales.

Download Template

Accurate and easy financial forecasting

Get a full financial picture of your business with LivePlan's simple financial management tools.

Get Started

See why 1.2 million entrepreneurs have written their business plans with LivePlan

Noah is the COO at Palo Alto Software, makers of the online business plan app LivePlan. He started his career at Yahoo! and then helped start the user review site Epinions.com. From there he started a software distribution business in the UK before coming to Palo Alto Software to run the marketing and product teams.

Table of Contents

• What to include for funding

Related Articles

6 Min. Read

How to create a business plan cover page

10 Min. Read

How to set milestones in your business plan

Show that you know the competition

3 Min. Read

What to include in your business plan appendix

The Bplans Newsletter

The Bplans Weekly

Subscribe now for weekly advice and free downloadable resources to help start and grow your business.

We care about your privacy. See our privacy policy .

The quickest way to turn a business idea into a business plan

Fill-in-the-blanks and automatic financials make it easy.

No thanks, I prefer writing 40-page documents.

Discover the world’s #1 plan building software

Importance and Benefits of Financial Planning in the Growth of a Business

When it comes to running a business, it’s impossible to do so without a clear plan in mind. You need to think about every aspect of your business and develop various plans to fulfill your goals. Otherwise, it’s quite challenging to keep up with the planned strategies of your competitors and run a successful business. Financial planning is perhaps the most crucial factor behind the success of a business. A business plan can never be complete if it lacks an effective financial plan.

Financial planning is essential to control the flow of funds and revenue around your company. It helps you stay updated with the current and future condition of your company’s money while also allowing you to make the most out of your money. After all, profits are the most critical asset of any business, and it’s crucial to keep your money from being wasted. Here are some benefits to further show you the importance of financial planning.

1.       Set Clear Goals

To keep working while progressing to become a better company, you need to follow clear goals. Otherwise, you won’t know where your company is headed, running your company blindly. However, you can’t set reliable company goals without a proper financial plan. After all, you need to know your company’s current and future financial position to set goals. For example, knowing your current financial position, you can set goals of gaining even more profits. However, a financial plan also helps you to make sure your goals are realistic enough to be achieved.

However, to benefit from setting clear and realistic goals and making your business progress, you need good financial management skills and knowledge. Alongside your business, you can also use your financial management skills to take advantage of the growing financial services industry. The rapid  financial services industry growth also shows just how important financial planning is in the modern business world.

2.       Smart Budgeting

Budgeting is a crucial task that every business focuses on. A carefully planned and thoroughly thought-out budget helps a business to make financial decisions and allocate money efficiently for different projects. A smart budget maximizes profits while cutting down costs and losses. However, it’s quite challenging to create a reasonable budget, as companies often miss out on the whole picture.

It is where a financial plan comes into play and helps struggling businesses create a smart budget. A financial plan helps companies gain a deeper insight into their funds, making it easy to see the bigger picture. A financial plan enables you to break down complicated budgets into smaller steps.

3.       Avoid Risks

In today’s world, there are many risk factors that your company should avoid at all costs. Financial frauds, theft, and other similar risks can lead to devastating consequences for any company. US businesses can lose  5%  of their revenues just to scams. Financial planning is one of the most effective ways to avoid such situations effectively. You may think that financial risks and crises are unpredictable. However, through proper planning and analysis involved in a financial plan, you can prepare for such situations.

A financial plan involves using data analysis of statistical models, which helps you see many patterns and trends. Many trends and patterns can indicate different types of risks, allowing you to take precautionary measures beforehand. Moreover, using your financial plan, you can also allocate appropriate amounts of money for business insurance during risky times.

4.       Measure Growth

When it comes to growing a business, it’s essential to measure your progress continuously. Hence, you’re more aware of where your business is headed. Otherwise, it can be quite hard to know if you’re making any progress at all. Financial planning keeps you updated with your company’s financial situation, helping in measuring growth. As you’re more in control of cash flow, budgets, and revenue, you can compare your company’s current assets with previous ones to measure growth.

More importantly, financial planning also gives you an accurate glimpse of your company’s future growth by allowing you to make predictions. Statistical models based on your business’s finance help you spot trends and patterns that show your company’s growth. You can use these trends to make important financial decisions for the future, making you more prepared. Forecasting is  essential  for a company’s growth and success.

ALSO READ:  What Businesses Need To Know To Hire STEM OPT Candidates?

You can’t run a business without making a well-thought plan first. However, behind every successful business plan, there is an effective financial plan. After all, financial planning helps you control your cash flow properly while measuring progress to fulfill your goals. More importantly, the benefits mentioned above further prove the vital role of a financial plan in business. So, make sure to prioritize financial planning if you want to thrive in the modern business world.

Do you have the world's best boss? Enter them to win two tickets to Sandals!

6 Elements of a Successful Financial Plan for a Small Business

Table of Contents

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.

Get Weekly 5-Minute Business Advice

B. newsletter is your digest of bite-sized news, thought & brand leadership, and entertainment. All in one email.

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!

The Importance of a Financial Plan for a Small Business

• Small Business
• Business Planning & Strategy
• Small Business Plans
• ')" data-event="social share" data-info="Pinterest" aria-label="Share on Pinterest">
• ')" data-event="social share" data-info="Reddit" aria-label="Share on Reddit">
• ')" data-event="social share" data-info="Flipboard" aria-label="Share on Flipboard">

How to Graph Linear Equations in Excel 2007

Importance of ratio analysis in financial planning, fundamental principles of strategic & business planning models.

• The Importance of Planning in an Organization
• Key Tools for Planning Finances

Going through the process of constructing a financial plan is a valuable exercise for any business owner. The financial plan helps guide the day-to-day decision making of the business. Comparing forecast numbers to actual results yields important information about the overall financial health and efficiency of the business. Even a one-person company needs to have a financial plan in place.

Cash Management and Budgets

Having a financial plan for your business helps you break down what is needed in your shorter-term budgets, says Brilliant Tax & Accounting Services . Many businesses have monthly or seasonal variations in revenues, which translate into periods when cash is plentiful and times when cash shortages occur.

In building the financial plan, the owner takes these cycles into account to keep a tight rein on expenditures during the forecast low revenue periods. Poor cash management can result in negative consequences such as not being able to make payroll. Having a financial plan that is structured so there is always a cash cushion helps the business owner sleep better at night. The cash cushion allows the business to take advantage of opportunities that arise, such as the chance to purchase inventory from a supplier at temporarily reduced prices.

Long-Range View

In business it is easy to become focused on the crises or issues that must be dealt with on a daily basis. The price for being too short-term oriented is that the owner may not spend enough time planning what needs to be done to grow the business long-term. The financial plan, with its forward looking focus, allows the business owner to better see what expenditures need to be made to keep the company on a growth track and to stay ahead of competitors, according to Spend Journal . The financial plan is a blueprint for continual improvement in the company's performance.

Spotting Trends

A business owner makes so many decisions over the course of a month that it can be difficult to tell which decisions resulted in success and which ideas or strategies did not work. Preparing the financial plan involves setting quantifiable targets that can be compared to actual results during the year. The owner can see, for example, whether an increase in advertising expenditures led to the hoped-for jump in sales. Trends in the sales of individual products help the owner make decisions about how to allocate marketing dollars.

Prioritizing Expenditures

Conserving financial resources and allocating capital effectively in a small business is a critical element of success. The benefits of financial planning for business include a business owner identifying the most important expenditures – those that bring about immediate improvements in productivity, efficiency, or market penetration, versus those that can be postponed until cash is more plentiful. Even the largest, most well-capitalized corporations go through this prioritization process, comparing the cost to the benefits of each proposed expenditure.

Measuring Progress

Especially in the early stages of their ventures, small business owners work long hours and deal with numerous challenges. It can be difficult to tell whether progress is being made or whether the business is mired in mediocrity. Seeing that actual results are better than forecast provides the small business owner needed encouragement. A chart showing steady growth in revenues month by month, or a rising cash balance is a great motivating factor. The importance of financial plan in business is similar to the importance of financial planning for students: It helps the owner see, with the clarity of hard data, that the business is on its way to being a success.

• Brilliant Tax & Accounting Services: The Importance of Financial Planning for Small Businesses
• Spend Journal: 9 Key Benefits of Business Financial Planning

Related Articles

How to put a business plan in motion, what is a quarterly budget, about business financial planning, how to write a department business plan, key concepts of financial management, the similarities between a cash budget and long-term financial planning, cash budgeting, forecasting cash flow and account analysis, the role of finance in formulating business strategies, the effects of seasonality on working capital, most popular.

• 1 How to Put a Business Plan in Motion
• 2 What Is a Quarterly Budget?
• 3 About Business Financial Planning
• 4 How to Write a Department Business Plan

How to Develop a Small Business Financial Plan

By Andy Marker | April 29, 2022

• Share on Facebook
• Share on Twitter
• Share on LinkedIn

Link copied

Financial planning is critical for any successful small business, but the process can be complicated. To help you get started, we’ve created a step-by-step guide and rounded up top tips from experts.

Included on this page, you’ll find what to include in a financial plan , steps to develop one , and a downloadable starter kit .

What Is a Small Business Financial Plan?

A small business financial plan is an outline of the financial status of your business, including income statements, balance sheets, and cash flow information. A financial plan can help guide a small business toward sustainable growth.

Financial plans can aid in business goal setting and metrics tracking, as well as provide proof of profitable ideas. Craig Hewitt, Founder of Castos , shares that “creating a financial plan will show you if your business ideas are sustainable. A financial plan will show you where your business stands and help you make better decisions about resource allocation. It will also help you plan growth, survive cash flow shortages, and pitch to investors.”

Why Is It Important for a Small Business to Have a Financial Plan?

All small businesses should create a financial plan. This allows you to assess your business’s financial needs, recognize areas of opportunity, and project your growth over time. A strong financial plan is also a bonus for potential investors.

Mark Daoust , the President and CEO of Quiet Light Brokerage, Inc., explains why a financial plan is important for small businesses: “It can sometimes be difficult for business owners to evaluate their own progress, especially when starting a new company. A financial plan can be helpful in showing increased revenues, cash flow growth, and overall profit in quantifiable data. It's very encouraging for small business owners who are often working long hours and dealing with so many stressful decisions to know that they are on the right track.”

To learn more about other important considerations for a small business, peruse our list of free startup plan, budget, and cost templates .

What Does a Small Business Financial Plan Include?

All small businesses should include an income statement, a balance sheet, and a cash flow statement in their financial plan. You may also include other documents, such as personnel plans, break-even points, and sales forecasts, depending on the business and industry.

• Balance Sheet: A balance sheet determines the difference between your liabilities and assets to determine your equity. “A balance sheet is a snapshot of a business’s financial position at a particular moment in time,” says Yüzbaşıoğlu. “It adds up everything your business owns and subtracts all debts — the difference reflects the net worth of the business, also referred to as equity .” Yüzbaşıoğlu explains that this statement consists of three parts: assets, liabilities, and equity. “Assets include your money in the bank, accounts receivable, inventories, and more. Liabilities can include your accounts payables, credit card balances, and loan repayments, for example. Equity for most small businesses is just the owner’s equity, but it could also include investors’ shares, retained earnings, or stock proceeds,” he says.
• Cash Flow Statement: A cash flow statement shows where the money is coming from and where it is going. For existing businesses, this will include bank statements that list deposits and expenditures. A new business may not have much cash flow information, but it can include all startup costs and funding sources. “A cash flow statement shows how much cash is generated and used during a given period of time. It documents all the money flowing in and out of your business,” explains Yüzbaşıoğlu.
• Break-Even Analysis: A break-even analysis is a projection of how long it will take you to recoup your investments, such as expenses from startup costs or ongoing projects. In order to perform this analysis, Yüzbaşıoğlu explains, “You need to know the difference between fixed costs and variable costs. Fixed costs are the expenses that stay the same, regardless of how much you sell or don't sell. For example, expenses such as rent, wages, and accounting fees are typically fixed. Variable costs are the expenses that change in accordance with production or sales volume. “In other words, [a break-even analysis] determines the units of products or services you need to sell at least to cover your production costs. Generally, to calculate the break-even point in business, divide fixed costs by the gross profit margin. This produces a dollar figure that a company needs to break even,” Yüzbaşıoğlu shares.
• Personnel Plan: A personnel plan is an outline of various positions or departments that states what they do, why they are necessary, and how much they cost. This document is generally more useful for large businesses, or those that find themselves spending a large percentage of their budget on labor.
• Sales Forecast: A sales forecast can help determine how many sales and how much money you expect to make in a given time period. To learn more about various methods of predicting these figures, check out our guide to sales forecasting .

How to Write a Small Business Financial Plan

Writing a financial plan begins with collecting financial information from your small business. Create income statements, balance sheets, and cash flow statements, and any other documents you need using that information. Then share those documents with relevant stakeholders.

“Creating a financial plan is key to any business and essential for success: It provides protection and an opportunity to grow,” says Yüzbaşıoğlu. “You can use [the financial plan] to make better-informed decisions about things like resource allocation on future projects and to help shape the success of your company.”

1. Create a Plan

Create a strategic business plan that includes your business strategy and goals, and define their financial impact. Your financial plan will inform decisions for every aspect of your business, so it is important to know what is important and what is at stake.

2. Gather Financial Information

Collect all of the available financial information about your business. Organize bank statements, loan information, sales numbers, inventory costs, payroll information, and any other income and expenses your business has incurred. If you have not already started to do so, regularly record all of this information and store it in an easily accessible place.

3. Create an Income Statement

Your income statement should display revenue, expenses, and profit for a given time period. Your revenue minus your expenses equals your profit or loss. Many businesses create a new statement yearly or quarterly, but small businesses with less cash flow may benefit from creating statements for shorter time frames.

4. Create a Balance Sheet

Your balance sheet is a snapshot of your business’s financial status at a particular moment in time. You should update it on the same schedule as your income statement. To determine your equity, calculate all of your assets minus your liabilities.

5. Create a Cash Flow Statement

As mentioned above, the cash flow statement shows all past and projected cash flow for your business. “Your cash flow statement needs to cover three sections: operating activities, investing activities, and financing activities,” suggests Hewitt. “Operating activities are the movement of cash from the sale or purchase of goods or services. Investing activities are the sale or purchase of long-term assets. Financing activities are transactions with creditors and investments.”

6. Create Other Documents as Needed

Depending on the age, size, and industry of your business, you may find it useful to include these other documents in your financial plan as well.

• Sales Forecast: Your sales forecast should reference sales numbers from your past to estimate sales numbers for your future. Sales forecasts may be more useful for established companies with historical numbers to compare to, but small businesses can use forecasts to set goals and break records month over month. “To make future financial projections, start with a sales forecast,” says Yüzbaşıoğlu. “Project your sales over the course of 12 months. After projecting sales, calculate your cost of sales (also called cost of goods or direct costs). This will let you calculate gross margin. Gross margin is sales less the cost of sales, and it's a useful number for comparing with different standard industry ratios.”

7. Save the Plan for Reference and Share as Needed

The most important part of a financial plan is sharing it with stakeholders. You can also use much of the same information in your financial plan to create a budget for your small business.

Additionally, be sure to conduct regular reviews, as things will inevitably change. “My best tip for small businesses when creating a financial plan is to schedule reviews. Once you have your plan in place, it is essential that you review it often and compare how well the strategy fits with the actual monthly expenses. This will help you adjust your plan accordingly and prepare for the year ahead,” suggests Janet Patterson, Loan and Finance Expert at  Highway Title Loans.

Small Business Financial Plan Example

Download Small Business Financial Plan Example Microsoft Excel | Google Sheets

Here is an example of what a completed small business financial plan dashboard might look like. Once you have completed your income statement, balance sheet, and cash flow statements, use a template to create visual graphs to display the information to make it easier to read and share. In this example, this small business plots its income and cash flow statements quarterly, but you may find it valuable to update yours more often.

Small Business Financial Plan Starter Kit

Download Small Business Financial Plan Starter Kit

We’ve created this small business financial plan starter kit to help you get organized and complete your financial plan. In this kit, you will find a fully customizable income statement template, a balance sheet template, a cash flow statement template, and a dashboard template to display results. We have also included templates for break-even analysis, a personnel plan, and sales forecasts to meet your ongoing financial planning needs.

Small Business Income Statement Template 

Download Small Business Income Statement Template Microsoft Excel | Google Sheets

Use this small business income statement template to input your income information and track your growth over time. This template is filled to track by the year, but you can also track by months or quarters. The template is fully customizable to suit your business needs.

Small Business Balance Sheet Template 

Download Small Business Balance Sheet Template Microsoft Excel | Google Sheets

This customizable balance sheet template was created with small businesses in mind. Use it to create a snapshot of your company’s assets, liabilities, and equity quarter over quarter. 

Small Business Cash Flow Statement Template 

Download Small Business Cash Flow Template Microsoft Excel | Google Sheets

Use this customizable cash flow statement template to stay organized when documenting your cash flow. Note the time frame and input all of your financial data in the appropriate cell. With this information, the template will automatically generate your total cash payments, net cash change, and ending cash position.

Break-Even Analysis Template 

Download Break-Even Analysis Template Microsoft Excel | Google Sheets

This powerful template can help you determine the point at which you will break even on product investment. Input the sale price of the product, as well as its various associated costs, and this template will display the number of units needed to break even on your initial costs.

Personnel Plan Template  

Download Personnel Plan Template Microsoft Excel | Google Sheets

Use this simple personnel plan template to help organize and define the monetary cost of the various roles or departments within your company. This template will generate a labor cost total that you can use to compare roles and determine whether you need to make cuts or identify areas for growth.

Sales Forecast Template

Download Sales Forecast Template Microsoft Excel | Google Sheets

Use this customizable template to forecast your sales month over month and determine the percentage changes. You can use this template to set goals and track sales history as well.

Small Business Financial Plan Dashboard Template

Download Small Business Financial Plan Dashboard Template Microsoft Excel | Google Sheets

This dashboard template provides a visual example of a small business financial plan. It presents the information from your income statement, balance sheet, and cash flow statement in a graphical form that is easy to read and share.

Tips for Completing a Financial Plan for a Small Business

You can simplify the development of your small business financial plan in many ways, from outlining your goals to considering where you may need help. We’ve outlined a few tips from our experts below:

• Outline Your Business Goals: Before you create a financial plan, outline your business goals. This will help you determine where money is being well spent to achieve those goals and where it may not be. “Before applying for financing or investment, list the expected business goals for the next three to five years. You can ask a certified public accountant for help in this regard,” says Thé. The U.S. Small Business Administration or a local small business development center can also help you to understand the local market and important factors for business success. For more help, check out our quick how-to guide on writing a business plan .
• Make Sure You Have the Right Permits and Insurance: One of the best ways to keep your financial plan on track is to anticipate large expenditures. Double- and triple-check that you have the permits and insurances you need so that you do not incur any fines or surprise expenses down the line. “If you own your own business, you're no longer able to count on your employer for your insurance needs. It's important to have a plan for how you're going to pay for this additional expense and make sure that you know what specific insurance you need to cover your business,” suggests Daost.
• Separate Personal Goals from Business Goals: Be as unbiased as possible when creating and laying out your business’s financial goals. Your financial and prestige goals as a business owner may be loftier than what your business can currently achieve in the present. Inflating sales forecasts or income numbers will only come back to bite you in the end.
• Consider Hiring Help: You don’t know what you don’t know, but fortunately, many financial experts are ready to help you. “Hiring financial advisors can help you make sound financial decisions for your business and create a financial roadmap to follow. Many businesses fail in the first few years due to poor planning, which leads to costly mistakes. Having a financial advisor can help keep your business alive, make a profit, and thrive,” says Hewitt.
• Include Less Obvious Expenses: No income or expense is too small to consider — it all matters when you are creating your financial plan. “I wish I had known that you’re supposed to incorporate anticipated internal hidden expenses in the plan as well,” Patterson shares. “I formulated my first financial plan myself and didn’t have enough knowledge back then. Hence, I missed out on essential expenses, like office maintenance, that are less common.”

Do Small Business Owners Need a Financial Planner?

Not all small business owners need a designated financial planner, but you should understand the documents and information that make up a financial plan. If you do not hire an advisor, you must be informed about your own finances.

Small business owners tend to wear many hats, but Powell says, “it depends on the organization of the owner and their experience with the financial side of operating businesses.” Hiring a financial advisor can take some tasks off your plate and save you time to focus on the many other details that need your attention. Financial planners are experts in their field and may have more intimate knowledge of market trends and changing tax information that can end up saving you money in the long run. 

Yüzbaşıoğlu adds, “Small business owners can greatly benefit from working with a financial advisor. A successful small business often requires more than just the skills of an entrepreneur; a financial advisor can help the company effectively manage risks and maximize opportunities.”

For more examples of the tasks a financial planner might be able to help with, check through our list of free financial planning templates .

Drive Small Business Success with Financial Planning in Smartsheet

Discover a better way to connect your people, processes, and tools with one simple, easy-to-use platform that empowers your team to get more done, faster.

With Smartsheet, you can align your team on strategic initiatives, improve collaboration efforts, and automate repetitive processes, giving you the ability to make better business decisions and boost effectiveness as you scale. 

When you wear a lot of hats, you need a tool that empowers you to get more done in less time. Smartsheet helps you achieve that. Try free for 30 days, today .

Connect your people, processes, and tools with one simple, easy-to-use platform.

9 key benefits of business financial planning

Published on January 31, 2024

Building a business financial plan is never easy. It requires effort, good data, and a fair amount of imagination. And if you’ve never done this before, you’ll likely hit a few roadblocks along the way.

But this post will show you why it’s so valuable, nonetheless.

A good financial plan keeps you focused and on track as the company grows , when new challenges arise, and when unexpected crises hit. It helps you communicate clearly with staff and investors, and build a modern, transparent business.

And there are plenty of other advantages .

We’ll explore nine of our favorites shortly. But first, let’s define exactly what we’re talking about.

What is business financial planning?

Your company’s financial plan is essentially just the financial section of your overall business plan . It applies real financial data and projections to put the rest of your business plan in context.

And crucially, it is forward-looking. While you use existing accounting figures (if you have them already) and experience to create your plan, it’s not simply a copy/paste of your accounting data. Instead, you look at your business goals and define the level of investment you’re willing to make to achieve each of these.

But this doesn’t mean that financial plans are just “made up.” If anything, this section of your business plan is the most grounded in reality.

As Elizabeth Wasserman writes for Inc :

“A business plan is all conceptual until you start filling in the numbers and terms. The sections about your marketing plan and strategy are interesting to read, but they don't mean a thing if you can't justify your business with good figures on the bottom line.

The financial section of a business plan is one of the most essential components of the plan, as you will need it if you have any hope of winning over investors or obtaining a bank loan. Even if you don't need financing, you should compile a financial forecast in order to simply be successful in steering your business.”

The importance of financial planning in business

This probably won’t come as a surprise to most readers, but financial planning is essential to building a successful business. Your business plan dictates how you plan to do business over the next month, quarter, year, or longer - depending on how far out you plan.

It includes an assessment of the business environment, your goals, resources needed to reach these goals, team and resource budgets, and highlights any risks you might face. While you can’t guarantee that everything will play out exactly as planned, this exercise prepares you for what’s to come.

We’ll look at the precise individual benefits next, but suffice it to say that, without a clear financial plan, you’re basically just hoping for the best .

9 benefits of financial planning for business

So what exactly can you hope to gain from business financial planning? The benefits of business planning are probably endless, but here are nine clear advantages.

1. Clear company goals

This is really the starting point for your whole financial plan. What is the company supposed to achieve in the next quarter, year, three years, and so on?

Early on, you’ll want to establish that there is a real need for your business , and that your business fills this need. This is also known as “product/market fit.” For many startups, the first several years may be devoted to building a product and establishing that product/market fit. So this would be your chief one-to-two year goal, with smaller checkpoints along the way.

Crucially, if this is your key goal, you won’t set lofty sales targets or huge marketing KPIs. What’s the point of investing in sales and marketing for new customers, if the product isn’t ready to sell?

We’ll refer back to your company goals throughout this post, so it’s worth getting a handle on them from the start.

2. Sensible cash flow management

Your financial plan should also set clear expectations for cash flow - the amount coming in and out of the company. In the beginning, you’ll of course spend more than you make. But what is an acceptable level of expense, and how will you stay on track?

As part of this plan, you also need to figure out how you’ll measure cash flow easily. You may not have seasoned finance experts in the team, so can you accurately and efficiently keep track of where your money’s going?

By making your plan now, you can anticipate challenges both in receiving money and spending it , and identify ways to do both more effectively.

3. Smart budget allocation

This is obviously closely related to cash flow management (above) and cost reductions (below). Once you have a clear understanding of the amount of funding you have to spend - whether through sales income or investments - you need to figure out how you’ll actually spend it.

The company has its overall budget - essentially its “burn rate” for each quarter or year. Break this down into specific team budgets (product development, marketing, customer support, etc), and ensure that the amounts dedicated to each reflect their importance.

Budgets give each team their own constraints from within which to build . They know what resources are available to them, and can plan out campaigns and personal or product development accordingly.

At the company level, tracking project or team budgets is always going to be easier than monitoring spending as a whole . Once you break each budget down, it’s relatively straightforward to keep an eye on who’s spending what.

Get our free marketing budget template to help.

4. Necessary cost reductions

Aside from setting out how much you can afford to spend (and on what), a financial plan also lets you spot savings ahead of time. If you’ve already been in business for some time, building your financial plan involves first looking back at what you’ve already spent and how fast you’re currently growing.

As you set out your budget(s) for next year, you’ll refer back to past spending and identify unnecessary or over-inflated costs along the way. And then for next year’s budget , you simply adjust accordingly.

This conscious effort is all part of spend control , the practice of keeping company spending in line with your expectations. Even better, a quarterly or annual review almost always unearths areas where you can save money and put your resources to better use.

Learn more about effective spend control .

5. Risk mitigation

A crucial aspect of the finance team’s role is to help companies avoid and navigate risk - from financial fraud to economic crisis . And while plenty of risks are hard to predict or even avoid, there are plenty that you can see coming.

Your financial plan should make room for certain business insurance expenses, losses through risky inefficiencies, and perhaps set aside resources for unexpected expenses . Particularly during turbulent times, you may in fact create several financial forecasts which show different outcomes for the business: one where revenue is easy to come by, and one or two others where times are tougher.

Again, the point is to have contingency plans in place, and to attempt to determine how your roadmap changes if you grow only 20% next quarter instead of 30% (or 50%) . There’s no reason to go overboard, but you can find risky areas within the business, and also consider your best responses if things go wrong.

6. Crisis management

The first thing that tends to happen in any company crisis is you review and re-build your plans. Which of course means that you must have a clear business plan in the first place . Otherwise, your crisis response is simply to improvise.

As the 2020 financial crisis unfolded, the key refrain we heard from finance leaders was the need to reforecast constantly. Nobody truly knew how long the crisis would last, or how it would impact their business. So companies created new financial plans on a monthly or quarterly basis, at least.

And those with robust and well thought-out financial plans found this process easier. They weren't starting from scratch over and over, and they’d already identified obvious risks and the key levers to pull in response.

7. Smooth fundraising

Let’s shift away from risk entirely now. Whether you’re a brand new startup, a sustainable company that needs a small cash injection, or looking for a significant series-level investment, at some point you’ll likely need funds.

And the first thing any prospective investor or bank will ask you for is your business plan . They want to see how you intend to grow the business, what risks and uncertainties are involved, and how you’ll put their money to good use.

A financial plan that speaks to investors is critical, and the better your history of planning is, the more likely they’ll trust your projections. So whether or not you’re looking for funds today , a business financial plan is an important tool in your chest.

8. A growth roadmap

Finally, your financial plan helps you analyze your current situation, and project where you want the business to be in the future . Again, your wider business plan will do this on a broad level: the markets you’d like to be present in; the number of employees you’ll have; the products or services you hope to sell.

The financial section adds data to these goals, and plugs in your level of investment along the way . For example, if you wish to hire 100 new employees this year, your financial plan will likely need to include recruiters, and a specific budget to find new talent.

Take the time to set out how large you expect the company to be, your expenses with a larger company, and the amount of revenue coming in to compensate. If you’ve raised venture capital to help grow financially , you can probably expect to burn cash faster than you make it - this is normal.

But if you burn through money and can’t reach your growth targets, then you’ll need to re-evaluate your position. So set those growth targets out now, and you’ll be able to assess as you go.

9. Transparency with staff and investors

We already mentioned how necessary your financial plan is for investors. So we won’t dive into them more here.

But the same is true for staff. It is now expected that company executives will be open and honest with staff . Some startups go so far as to publicize their salaries for the world to see.

At the very least, modern employees want to see that the company is in good hands and on the road to success. And when executives can share the financial plan in all-hands meetings, they bring real data to what would otherwise be a business plan lacking in details.

Employees love to see key figures like revenue coming in, costs, and where you are on the road to profitability .

What to include in a business financial plan

We won’t go into too much detail here, but it’s worth giving an idea of what belongs in the typical financial plan.

A three-year financial plan is most common. But whatever the period in question is, your plan should include:

Sales projections : Project your expected sales growth for the near future, as well as the cost of sales . You can break these down in different pricing groups, products, and other important factors.

Expenses & budgets : Most important here are costs - separated into fixed and variable expenses. (Lower fixed costs usually mean lower risk for the business).

Profit & loss statement : Alternatively, you can create a cash flow statement, which achieves a similar outcome. You essentially want to project money in and money out over the next three years.

Assets & liabilities : These will usually be separated from your P&L statement, and will certainly include startup costs and assets for new businesses.

Break-even analysis : Ideally, you’ll be able to identify your break-even point within the coming three years.

Hiring & team structure : This one is not essential, but it makes sense to add as part of your business plan. Who will you need - and when will you acquire them - in order to reach your goals?

For more information - especially on forecasting in uncertain times - read our expert’s guide to startup financial planning .

There’s no time like the present to create your business financial plan

We’ve seen nine excellent reasons to get to work on your company financial plan as soon as possible. As we explored, the financials form a critical part of your overall business plan , without which you’ll have a hard time assessing your performance as a company.

Of course, this exercise requires projection - you can’t just rely on the numbers you have today. But that’s not the same thing as guesswork . Follow best practices and consider all potential outcomes, and you’ll walk away with a clear roadmap to get you to business success in the foreseeable future.

From there, it’s a matter of putting in the work, measuring success, and regularly updating your financial plan.

More reads on Business strategy

11 top HRIS software and tools

Effortless bookkeeping with our new "Payment Inbox" feature 

Interview with Mong-Trang Sarrazin, CFO at Doctolib

Get started with spendesk.

Close the books 4x faster , collect over 95% of receipts on time , and get 100% visibility over company spending.

Financial Planning

Financial planning definition.

Financial planning enables a business to determine how it will afford to achieve its objectives and strategic goals. A business typically sets a vision and objectives, and then immediately creates a financial plan to support those goals. The financial plan describes all of the resources and activities that the company will require—and the expected timeframes—for achieving these objectives.

Financial planning is crucial to organizational success because it compliments the business plan as a whole, confirming that set objectives are financially achievable.

The financial planning process includes multiple tasks, including:

• Confirming the vision and objectives of the business
• Assessing the business environment and company priorities
• Identifying which resources the business needs to achieve its objectives
• Assigning costs business costs centers included in the plan
• Quantifying the amount of equipment, labor, materials, and other resources needed
• Creating and setting a budget
• Identifying any issues and risks with the budget
• Establishing the time period of the plan or planning horizon, either short-term (typically 12 months) or long-term (2 to 5 years)
• Preparing a full financial plan summarizing all key investments, budgets and departmental costs

Generally, the financial partner role includes three areas:

• Strategic financial management;
• Determining financial management objectives; and
• Managing the planning cycle itself.
• Connecting business partners and teams to financial plan

What Is Financial Planning?

Financial planning is the process of assessing the current financial situation of a business to identify future financial goals and how to achieve them. The financial plan itself is a document that serves as a roadmap for a company’s financial growth. It reflects the current status of the business, what progress they intend to make, and how they intend to make it.

Financial plans include budgets, but the terms are not interchangeable. Budgets are just one piece of a financial business plan, which should also include other important information that contribute to a complete picture of a business’ financial health, such as detailed, itemized breakdowns of company assets; typical expenditures; and forecasts of income, cash flow, and revenue.

Typically, business financial plans also focus on specific growth goals and other long-term objectives, as well as potential obstacles to achieving those objectives. A detailed financial planning checklist can identify overlooked opportunities and highlight possible risks that will affect the growth plan.

The comprehensive financial planning process in business is designed to determine how to most effectively use the company’s financial resources to support the objectives of the organization, both short- and long-range, by accurately forecasting future financial results. Financial planning processes are both analytical and informative, balancing the use of data and metrics to predict the future as well as institutional knowledge in departments and teams.

What is Financial Planning and Analysis (FP&A)?

Financial planning and analysis (FP&A) is a group within a company’s finance organization that supports the health of the organization by engaging in several types of activities: budgeting, integrated financial planning, modeling, and forecasting; decision support via reporting on management and performance; and various special projects. FP&A solutions link corporate strategy and execution, enhancing the ability of the finance department to manage performance.

FP&A professionals provide senior management with forecasts of the company’s operating performance and profit and loss for each upcoming quarter and year. These forecasts allow leadership to assess investments and strategic plans for effectiveness and progress. They also enable improved communication between external stakeholders and management.

To map out future goals and plans and evaluate the company’s progress toward achieving its goals, corporate FP&A professionals analyze the company’s operational aspects both quantitatively and qualitatively. FP&A analysts review past company performance, consider business and economic trends, and identify risks and possible obstacles, all to more effectively forecast future financial results for a company.

In contrast to accountants, who are tasked with accurate recordkeeping, consolidations and reporting, financial analysts must analyze and evaluate the totality of a company’s financial activities and map out the financial future of the business. FP&A professionals manage a broad range of financial scenarios and plans, including capital expenditures, expenses, financial statements, income, investments, and taxes.

Budgeting, planning, modeling, and forecasting

The primary responsibility of FP&A is to anchor the company, unite the business and translate plans to actionable & informed results. . So, what is financial planning and analysis, and how does it look in practice?

Senior management creates and drives the strategic plan in a top-down way, setting net income and revenue goals, core strategic initiatives, and other high-level business targets for the company’s next 2 to 10 years. FP&A’s corporate performance management aim is to develop the financial plan needed to achieve the strategic plan created by management.

In the past, financial planning and analysis teams developed annual budgets that remained mostly static and updated annually. However, whether in tandem with a traditional budget or as a replacement altogether, modern FP&A teams are increasingly developing rolling forecasts to cope with stale static budgets. Other important tasks of FP&A teams that are related to the budgeting, planning, and forecasting process include:

• Creating, maintaining, and updating detailed forecasts and financial models of future business operations
• Comparing budgets and forecasts to historical results, and conducting variance analysis to illustrate to management how actual performance and the rolling forecast or budget compare, suggesting ways to improve future performance
• Assessing expansion and growth opportunities based on forecasts and other projections
• Mapping out capital expenditures and investments, and other growth plans
• Generating long-term financial forecasts in the three- to five-year range

Decision support and reporting

FP&A reports variances and forecasts, naturally. However, the team also advises management using that data, offering support on decisions concerning performance improvement, risk minimization, or risk benefit analysis of new opportunities from outside and within the company.

One primary piece of this the FP&A team typically generates is the monthly budget versus actual variance comparison. This report explanations of variances; analysis of historical financials; an updated version of the forecast with opportunities and risks related to the current stage of plan; and Key Performance Indicators (KPIs). Ideally, this report or analysis offers leadership information sufficient to identify ways to meet specific goals or optimize performance, and answer imminent questions of stakeholders. However, the true goal of the budget vs. actual report should be to inform the business around gaps or opportunities that inform the future.

Other ongoing pieces of the FP&A team’s reporting and decision support role include:

• Using key financial ratios such as the current ratio, debt to equity ratio, and interest coverage ratio to gauge the overall financial health of the business
• Identifying which company products, product lines, or services generate the most net profit
• Determining which products, product lines, or services have the highest and lowest profit margins—separate from total profit
• Assessing and evaluating each department’s cost-efficiency in light of the percentage of total company financial resources it consumes
• Collaborating with departments to prepare and consolidate budgets into a single corporate budget
• Preparing other internal reports in support of decision making for executive leadership

Special projects

Inevitably, the FP&A team works on special projects, depending on the size and needs of the business. For example:

Capital allocation. How much of the organization’s capital should be spent, and on what? Based on factors such as return on investment (ROI) and comparisons with increased stock dividends, different possible investments, and other ways the business could utilize its cash flow, are the company’s current investments and assets the best use of excess working capital?

Market research. What are the sizes and contours of a given market in which the organization may have a competitive advantage? Who are its laggards and leaders, and what potential opportunities does it hold for the company?

M&A. Which potential buy-side support, acquisition targets, integration, and divestiture opportunities exist for the company?

Process optimization. How can the company improve problems of process and workflow inefficiency? How can tools and technology in use by the business speak to and work with each other more effectively?

Ultimately, the FP&A team provides upper management with advice and analysis concerning how to best deploy the organization’s financial resources for optimal growth and increased profitability, while avoiding serious financial risk.

What is Corporate Financial Planning and Analysis?

Corporate financial planning is the process of determining what a company’s financial needs and goals for the future are, and how best to achieve them. Corporate financial planning considers the individual circumstances of the company as well as its broader economic context to determine which activities and investments would be most advantageous and appropriate. Generally, because short-term market trends are more predictable, short-term corporate financial planning involves less uncertainty and more readily adaptable financial plans.

Balanced corporate financial planning should elucidate how the company can achieve its goals and priorities while upholding its values. A financial plan for a corporation achieves at least two aims.

First, it forces management to think about the company’s prospects for business success objectively by basing their analysis on company finances. It also gives lenders and investors a good reason to invest into the business performance, by showing the growth and profit projections. Unrealistic or unbalanced financial plans or plans that understate profits tell investors to reconsider their investment or evaluation.

As a basic matter, three financial statements form the core of a corporate financial plan: income statement, statement of cash flow, and balance sheet. These statements clarify how much profit the business earns, and how much cash actually comes in, compared to the income reflected in accounts receivables. They also detail the relationships between corporate liabilities, corporate assets, and owner equity.

What is the Financial Planning Process?

The financial planning process results in the development of a financial plan, a financial forecast, or both. There are several well-understood steps in this process, and they often come out of sequence, depending on the deliverable or project at hand. However, it’s often simplest to think about these as steps in financial planning as financial planning tips, all of which are parts of a larger, flexible financial planning process.

With that in mind, these key components of financial planning for businesses are, in a sense, a set of best practices for your financial planning checklist.

Forecast revenue

Project revenue or sales for the next three years in a spreadsheet, or even better, in Planful. You’ll track numbers at least monthly in year one, and quarterly in years two and three.

Ideally you want to include sections that track unit sales, pricing, units times price to calculate sales, unit costs, and units times unit cost to calculate COGS or cost of goods sold, also called direct costs. Calculate gross margin, which is sales less cost of sales, and it’s a useful number for considering a new line of business or a new product expansion.

Budget expenses

Here you want to determine the actual cost of making the revenue you have forecasted. Differentiate between fixed costs such as payroll and rent and variable costs such as most promotional and advertising expenses. Lower fixed costs mean less risk; higher fixed costs may signal a need for reduced risk tolerance.

Remember, this is not accountancy, but a forecast, so you will have to estimate things such as taxes and interest. Use run rates or average assumptions whenever possible, and estimate taxes by multiplying estimated profits by estimated tax percentage rate. Then estimate interest by multiplying estimated debts balance by estimated interest rate.

Project cash flow

Project cash flow, or dollars moving in and out of the business, in this statement is based partly on balance sheet items, sales forecasts, and reasonable assumptions.

An existing company should have historical documents to base these forecasts on, such as balance sheets and profit and loss statements from years past. A new business which lacks these historical financial statements can project a cash-flow statement broken down month by month.

Remember to choose a realistic ratio for how many of your invoices will be paid in cash, 30 days, 60 days, 90 days and so on when compiling a cash-flow projection so you are not reliant on collecting 100 percent to pay your expenses. Some financial planning platforms build these formulas to make these projections simpler.

Project income

The income projection is the company’s pro forma profit and loss statement or P&L, which offers detailed business forecasts for the coming three years. To project income, use expense projections, sales forecasts, and cash flow statement numbers. Sales minus cost of sales equals gross margin. Gross margin minus expenses, interest, and taxes equals net profit.

Compile assets and liabilities

To deal with assets and liabilities that project the net worth of your business at the end of the fiscal year but are not in the profit and loss statement you need a projected balance sheet. Some of these, such as startup assets, are obvious and affect just one part of the process. However, others are less apparent.

For example, although the profit and loss reflects interest, it does not reflect repayment of principle. This means that loans and inventory register only as assets, but only up until you pay for them.

Cope with this by compiling a complete list of assets, equipment, real estate, and an estimate month by month of inventory if the business has it, accounts receivable (money owed to the company), and cash the business will have on hand. Then compile a complete list of liabilities and debts, including outstanding loans.

Conduct breakeven analysis

The breakeven point is when the expenses of the business match volumes or revenue. Undertake this analysis using the three-year income projection. Overall revenue will exceed overall expenses, including interest, within this period of time if the business is viable. Potential investors must engage in this critical analysis to ensure they are investing in a healthy business that is fast-growing and maintains reasonable profit.

Put the plan to work

Many companies work hard to create a financial plan for small business, only to ignore it as soon as it has been created. Placing all of the focus on creating the plan is a major error, because it is a powerful management tool. It is a better practice to compare actual numbers in the profit and loss statement with projections in the financial plan once a month, and use that data to revise future projections.

Compare statements over time

Undertake a financial statement analysis to compare specific items and entire financial statements over time—even the statements of the business to those of other companies. Conduct a ratio analysis to determine the prevailing industry ratios for profitability analysis, liquidity analysis, and debt. Measure the business both against its past performance and other similar businesses by comparing these standard ratios. You can also use the business plans from similar companies as financial plan examples.

Pitch with past plans

Include past financial plans as supplementary documentation of the business’s financial history as the organization applies for a loan or works to attract investment.

Use financial planning software

Obviously, this is a tremendous amount of dynamic information and calculation, making financial planning software a good option for many teams assembling a business plan’s financial section. These digital financial planning tools also enable visual financial projections such as bar graphs and pie charts.

What Should Financial Planning Include?

All business financial plans should include: a profit and loss statement; a cash flow statement; a balance sheet; a sales forecast; a personnel plan; business ratios; and a break-even analysis.

Profit and loss statement

The profit and loss statement is a financial statement that goes by several names, including P&L, income statement, and pro forma income statement. By any name, the profit and loss statement is essentially an explanation of how the business either made a profit or incurred a loss over a specific time period—typically three-months. The table lists all revenue streams and expenses, along with the total net profit or loss.

Depending on the type and structure of the business, there are different formats for profit and loss statements. However, in general, include in the profit and loss statement:

• Revenue or sales
• Cost of sale or cost of goods sold (COGS), although services companies may not have COGS
• Gross margin, which is revenue less COGS

Revenue, COGS, and gross margin are at the heart of how most businesses make money.

The P&L should also include operating expenses, those expenses that are not directly associated with making a sale but that are associated with running the business. These are the fixed costs that fluctuations in business really don’t affect, such as utilities, rent, and insurance.

The P&L statement should also include operating income:

• Gross Margin – Operating Expenses = Operating Income

Typically, operating income is equivalent to EBITDA: earnings before interest, taxes, depreciation, and amortization—although this depends on how the organization classifies expenses. Another way to think about operating income is the amount in profit before tax and interest but after operational costs.

The net income is the bottom line of the business, found at the end of the profit and loss statement. It represents going back to EBITDA and going a few steps further, subtracting expenses for interest, taxes, depreciation, and amortization to find net income:

• Operating Income – Interest, Taxes, Depreciation, and Amortization Expenses = Net Income

Cash flow statement

Just as critical as the P&L, the cash flow statement is typically a per-month explanation of how much cash the business brings in, pays out, and the ending cash balance. This detailed map of how much cash is in play, where it originates and goes to, and the cash flow schedule itself, is essential to any healthy, functional business.

The cash flow statement assists management in understanding the difference between the company’s actual cash position and the reported income on the profit and loss statement. It is just as important to clearly lay this information out for investors and lenders in the cash flow statement to raise funds.

Some businesses might be profitable but still lack the cash to pay expenses and continue to operate. Others might have the cash on hand to stay open even if they are unprofitable—cash flow break-even is vital to future company scale.. Therefore, the cash flow statement is important to understand.

There are two methods of accounting in the cash flow statement—the indirect method and the direct method. Which you select can affect how the cash flow statement and profit and loss statement compare, and accrual accounting might better reflect actual cash flow than cash accounting for many businesses.

Balance sheet

The balance sheet is a picture of the financial position of the business at a specific point in time. It reflects how much cash and equity is on hand, how much is in receivables, and how the business owes vendors and other debtors.

A balance sheet should include:

• Assets: Cash, inventory, accounts receivable, etc.
• Liabilities: Debt, loan repayments, accounts payable, etc.
• Equity: Owners’ equity, investors’ shares, stock proceeds, retained earnings, etc.

Ideally, as the name suggests, the balance sheet items should balance out. Total assets on one side should always equal total liabilities plus total equity.

• Assets = Liabilities + Equity

Sales forecast

The sales forecast is the FP&A team’s forecast or projections for a set period of what they think will generate revenue. Particularly if a business is seeking investment from investors or lenders, the sales forecast is among the fundamentals of financial planning, and should be part of a dynamic, ongoing process.

The sales or revenue number in the profit and loss statement and the sales forecast should be consistent. In fact, many types of financial planning software automatically connect these projects. Develop, organize, and segment an individualized sales forecast to meet the needs of a specific business.

Personnel plan

The personnel plan identifies the resourced structure and positions needed to run the company operations. How important the personnel plan is depends in large part on the company.

A sole proprietor doesn’t need much of a personnel plan. A large company with high labor costs requires a detailed personnel plan and should invest the necessary time in determining how personnel impacts the business.

A complete personnel plan should describe the expertise, training, and market or product knowledge of each member of the management team. Some businesses might find listing entire departments as a better tactic for the personnel plan.

Business ratios and break-even analysis

To calculate standard business ratios, all that is required are the profit and loss statement, cash flow statement, and balance sheet. Common profitability ratios and liquidity ratios include the gross margin, return on investment (ROI), and debt-to-equity ratios.

The break-even analysis determines how much revenue a business needs to cover all of its expenses, or break even. To assess the break-even point for the business, find the contribution margin—those are the costs necessary to generate revenue.

For management to get an accurate sense of how high revenue must be for the company to stay profitable, they must subtract those contribution margin costs as well as fixed costs from the profit to find that break-even point. For example, most businesses have some labor costs as well as things like insurance and rent—those are fixed costs. Then there might be contribution costs per sale, such as costs per meal prepared in a restaurant or costs per package shipped or outfit sold in a store. A functional business has to cover them all and generate additional profit to break-even.

What are the Steps in Financial Planning?

There are many routes toward creating a solid financial plan. A well-designed financial business plan thoroughly clarifies business goals in financial context and helps a company plan for the future. Although there is no one correct way to engage in financial planning, understanding some basic steps in financial planning can make the process easier.

Review your strategic plan

The strategic plan of the business is usually where comprehensive financial planning services start. If the business lacks such a plan, it’s time to develop one.

As management reviews the plan, they should consider several questions for the coming year:

• Will we want or need to expand?
• Will we need to hire talent/staff?
• Will we need more equipment?
• What about additional new resources?
• Are there any other plans that we have in mind this year that will require resources?
• How will these plans impact cash flow?
• Will we need financing? If so, how much? Can we revise our plans? Should we?

Fully assess the financial impact of all spending on major projects over the next 12 months.

Develop financial projections

Develop financial projections based on anticipated income and anticipated expenses. Sales forecasts are the basis for anticipated income, while things like costs for supplies, labor, and other overhead form the basis for anticipated expenses. Typically these financial projections will be monthly, but weekly projections may be better for businesses focused on cash optimization.

To make a financial projection, the business will compare project costs from the strategic plan to these anticipated costs and expenses. In other words, the team will look at the costs of doing business as normal plus the costs of adding in the projects, keeping in mind that sales will not always convert to cash immediately.

To create a financial projection, management often also must refer to a projected profit and loss or income statement and a projected balance sheet which it may need to develop in tandem with the financial projection. To assist the team in evaluating the impact of each possible scenario, it can be useful to include various outcomes—optimistic, most likely, and pessimistic—for the projections.

Finance’s advice may be essential to developing financial projections. However, ensure that leadership and anyone who will be seeking financing and explaining the plan to investors and lenders understands the projections and how they fit into the plan.

Arrange financing, plan for growth and contingencies

Determine the financing needs of the business using the financial projections. Well-prepared projections presented to financial stakeholders in advance of deadlines are always more reassuring.

How will the business grow in the coming year? Turn to the FP&A team to make smart investment and growth decisions.

Keep emergency sources of money on hand in case business finances suddenly pivot.. Maintaining credit or a cash reserve are possibilities. Keep laser focus on cash management and optimization.

Financial planning is a dynamic process. Compare projections to actual results throughout the year to see if they are accurate or require adjustments. Monitoring assists businesses in spotting financial problems before they are out of control, and ultimately in identifying smarter growth opportunities.

Consult and use tools

For some businesses, expert help in the form of financial planning services may be necessary to create a financial plan. For many others, the right financial planning software and other financial planning tools are critical to the job.

Why is Financial Planning Important?

A financial business plan has two main purposes. A business needs a financial plan that proves the business will grow, scale, and provide shareholder value over the long term.. Ensuring growth, scale and consistent shareholder value is vital to all stakeholders in the business. . Similarly, the financial plan proves to lenders and banks that the business will be able to repay any loans.

Just as critically, though, a financial forecast benefits leadership. A realistic projection of how the business is likely to perform prepares management and staff. A financial plan is a guide to running a healthy business and should be considered a living document.

There are several other reasons why financial planning is important to a business:

Credibility

Be realistic when developing a financial business plan, make sure your forecast or plan mirrors business reality. However, if you can demonstrate that your financial plan is realistic in a step-by-step way, your financial forecast will be credible. For example, if you break down your figures into components or channels to provide more detailed estimates, you may be able to reassure lenders, investors, and leadership more.

Balancing the balance sheet

Balance sheet optimization is one of the powerful benefits of financial planning. Identifying and assessing all business assets and liabilities and planning in advance how and when to pay all taxes, salaries, expenses, overheads, and miscellaneous costs is part of this process. Another strategy is to divide the business into functions or departments and prioritize them to better identify which important and urgent investment areas.

Long-term visibility

Efficient, comprehensive financial planning gives businesses improved long-term visibility into fund allocation. Analysis of how funds are deployed within a business can positively affect productivity and revenue and offer deeper insight into the health of the business. This kind of visibility also empowers more insightful decision making.

Strategic marketing

No business has endless money to burn on marketing, and a well-designed financial plan helps identify which marketing strategies are most productive for that particular business. Business marketing strategies frame tasks for a company, from planning to execution and implementation.

The marketing team may well be experts across the board when it comes to marketing channels and strategies. However, only actions that generate more business in measurable ways should be planned for the company. Ultimately, finance partnership with the business assesses whether the metrics in the reports justify ongoing marketing campaigns, so for every strategy the team formulates for business, they should highlight the ratio of expense and profits.

Monitoring assets (In’s) and liabilities(Out’s)

The financial team protects the stability of the business by routinely monitoring its assets and liabilities and the ratio of liabilities and assets. This ongoing activity provides insight into needed improvements and actionable ways to decrease liabilities and increase assets.

Measuring profit and loss

The finance team compiles financial planning reports to support evaluation of organizational profits and loss. These reports also showcase the net profits and their main causes, assisting management in evaluating which strategies worked best for the business.

What are Financial Planning Benefits?

It is easier for businesses that focus on financial planning to grow their revenues at a quicker pace than it is for companies that lack an efficient financial planning process. Corporate financial planning offers decision making support in the form of forecasts or budgets. It assists businesses in managing costs and building revenues by highlighting where they should focus resources for optimal effectiveness. Impactful financial management nurtures more growth by freeing up more funds for expanding operations, marketing, and product development.

As a broader matter, strategic business planning develops tasks and determines who will be responsible for delivering those tasks in a timely way, thus determining the company’s direction. Financial planning aligns to the strategic plan which then translates to actionable outcomes and measurable results.

The financial plan projects the revenues the team thinks will result from implementing the strategies and the expenses taking those actions will require. Senior management, operations, and marketing personnel are all deeply involved in strategic financial planning, and finance is focused on developing deep business partnerships, connecting the business and tracking the results. Here are some of the specific benefits of financial planning:

The starting point for the financial plan as a whole is what the company aims to achieve in the coming quarter, year, three years, five years, and longer. This is because it is essential to establish that a real need for the business exists, and this company in particular fills the need—a product/market fit.

Many startups devote several years to establishing that product/market fit as they build out and refine their product. In fact, achieving that kind of fit, with smaller checkpoints along the way, is a good one-to-two year goal. In these early stages, the financial plan can reveal to the team that it doesn’t yet make sense to set massive marketing KPIs or sales targets as the refinement process continues.

Business alignment

The financial plan sets forth clear cash flow expectations. For new businesses, the amount of cash going out is often more than is coming in, but it remains important to determine an acceptable level of expense, and ensure the business stays on track, and the statement helps achieve this. Cash flow management is also an important part of a financial plan, so that even team members who are not seasoned finance experts can efficiently and accurately track cash flow as needed. For all of these reasons, a solid financial plan assists with sensible cash flow management.

Agility, collaborative and actionable budgeting

Closely related to both cost reductions and cash flow management, it is essential to know the best way to spend the funding that is actually available to the business, whether through investments, revenue, or some other source. The business should break down the overall budget for the quarter or year into separate budgets for specific teams such as customer support, marketing, product development, and sales. This way management can ensure each budget accurately reflects the team’s productivity and relative importance.

Budgets also allow each team to build within a known set of limits. Team members can effectively plan campaigns and other tasks because they know what resources are available. Furthermore, it is always simpler to track team or project budgets than to monitor overspending at the company level.

Identify spend reductions

A financial plan enables the FP&A team to identify ways to reduce spend in advance. Building a financial plan includes a careful look back over the speed of current growth and what has already been spent. The goal with this kind of spend control is to detect over-inflated costs and unnecessary spending in the past to eliminate it in future budgets. The result from this kind of periodic review is keeping spending in line with expectations and making better use of resources.

Mitigated risks

The finance team assists the business in avoiding risk and navigating pitfalls when they occur. Many risks, from fraud and other forms of economic crises, are predictable and avoidable.

A strong financial plan should account for some uncertainty, business insurance expenses, and other unexpected expenses, and set aside resources to cope with them. Some teams create several financial forecasts with various business outcomes: one that shows results under conditions with more revenue, and others under conditions with less.

Especially during economically volatile times, prepare for many contingencies in the financial plan, which should clarify how the roadmap for the business will change as growth fluctuates.

Crisis management

During a crisis in any business, the first move is typically to review and re-build strategic plans. Without strategic plans in place, a crisis response is merely improvisational.

As the coronavirus crisis and surrounding financial crisis in 2020 and beyond have revealed, finance teams and leaders must constantly reforecast to deal with adversity. Businesses are developing new financial plans quarterly or even monthly to cope, and nobody truly knows when the crises will end.

The financial-planning team should help get through this particular challenge and other crises by focusing on several steps, all using their ongoing financial planning process. The first step in crisis management is to reassess new business operational baselines. Next, the team should use the plans and feedback to build a reality-based plan they will review many different business scenarios.

The team will next determine the business’s general direction and align on a financial plan that fits with this possibly new direction, in context. Then they will identify the best actions for the company to take, as well as any trigger points that could require further changes. A strong financial planning process, FP&A team, and store of financial statements can all make these crisis management steps much simpler.

Be opportunistic around fundraising

Any prospective bank, lender, or investor needs to see financial planning in the form of a business plan. A financial plan must tell a story to investors, while communicating the trustworthiness of the projections.

Roadmap for growth

A financial plan clarifies both the current financial situation of a business, and helps it project where it intends to be in the future. This may be reflected in various specifics, such as number of employees to hire; markets to penetrate; or new services or products to sell. The financial plan itself augments these goals with specific data, such as a budget for a particular number of new employees, including talent and recruitment costs and other resourcing needs.

Transparency

Of course transparency in the financial plan is critical for lenders and investors. But it’s just as important for the team and staff. To ensure your team that the business is healthy, following a solid plan towards growth and scale, and in good leadership hands, a transparent financial plan is key.

Does Planful Help With Financial Planning?

Yes. Planful delivers a continuous planning platform elevating the financial conversation, aligning finance’s need for structured planning with the business’ need for dynamic planning, and enabling your organization to make better decisions more confidently, quickly, and strategically by uniting the business together.

Comprehensive budgeting, planning, and forecasting features offer the financial planning and analysis team the control, structure, and partnership with the business they want. Meanwhile, dynamic planning features empower business leaders and finance with individualized, agile models and plans to manage for multiple business outcomes

Planful also delivers complete financial consolidation, including inter-company eliminations, partial ownership rules, and statutory reporting. The platform also ensures your business meets every management, financial, regulatory, and ad hoc reporting need with a robust library of delivery options and reporting formats.

Planful can help your business:

• Reduce reporting time up to 90% by automating manual processes
• Replace annual planning cycles with rolling forecasts to better respond to changing business conditions with increased agility, more accurate financial plans, and optimized financial results in real-time
• Leverage data from across the business to drive strategic planning, long-term value, and growth
• Free up time for collaboration and analysis by automating tedious, manual tasks in the planning process
• Simplify complex ad-hoc financial analysis and explore financial insights with greater confidence and speed
• Reduce time to close by up to 75% by automating data collection, aggregation, and validation across the organization with low risk and high security thanks to robust, searchable audit logs and strong internal controls
• Create impressive, professional financial and management reports that share insights with clarity
• Improve collaboration and workflow with accurate, current data

Find out more about Planful’s Financial Planning solution here.

Get Started with Planful

• Creating a Small Business Financial Plan

Written by True Tamplin, BSc, CEPF®

Reviewed by subject matter experts.

Updated on September 02, 2023

Get Any Financial Question Answered

Table of contents, financial plan overview.

A financial plan is a comprehensive document that charts a business's monetary objectives and the strategies to achieve them. It encapsulates everything from budgeting and forecasting to investments and resource allocation.

For small businesses, a solid financial plan provides direction, helping them navigate economic challenges, capitalize on opportunities, and ensure sustainable growth.

The strength of a financial plan lies in its ability to offer a clear roadmap for businesses.

Especially for small businesses that may not have a vast reserve of resources, prioritizing financial goals and understanding where every dollar goes can be the difference between growth and stagnation.

It lends clarity, ensures informed decision-making, and sets the stage for profitability and success.

Understanding the Basics of Financial Planning for Small Businesses

Role of financial planning in business success.

Financial planning is the backbone of any successful business endeavor. It serves as a compass, guiding businesses toward profitability, stability, and growth.

With proper financial planning, businesses can anticipate potential cash shortfalls, make informed investment decisions, and ensure they have the capital needed to seize new opportunities.

For small businesses, in particular, tight financial planning can mean the difference between thriving and shuttering. Given the limited resources, it's vital to maximize every dollar and anticipate financial challenges.

Through diligent planning, small businesses can position themselves competitively, adapt to market changes, and drive consistent growth.

Core Components of a Financial Plan for Small Businesses

Every financial plan comprises several core components that, together, provide a holistic view of a business's financial health and direction. These include setting clear objectives, estimating costs , preparing financial statements , and considering sources of financing.

Each component plays a pivotal role in ensuring a thorough and actionable financial strategy .

For small businesses, these components often need a more granular approach. Given the scale of operations, even minor financial missteps can have significant repercussions.

As such, it's essential to tailor each component, ensuring they address specific challenges and opportunities that small businesses face, from initial startup costs to revenue forecasting and budgetary constraints.

Setting Clear Small Business Financial Objectives

Identifying business's short-term and long-term financial goals.

Every business venture starts with a vision. Translating this vision into actionable financial goals is the essence of effective planning.

Short-term goals could range from securing initial funding and achieving a set monthly revenue to covering startup costs. These targets, usually spanning a year or less, set the immediate direction for the business.

On the other hand, long-term financial goals delve into the broader horizon. They might encompass aspirations like expanding to new locations, diversifying product lines, or achieving a specific market share within a decade.

By segmenting goals into short-term and long-term, businesses can craft a step-by-step strategy, making the larger vision more attainable and manageable.

Understanding the Difference Between Profitability and Cash Flow

Profitability and cash flow, while closely linked, are distinct concepts in the financial realm. Profitability pertains to the ability of a business to generate a surplus after deducting all expenses.

It's a metric of success and indicates the viability of a business model . Simply put, it answers whether a business is making more than it spends.

In contrast, cash flow represents the inflow and outflow of cash within a business. A company might be profitable on paper yet struggle with cash flow if, for instance, clients delay payments or unexpected expenses arise.

For small businesses, maintaining positive cash flow is paramount. It ensures that they can cover operational costs, pay employees, and reinvest in growth, even if they're awaiting payments or navigating financial hiccups.

Estimating Small Business Startup Costs (for New Businesses)

Fixed vs variable costs.

When embarking on a new business venture, understanding costs is paramount. Fixed costs remain consistent regardless of production levels. They include expenses like rent, salaries, and insurance . These are predictable outlays that don't fluctuate with business performance.

Variable costs , conversely, change in direct proportion to production or business activity. Think of costs associated with materials for manufacturing or commission for sales .

For a startup, delineating between fixed and variable costs aids in crafting a more dynamic budget, allowing for adaptability as the business scales and evolves.

One-Time Expenditures vs Ongoing Expenses

Startups often grapple with numerous upfront costs. From purchasing equipment and setting up a workspace to initial marketing campaigns, these one-time expenditures lay the foundation for business operations.

They differ from ongoing expenses like utility bills, raw materials, or employee wages that recur monthly or annually.

For a small business owner, distinguishing between these costs is critical. One-time expenditures often demand a larger chunk of initial capital, while ongoing expenses shape the monthly and annual budget.

By categorizing them separately, businesses can strategize funding needs more effectively, ensuring they're equipped to meet both immediate and recurrent financial obligations.

Funding Sources for Small Businesses

Personal savings.

This is often the most straightforward way to fund a startup. Entrepreneurs tap into their personal savings accounts to jumpstart their business.

While this method has the benefit of not incurring debt or diluting company ownership, it intertwines the individual's personal financial security with the business's fate.

The entrepreneur must be prepared for potential losses, and there's the evident psychological strain of putting one's hard-earned money on the line.

Loans can be sourced from various institutions, from traditional banks to credit unions . They offer a substantial sum of money that can be paid back over time, usually with interest .

The main advantage of taking a loan is that the entrepreneur retains full ownership and control of the business.

However, there's the obligation of monthly repayments, which can strain a business's cash flow, especially in its early days. Additionally, securing a loan often requires collateral and a sound credit history.

Investors, including angel investors and venture capitalists , offer capital in exchange for equity or a stake in the company.

Angel investors are typically high-net-worth individuals who provide funding in the initial stages, while venture capitalists come in when there's proven business potential, often injecting larger sums. The advantage is substantial funding without the immediate pressure of repayments.

However, in exchange for their investment, they often seek a say in business decisions, which might mean compromising on some aspects of the original business vision.

Grants are essentially 'free money' often provided by government programs, non-profit organizations, or corporations to promote innovation and support businesses in specific sectors.

The primary advantage of grants is that they don't need to be repaid, nor do they dilute company ownership. However, they can be highly competitive and might come with stipulations on how the funds should be used.

Moreover, the application process can be lengthy and requires showcasing the business's potential or alignment with the specific goals or missions of the granting institution.

Preparing Key Financial Statements for Small Businesses

Income statement (profit & loss).

An Income Statement , often termed as the Profit & Loss statement , showcases a business's financial performance over a specific time frame. It details revenues , expenses, and ultimately, profits or losses.

By analyzing this statement, business owners can pinpoint revenue drivers, identify exorbitant costs, and understand the net result of their operations.

For small businesses, this document is instrumental in making informed decisions. For instance, if a certain product line is consistently unprofitable, it might be prudent to discontinue it. Conversely, if another segment is thriving, it might warrant further investment.

The Income Statement, thus, serves as a financial mirror, reflecting the outcomes of business strategies and decisions.

Balance Sheet

The Balance Sheet offers a snapshot of a company's assets , liabilities , and equity at a specific point in time.

Assets include everything the business owns, from physical items like equipment to intangible assets like patents .

Liabilities, on the other hand, encompass what the company owes, be it bank loans or unpaid bills.

Equity represents the owner's stake in the business, calculated as assets minus liabilities.

This statement is crucial for small businesses as it offers insights into their financial health. A robust asset base, minimal liabilities, and growing equity signify a thriving enterprise.

In contrast, mounting liabilities or dwindling assets could be red flags, signaling the need for intervention and strategy recalibration.

Cash Flow Statement

While the Income Statement reveals profitability, the Cash Flow Statement tracks the actual movement of money.

It categorizes cash flows into operating (day-to-day business), investing (buying/selling assets), and financing (loans or equity transactions) activities. This statement unveils the liquidity of a business, indicating whether it has sufficient cash to meet immediate obligations.

For small businesses, maintaining positive cash flow is often more vital than showcasing profitability.

After all, a business might be profitable on paper yet struggle if clients delay payments or unforeseen expenses emerge.

By regularly reviewing the Cash Flow Statement, small business owners can anticipate cash crunches and strategize accordingly, ensuring seamless operations irrespective of revenue cycles.

Small Business Budgeting and Expense Management

Importance of budgeting for a small business.

Budgeting is the financial blueprint for any business, detailing anticipated revenues and expenses for a forthcoming period. It's a proactive approach, enabling businesses to allocate resources efficiently, plan for investments, and prepare for potential financial challenges.

For small businesses, a meticulous budget is often the linchpin of stability, ensuring they operate within their means and avoid financial pitfalls.

Having a well-defined budget also fosters discipline. It curtails frivolous spending, emphasizes cost-efficiency, and sets clear financial boundaries.

For small businesses, where every dollar counts, a stringent budget is the gateway to financial prudence, ensuring that funds are utilized judiciously, fostering growth, and minimizing wastage.

Strategies for Reducing Costs and Optimizing Expenses

Bulk purchasing.

When businesses buy supplies in large quantities, they often benefit from discounts due to economies of scale . This can significantly reduce per-unit costs.

However, while bulk purchasing leads to immediate savings, businesses must ensure they have adequate storage and that the products won't expire or become obsolete before they're used.

Renegotiating Vendor Contracts

Regularly reviewing and renegotiating contracts with suppliers or service providers can lead to better terms and lower costs. This might involve exploring volume discounts, longer payment terms, or even bartering services.

Building strong relationships with vendors often paves the way for such negotiations.

Adopting Energy-Saving Measures

Simple changes, like switching to LED lighting or investing in energy-efficient appliances, can lead to long-term savings in utility bills. Moreover, energy conservation not only reduces costs but also minimizes the environmental footprint, which can enhance the business's reputation.

Embracing Technology

Modern software and technology can streamline business processes. Automation tools can handle repetitive tasks, reducing labor costs.

Meanwhile, data analytics tools can provide insights into customer preferences and behavior, ensuring that marketing budgets are used effectively and target the right audience.

Streamlining Operations

Regularly reviewing and refining business processes can eliminate redundancies and improve efficiency. This might mean merging roles, cutting down on unnecessary meetings, or simplifying supply chains. A leaner operation often translates to reduced expenses.

Outsourcing Non-core Tasks

Instead of maintaining an in-house team for every function, businesses can outsource tasks that aren't central to their operations.

For instance, functions like accounting , IT support, or digital marketing can be outsourced to specialized agencies, often leading to cost savings and access to expert skills.

Cultivating a Culture of Frugality

Encouraging employees to adopt a cost-conscious mindset can lead to collective savings. This can be fostered through incentives, regular training, or even simple practices like recycling and reusing office supplies.

When everyone in the organization is attuned to the importance of cost savings, the cumulative effect can be substantial.

Forecasting Small Business Revenue and Cash Flow

Techniques for predicting future sales in a small business, past sales data analysis.

Historical sales data is a foundational element in any forecasting effort. By reviewing previous sales figures, businesses can identify patterns, understand seasonal fluctuations, and recognize the effects of past initiatives.

This information offers a baseline upon which to build future projections, accounting for known recurring variables in the business cycle .

Market Research

Understanding the larger market dynamics is crucial for accurate forecasting. This involves tracking industry trends, monitoring shifts in consumer behavior, and being aware of potential market disruptions.

For instance, a sudden technological advancement can change consumer preferences or regulatory changes might impact an industry.

Local Trend Analysis

For small businesses, localized insights can be especially impactful. Observing local competitors, understanding regional consumer preferences, or noting shifts in the local economy can offer precise data points.

These granular details, when integrated into a larger forecasting model, can enhance prediction accuracy.

Customer Feedback

Direct feedback from customers is an invaluable source of insights. Surveys, focus groups, or even informal chats can reveal customer sentiments, preferences, and potential future purchasing behavior.

For instance, if a majority of loyal customers express interest in a new product or service, it can be indicative of future sales potential.

Moving Averages

This technique involves analyzing a series of data points (like monthly sales) by creating averages from different subsets of the full data set.

For yearly forecasting, a 12-month moving average can be used to smooth out short-term fluctuations and highlight longer-term trends or cycles.

Regression Analysis

Regression analysis is a statistical tool used to identify relationships between variables. In sales forecasting, it can help understand how different factors (like marketing spend, seasonal variations, or competitor actions) relate to sales figures.

Once these relationships are understood, businesses can predict future sales based on planned actions or expected external events.

Understanding the Cash Cycle of Business

The cash cycle encompasses the time it takes for a business to convert resource investments, often in the form of inventory, back into cash.

This involves the processes of purchasing inventory, selling it, and subsequently collecting payment. A shorter cycle implies quicker cash turnarounds, which are vital for liquidity.

For small businesses, a firm grasp of the cash cycle can aid in managing cash flow more effectively.

By identifying bottlenecks or delays, businesses can strategize to expedite processes. This might involve renegotiating payment terms with suppliers, offering discounts for prompt customer payments, or optimizing inventory levels to prevent overstocking.

Ultimately, understanding and optimizing the cash cycle ensures that a business remains liquid and agile.

Preparing for Seasonality and Unexpected Changes

Seasonality affects many businesses, from the ice cream vendor witnessing summer surges to the retailer bracing for holiday shopping frenzies.

By analyzing historical data and market trends, businesses can prepare for these cyclical shifts, ensuring they stock up, staff appropriately, and market effectively.

Small businesses, often operating on tighter margins , need to be especially vigilant. Beyond seasonality, they must also brace for unexpected changes – a local construction project obstructing store access, a sudden competitor emergence, or unforeseen regulatory changes.

Building a financial buffer, diversifying product or service lines, and maintaining flexible operational strategies can equip small businesses to weather these unforeseen challenges with resilience.

Securing Small Business Financing and Capital

Role of debt and equity financing.

When businesses seek external funding, they often grapple with the debt vs. equity conundrum. Debt financing involves borrowing money, typically via loans. While it doesn't dilute ownership, it necessitates regular interest payments, potentially impacting cash flow.

Equity financing, on the other hand, entails selling a stake in the business to investors. It might not demand regular repayments, but it dilutes ownership and might influence business decisions.

Small businesses must weigh these options carefully. While loans offer a structured repayment plan and retained control, they might strain finances if the business hits a rough patch.

Equity financing, although relinquishing some control, might bring aboard strategic partners, offering expertise and networks in addition to funds.

The optimal choice hinges on the business's financial health, growth aspirations, and the founder's comfort with sharing control.

Choosing Between Different Types of Loans

A staple in the lending arena, term loans offer businesses a fixed amount of capital that is paid back over a specified period with interest. They're often used for significant one-time expenses, such as purchasing machinery, real estate , or even business expansion.

With predictable monthly payments, businesses can plan their budgets accordingly. However, they might require collateral and a robust credit history for approval.

Lines of Credit

Unlike term loans that provide funds in a lump sum, a line of credit grants businesses access to a pool of funds up to a certain limit.

Businesses can draw from this line as needed, only paying interest on the amount they use. This makes it a versatile tool, especially for managing cash flow fluctuations or unexpected expenses. It serves as a financial safety net, ready for use whenever required.

As the name suggests, microloans are smaller loans designed to cater to businesses that might not need substantial amounts of capital. They're particularly beneficial for startups, businesses with limited credit histories, or those in need of a quick, small financial boost.

Since they are of a smaller denomination, the approval process might be more lenient than traditional loans.

Peer-To-Peer Lending

A contemporary twist to the traditional lending model, peer-to-peer (P2P) platforms connect borrowers directly with individual lenders or investor groups.

This direct model often translates to quicker approvals and competitive interest rates as the overheads of traditional banking structures are removed. With technology at its core, P2P lending can offer a more user-friendly, streamlined process.

However, creditworthiness still plays a pivotal role in determining interest rates and loan amounts.

Crowdfunding and Alternative Financing Options

In an increasingly digital age, crowdfunding platforms like Kickstarter or Indiegogo have emerged as viable financing avenues.

These platforms enable businesses to raise small amounts from a large number of people, often in exchange for product discounts, early access, or other perks. This not only secures funds but also validates the business idea and fosters a community of supporters.

Other alternatives include invoice financing, where businesses get an advance on pending invoices, or merchant cash advances tailored for businesses with significant credit card sales.

Each financing mode offers unique advantages and constraints. Small businesses must meticulously evaluate their financial landscape, growth trajectories, and risk appetite to harness the most suitable option.

Small Business Tax Planning and Management

Basic tax obligations for small businesses.

Navigating the maze of taxation can be daunting, especially for small businesses. Yet, understanding and fulfilling tax obligations is crucial.

Depending on the business structure—whether sole proprietorship , partnership , LLC , or corporation—different tax rules apply. For instance, while corporations are taxed on their earnings, sole proprietors report business income and expenses on their personal tax returns.

In addition to income taxes, small businesses may also be responsible for employment taxes if they have employees. This covers Social Security , Medicare , federal unemployment, and sometimes state-specific taxes.

There might also be sales taxes, property taxes, or special state-specific levies to consider.

Consistently maintaining accurate financial records, being aware of filing deadlines, and setting aside funds for tax obligations are essential practices to avoid penalties and ensure compliance.

Advantages of Tax Planning and Potential Deductions

Tax planning is the strategic approach to minimizing tax liability through the best use of available allowances, deductions, exclusions, and breaks.

For small businesses, effective tax planning can lead to significant savings.

This might involve strategies like deferring income to a later tax year, choosing the optimal time to purchase equipment, or taking advantage of specific credits available to businesses in certain sectors or regions.

Several potential deductions can reduce taxable income for small businesses. These include expenses like rent, utilities, business travel, employee wages, and even certain meals.

By keeping abreast of tax law changes and actively seeking out eligible deductions, small businesses can optimize their financial landscape, ensuring they're not paying more in taxes than necessary.

Importance of Hiring a Tax Professional or Accountant

While it's feasible for small business owners to manage their taxes, the intricate nuances of tax laws make it beneficial to consult professionals.

An experienced accountant or tax consultant can not only ensure compliance but can proactively recommend strategies to reduce tax liability.

They can guide businesses on issues like whether to classify someone as an employee or a contractor, how to structure the business for optimal taxation, or when to make certain capital investments.

Beyond just annual tax filing, these professionals offer year-round counsel, helping businesses maintain clean financial records, stay updated on tax law changes, and plan for future financial moves.

The investment in professional advice often pays dividends , saving businesses from costly mistakes, penalties, or missed financial opportunities.

Regularly Reviewing and Adjusting the Small Business Financial Plan

Setting checkpoints and milestones.

Like any strategic blueprint, a financial plan isn't static. It serves as a guiding framework but should be flexible enough to adapt to evolving business realities.

Setting regular checkpoints— quarterly , half-yearly, or annually—can help businesses assess whether they're on track to meet their financial objectives.

Milestones, such as reaching a specific sales target, launching a new product, or expanding into a new market, offer tangible markers of progress. Celebrating these victories can bolster morale, while any shortfalls can serve as lessons, prompting strategy tweaks. F

or small businesses, where agility is an asset, regularly revisiting the financial plan ensures that the business remains aligned with its overarching financial goals while being responsive to the dynamic marketplace.

Using Financial Ratios to Monitor Business Health

Financial ratios offer a distilled snapshot of a business's health. Ratios like the current ratio ( current assets divided by current liabilities ) can shed light on liquidity, indicating whether a business can meet short-term obligations.

The debt-to-equity ratio , contrasting borrowed funds with owner's equity, offers insights into the business's leverage and potential financial risk.

Profit margin , depicting profitability relative to sales, can highlight operational efficiency. By consistently monitoring these and other pertinent ratios, small businesses can glean actionable insights, understanding their financial strengths and areas needing attention.

In a realm where early intervention can stave off major financial setbacks, these ratios serve as vital diagnostic tools, guiding informed decision-making.

Pivoting Strategies Based on Financial Performance

In the ever-evolving world of business, flexibility is paramount. If financial reviews indicate that certain strategies aren't yielding anticipated results, it might be time to pivot.

This could involve tweaking product offerings, revising pricing strategies, targeting a different customer segment, or even overhauling the business model.

For small businesses, the ability to pivot can be a lifeline. It allows them to respond swiftly to market changes, customer feedback, or internal challenges.

A robust financial plan, while offering direction, should also be pliable, accommodating shifts in strategy based on real-world performance. After all, in the business arena, adaptability often spells the difference between stagnation and growth.

Bottom Line

Financial foresight is integral for the stability and growth of small businesses. Effective revenue and cash flow forecasting, anchored by historical sales data and enhanced by market research, local trends, and customer feedback, ensures businesses are prepared for future demands.

With the unpredictability of the business environment, understanding the cash cycle and preparing for unforeseen challenges is essential.

As businesses contemplate external financing, the decision between debt and equity and the myriad of loan types, should be made judiciously, keeping in mind the business's health, growth aspirations, and risk appetite.

Furthermore, diligent tax planning, with professional guidance, can lead to significant financial benefits. Regular reviews using financial ratios allow businesses to gauge their performance, adapt strategies, and pivot when necessary.

Ultimately, the agility to adapt, guided by a well-structured financial plan, is pivotal for businesses to thrive in a dynamic marketplace.

Creating a Small Business Financial Plan FAQs

What is the importance of a financial plan for small businesses.

A financial plan offers a structured roadmap, guiding businesses in making informed decisions, ensuring growth, and navigating financial challenges.

How do forecasting revenue and understanding cash cycles aid in financial planning?

Forecasting provides insights into expected income, aiding in budget allocation, while understanding cash cycles ensures effective liquidity management.

What are the core components of a financial plan for small businesses?

Core components include setting objectives, estimating startup costs, preparing financial statements, budgeting, forecasting, securing financing, and tax management.

Why is tax planning vital for small businesses?

Tax planning ensures compliance, optimizes tax liabilities through available deductions, and helps businesses save money and avoid penalties.

How often should a small business review its financial plan?

Regular reviews, ideally quarterly or half-yearly, ensure alignment with business goals and allow for strategy adjustments based on real-world performance.

About the Author

True Tamplin, BSc, CEPF®

True Tamplin is a published author, public speaker, CEO of UpDigital, and founder of Finance Strategists.

True is a Certified Educator in Personal Finance (CEPF®), author of The Handy Financial Ratios Guide , a member of the Society for Advancing Business Editing and Writing, contributes to his financial education site, Finance Strategists, and has spoken to various financial communities such as the CFA Institute, as well as university students like his Alma mater, Biola University , where he received a bachelor of science in business and data analytics.

To learn more about True, visit his personal website or view his author profiles on Amazon , Nasdaq and Forbes .

Related Topics

• Advanced Diploma in Financial Planning
• Average Cost of a Certified Financial Planner
• Benefits of Having a Financial Planner
• Cash Flow-Based Financial Planning
• Charitable Financial Planning
• Components of a Good Financial Plan
• Fee-Only Financial Planning
• Financial Contingency Planning
• Financial Planner for Retirement
• Financial Planning Career Pathway
• Financial Planning Pyramid
• Financial Planning Tips
• Financial Planning Trends
• Financial Planning and Analysis
• Financial Planning for Married Couples
• Financial Planning for Startups
• Financial Planning vs Budgeting
• Financial Tips for Young Adults
• High-Net-Worth Financial Planning
• How to Become a Chartered Financial Planner
• How to Build a 5-Year Financial Plan
• How to Choose a Financial Planner
• Limitations of Financial Planning
• Registered Education Savings Plan (RESP)
• Role of Financial Planner in Estate Planning
• The Function of a Financial Planner
• Ultra-High-Net-Worth Financial Planning
• What Degree Do You Need to Be a Financial Planner?
• When Do You Need a Financial Planner?

Ask a Financial Professional Any Question

Meet top certified financial advisors near you, find advisor near you, our recommended advisors.

Taylor Kovar, CFP®

WHY WE RECOMMEND:

Fee-Only Financial Advisor Show explanation

Certified financial planner™, 3x investopedia top 100 advisor, author of the 5 money personalities & keynote speaker.

IDEAL CLIENTS:

Business Owners, Executives & Medical Professionals

Strategic Planning, Alternative Investments, Stock Options & Wealth Preservation

Claudia Valladares

Bilingual in english / spanish, founder of wisedollarmom.com, quoted in gobanking rates, yahoo finance & forbes.

Retirees, Immigrants & Sudden Wealth / Inheritance

Retirement Planning, Personal finance, Goals-based Planning & Community Impact

We use cookies to ensure that we give you the best experience on our website. If you continue to use this site we will assume that you are happy with it.

Fact Checked

At Finance Strategists, we partner with financial experts to ensure the accuracy of our financial content.

Our team of reviewers are established professionals with decades of experience in areas of personal finance and hold many advanced degrees and certifications.

They regularly contribute to top tier financial publications, such as The Wall Street Journal, U.S. News & World Report, Reuters, Morning Star, Yahoo Finance, Bloomberg, Marketwatch, Investopedia, TheStreet.com, Motley Fool, CNBC, and many others.

This team of experts helps Finance Strategists maintain the highest level of accuracy and professionalism possible.

Why You Can Trust Finance Strategists

Finance Strategists is a leading financial education organization that connects people with financial professionals, priding itself on providing accurate and reliable financial information to millions of readers each year.

We follow strict ethical journalism practices, which includes presenting unbiased information and citing reliable, attributed resources.

Our goal is to deliver the most understandable and comprehensive explanations of financial topics using simple writing complemented by helpful graphics and animation videos.

Our writing and editorial staff are a team of experts holding advanced financial designations and have written for most major financial media publications. Our work has been directly cited by organizations including Entrepreneur, Business Insider, Investopedia, Forbes, CNBC, and many others.

Our mission is to empower readers with the most factual and reliable financial information possible to help them make informed decisions for their individual needs.

How It Works

Step 1 of 3, ask any financial question.

Ask a question about your financial situation providing as much detail as possible. Your information is kept secure and not shared unless you specify.

Step 2 of 3

Our team will connect you with a vetted, trusted professional.

Someone on our team will connect you with a financial professional in our network holding the correct designation and expertise.

Step 3 of 3

Get your questions answered and book a free call if necessary.

A financial professional will offer guidance based on the information provided and offer a no-obligation call to better understand your situation.

Where Should We Send Your Answer?

Just a Few More Details

We need just a bit more info from you to direct your question to the right person.

Tell Us More About Yourself

Is there any other context you can provide.

Pro tip: Professionals are more likely to answer questions when background and context is given. The more details you provide, the faster and more thorough reply you'll receive.

What is your age?

Are you married, do you own your home.

• Owned outright
• Owned with a mortgage

Do you have any children under 18?

• Yes, 3 or more

What is the approximate value of your cash savings and other investments?

• $50k - $250k
• $250k - $1m

Pro tip: A portfolio often becomes more complicated when it has more investable assets. Please answer this question to help us connect you with the right professional.

Would you prefer to work with a financial professional remotely or in-person?

• I would prefer remote (video call, etc.)
• I would prefer in-person
• I don't mind, either are fine

What's your zip code?

• I'm not in the U.S.

Submit to get your question answered.

A financial professional will be in touch to help you shortly.

Part 1: Tell Us More About Yourself

Do you own a business, which activity is most important to you during retirement.

• Giving back / charity
• Spending time with family and friends
• Pursuing hobbies

Part 2: Your Current Nest Egg

Part 3: confidence going into retirement, how comfortable are you with investing.

• Very comfortable
• Somewhat comfortable
• Not comfortable at all

How confident are you in your long term financial plan?

• Very confident
• Somewhat confident
• Not confident / I don't have a plan

What is your risk tolerance?

How much are you saving for retirement each month.

• None currently
• Minimal: $50 - $200
• Steady Saver: $200 - $500
• Serious Planner: $500 - $1,000
• Aggressive Saver: $1,000+

How much will you need each month during retirement?

• Bare Necessities: $1,500 - $2,500
• Moderate Comfort: $2,500 - $3,500
• Comfortable Lifestyle: $3,500 - $5,500
• Affluent Living: $5,500 - $8,000
• Luxury Lifestyle: $8,000+

Part 4: Getting Your Retirement Ready

What is your current financial priority.

• Getting out of debt
• Growing my wealth
• Protecting my wealth

Do you already work with a financial advisor?

Which of these is most important for your financial advisor to have.

• Tax planning expertise
• Investment management expertise
• Estate planning expertise
• None of the above

Where should we send your answer?

Submit to get your retirement-readiness report., get in touch with, great the financial professional will get back to you soon., where should we send the downloadable file, great hit “submit” and an advisor will send you the guide shortly., create a free account and ask any financial question, learn at your own pace with our free courses.

Take self-paced courses to master the fundamentals of finance and connect with like-minded individuals.

Get Started

The Importance of Financial Planning for Small Businesses

A financial plan is the most important thing a small business needs. It’s a road map, a guideline, a reminder of what your goals are–what you are trying to achieve in the short-term and the long-term. It lays out what your possible costs are, and it seeks out to address avenues for how to manage these costs. It is so important that investors, bankers, and creditors won’t even set up a meeting with you if you don’t have a financial plan for your small business.

Your financial plan helps you manage your cash flow. Most businesses have income that varies from season to season. A good financial plan takes these vicissitudes into account so that there aren’t shortages in the long term. Having a cash cushion helps ensure that your business can take a poor season and still come out on top. Planning your taxes, prudishly spending your cash flow, and budgeting carefully can result from careful financial planning. When someone is in the thick of running his/her business, he /she can lose sight of the long term goals that ensure proper growth of your small business. A solid financial plan can be a reminder of all the necessary expenditures to keep your small business growing so as to stay ahead of the competitors in your market. The decisions of the small business owner takes can have positive or negative consequences. A good financial plan can spot positive and negative trends where they may have become lost in a sea of numbers. This will help you better allocate funds to the areas that are making your business money, and avoid expenditures that didn’t yield enough results. Financial planning can also help you prioritize expenditures. In small businesses, conserving financial resources is a must. A well thought out financial plan can help you prioritize what areas need to be funded immediately, and where your expenses can wait until you have a better season. Even the world’s largest corporations go through a process of prioritization of expenditures resulting from careful cost/benefit analysis.

Overall, the financial plan is there to help you measure your progress. How did your season go? What steps have been made in achieving your goals? When a small business owner is knee-deep in the day-to-day operations of running their business, they can often lose sight of what strides they have made to grow their small business. The financial plan helps the small business owner see precisely what is occurring through reviewing and analyzing the hard data. In short, every small business owner must have a methodical business plan that is updated regularly if they want to operate successfully for years to come.

Request A Free Consultation

Fill out the form below to recieve a free and confidential intial consultation.

• Business Essentials
• Leadership & Management
• Credential of Leadership, Impact, and Management in Business (CLIMB)
• Entrepreneurship & Innovation
• *New* Digital Transformation
• Finance & Accounting
• Business in Society
• For Organizations
• Support Portal
• Media Coverage
• Founding Donors
• Leadership Team

• Harvard Business School →
• HBS Online →
• Business Insights →

Business Insights

Harvard Business School Online's Business Insights Blog provides the career insights you need to achieve your goals and gain confidence in your business skills.

• Career Development
• Communication
• Decision-Making
• Earning Your MBA
• Negotiation
• News & Events
• Productivity
• Staff Spotlight
• Student Profiles
• Work-Life Balance
• Alternative Investments
• Business Analytics
• Business Strategy
• Business and Climate Change
• Design Thinking and Innovation
• Digital Marketing Strategy
• Disruptive Strategy
• Economics for Managers
• Entrepreneurship Essentials
• Financial Accounting
• Global Business
• Launching Tech Ventures
• Leadership Principles
• Leadership, Ethics, and Corporate Accountability
• Leading with Finance
• Management Essentials
• Negotiation Mastery
• Organizational Leadership
• Power and Influence for Positive Impact
• Strategy Execution
• Sustainable Business Strategy
• Sustainable Investing
• Winning with Digital Platforms

Why Is Budgeting Important in Business? 5 Reasons

• 06 Jul 2022

There are few skills as critical to running a business as budgeting. Yet, over half of the executives surveyed in a 2019 McKinsey study report feeling dissatisfied with the transparency surrounding their organizations’ budgets.

Any employee—especially managers—should understand budgeting and how it can profoundly impact an organization.

Here’s a primer on the importance of budgeting in business.

Access your free e-book today.

What Is Business Budgeting?

Budgeting is the process of preparing and overseeing a financial document that estimates income and expenses for a period. For business owners, executives, and managers, budgeting is a key skill for ensuring organizations and teams have the resources to execute initiatives and reach goals.

A basic budget consists of projected income and expenses for a given period (for instance, the upcoming quarter or year). After expenses are subtracted from projected income, the leftover money can be allocated to projects and initiatives, ensuring you’re not planning to overspend.

Budgets from previous periods can be compared to the company’s actual financial allocation and performance, giving an idea of how close predictions were to actual spend.

For example, imagine you allocated $10 million for your company’s annual corporate social responsibility (CSR) project. Unforeseen circumstances caused it to run $1 million over budget, and that money had to come out of other projects’ budgets.

During the project’s postmortem, you ask questions like, “Why did we run over budget? Was this an issue of inefficiency or misallocation?” When creating the budget for next year, you use those insights to tighten the process and keep the project’s spend at $10 million or more accurately allocate funds to other projects.

Types of Budgeting

There are several budgeting types that each prioritize different factors when approaching a financial plan. These include:

• Zero-based budgeting , which sets each item at zero dollars at the start of periods before reallocating
• Static budgeting or incremental-based budgeting , which uses historical data to add or subtract a percentage from the previous period to create the upcoming period’s budget
• Performance-based budgeting , which emphasizes the cash flow per unit of product or service
• Activity-based budgeting , which starts with the company’s goals and works backward to determine the cost of attaining them
• Value proposition budgeting , which assumes no line item should be included in the budget unless it directly provides value to the organization

The right budgeting type varies by company and situation. If your organization is in financial distress, the zero-based method may be the best fit, as it starts from scratch each period. Trying out several methods is a good way to determine which is ideal; when doing so, ensure your entire organization is aligned.

Related: 6 Budgeting Tips for Managers

Why Is Budgeting Important?

Budgeting involves number-crunching, attention to detail, and making informed decisions about fund allocation—but it’s well worth the effort. Here are five reasons budgeting is important in business.

1. It Ensures Resource Availability

At its core, budgeting’s primary function is to ensure an organization has enough resources to meet its goals. By planning financials in advance, you can determine which teams and initiatives require more resources and areas where you can cut back.

If, for instance, your team needs to hire an additional employee to scale efforts, budgeting for that in advance can allow you to plan other spending.

2. It Can Help Set and Report on Internal Goals

Budgeting for an upcoming period isn’t just about allocating spend; it’s also about determining how much revenue is needed to reach company goals.

You can use budgeting to set company-wide and team financial goals that align with them. This is especially prominent when using activity-based budgeting, but it’s beneficial no matter which type you use.

Financial goals should be attainable enough that you count on them to inform the rest of your budget allocations. Your goals inform the expenses needed to reach them and vice versa.

You can also use budgeting to update employees on progress and revisit the next period’s goals. For instance, if your company aimed to gain 10,000 new users this past year but fell short by 4,000, what could you have done differently? Does the initiative require fund redistribution? What resources could have propelled progress?

Tracking progress, or lack thereof, allows you to align your team and plan for growth in the next period.

3. It Helps Prioritize Projects

A byproduct of the budgeting process is that it requires prioritizing projects and initiatives. When prioritizing, consider the potential return on investment for each project, how each aligns with your company’s values, and the extent they could impact broader financial goals.

The value proposition budgeting method forces you to determine and explain each line item's value to your organization, which can be useful for prioritizing tasks and larger initiatives.

4. It Can Lead to Financing Opportunities

If you work at a startup or are considering seeking outside investors , it’s important to have documented budgetary information. When deciding whether to fund a company, investors highly value its current, past, and predicted financial performance.

Providing documents for previous periods with budgeted and actual spend can show your ability to handle a company’s finances, allocate funds, and pivot when appropriate. Some investors may ask for your current budget to see your predicted performance and priorities based on it.

5. It Provides a Pivotable Plan

A budget is a financial roadmap for the upcoming period; if all goes according to plan, it shows how much should be earned and spent on specific items.

Yet, the business world is anything but predictable. Circumstances outside your control can impact your revenue or cause priorities to change at a moment’s notice.

Consider the onset of the coronavirus (COVID-19) pandemic in 2020. The economic impact of travel bans, lockdowns, and other safety precautions was far-reaching and unexpected. Executives were forced to quickly—yet thoughtfully—rework budgets to account for major losses and newfound safety concerns.

More than two years later, executives are rethinking their budgeting procedures to make it easier to pivot if needed. One shift noted by McKinsey is the turn toward zero-based budgeting to determine the minimum resources necessary to survive as a business—should the circumstances call for it.

A budget gives you a plan; maintaining an agile mindset enables you to pivot that plan and help lead your organization through turbulent times.

Learn to Budget Effectively

Anyone can learn to budget effectively and reap the benefits. To build a foundation of financial literacy , gain a deeper understanding of the levers that impact an organization’s finances, and discover how budgeting can enable you to become a better leader and manager, consider taking an online financial accounting course .

Do you want to take your career to the next level? Explore Financial Accounting —one of three online courses comprising our Credential of Readiness (CORe) program —which teaches the key financial topics needed to understand business performance and potential. Not sure which course is right for you? Download our free flowchart .

About the Author

Small Business HQ

Table Content

11 benefits of financial planning for small businesses.

• No Comments

The benefits of financial planning far outweigh its costs. Financial planning is extremely important for businesses to utilize their resources efficiently and chart out a path to grow quickly and sustainably.

It’s even more crucial for startups as they face more financial risks, especially at the beginning. Due to minimal experience in their industries, mitigating risks gets hard, more so the ones that involve financial losses.

Therefore, small business owners often find themselves dipping into personal accounts to offset business expenditures.

Having a financial plan may not necessarily mean the future success of your business is guaranteed. However, without one, you’ll certainly be blindsided.

You don’t want to wade the murky waters of growing a business without a financial plan. So here is a list of the benefits of financial planning. Hopefully, they’ll inspire you to take a deeper look into your monetary situation.

Here we go.

What is Financial Planning?

Financial planning is the process of accessing your business’s financial situation and coming up with a plan to achieve your goals. When starting a business, the entrepreneur creates a vision and sets objectives for the business. 

They are then required to create a financial plan for achieving these strategic goals and objectives. The benefit here is that it serves as a roadmap to reach your goals while managing your finances well. 

You May Also Like:

• What is a Checking Account and How Does It Work?
• 18 Best Accounting Software for a Small Business in 2024

Financial planning complements your business plan. While the business plan sets the business direction and captures the goals, the financial plan outlines how funds will be acquired and used to achieve business goals. 

It confirms that the business objectives are financially viable and defines the strategies for achieving them. 

The process of financial planning normally includes multiple tasks such as:

• Confirming the business goals and objectives
• Examining the business environment and assessing company priorities
• Identifying the resources the business requires to achieve its goals
• Assigning costs to activities in the business plan
• Creating a budget
• Identifying risks and issues with your budget
• Setting the time frame for your financial plan
• Connecting strategic business teams like financial advisors with the financial plan

Top 11 Benefits of Financial Planning

All the major functions of a business heavily rely on financing. It’s by planning your finances that you get to:

• Set a budget
• Allocate resources
• Track your cash flows

Therefore, without a financial plan, a lot is at stake. Here is a deeper look at the benefits of financial planning and what it can help you do.

1. Set Clear Business Goals

One of the benefits of financial planning is that it helps you set clear goals. In the early stages of business, a company’s main goals and objectives determine where most of its financial expenditure goes.

These goals vary by business. For instance, in the beginning, a business’s main goals could be:

• Establishing a product-market fit
• Spreading brand awareness
• Developing their product, e.g. designing software, making upgrades, and fixing bugs
• Increasing productivity and operational efficiency

So, how does a financial plan benefit you here?

Having a financial plan adds more clarity to your objectives and goals. It shows you if your finances can sustain your daily operations and your major expenses.

With a financial plan, you can direct your financial resources toward these objectives. You can also make projections about these allocations in the next quarter, year, five years, and so on.

For example, if your main goal is to establish a product-market fit, most of your resources would go towards market research.

To track its benefits, you’d need to set KPIs, such as sales targets or conversion rates, and so on. All these need careful financial planning.

Another example would be investing in expert services if your goal is to develop your product. Or buying next-lever machinery if you aim to increase productivity.

Therefore, this is one of the most important benefits of financial planning. Any company that is clear about its objectives has a sense of direction.

• 18 Best Small Business Checking Accounts for 2024
• What is Accounting Software? Everything You Need To Know

2. Manage Cash Flow

This involves prioritizing major expenses and tracking the minor ones. A lot of small businesses fail to realize just how expensive day-to-day operations can get and need to sort their financial priorities.

While it is the major expenses that take up a major share of your finances, daily operations can be the reason you incur losses over time.

Small businesses often face financial constraints as their monthly income may not always offset their expenses. Therefore, whenever money can be saved, it’s important to do so.

So what benefit does financial planning bring to manage your cash flow and ultimately save money?

First, it helps you allocate your financial resources. This is another one of the benefits of financial planning.

A financial plan helps you keep track of your cash inflow and outflow, and manage your spending.

You’ll identify where money is getting wasted, and redirect it elsewhere. You’ll also see which areas of the business bring in more revenue, and channel more resources towards them.

Therefore, financial planning benefits you by helping you:

• Track operational expenses
• Prioritize core expenses
• Reallocate resources appropriately

3. Manage Investments

One of the important benefits of financial planning is that it helps you better manage your investment portfolio. Most investments take up large sums of a business’s finances.

Take a major capital investment for example, like buying heavy machinery. If you have a financial plan, you can set resources aside for these big investments and even for contingencies.

Investments can also be a source of constant, long-term cash inflow if you do it right. This is another benefit of financial planning.

With a financial plan, you’ll also track your return on investments.

Did your investments yield income as projected? How significant are the yields? Or, are the investments incurring losses? Is it time to back out?

This way, you’ll terminate unprofitable investments whenever required. Clearly, the benefits of financial planning are worth the time and effort.

4. Mitigate Risks

There are many risks associated with running a small business. Being able to provide financial security and minimize these risks is one of the benefits of financial planning.

Some of the common business risks include:

• A business losing its employees
• Having unforeseen expenses
• Legal risks
• Irregular revenue
• Insurance risks
• Risk due to external environmental factors like economic risks

Most startups invest only in essential personnel who take up core business responsibilities and often perform multiple tasks. Losing a single crucial employee, in such instances, could interrupt your business, at least in the short run.

A financial plan consists of a personnel plan section that outlines a course of action for such situations.

Also, small businesses can have irregular revenue streams. They need contingency plans to keep day-to-day operations running even when there’s no revenue coming in. That’s where the benefits of financial planning come through.

One of the benefits of financial planning is that it sets aside an emergency fund to deal with unexpected costs, economic risks, legal risks, etc.

With a financial plan, such risks do not end up having massive negative implications on the business financials that would set the business back. One of the benefits of financial planning is you can make pessimistic financial projections and plan for contingencies.

5. Prepare a Blueprint for Future Operations

One of the benefits of financial planning is that a financial plan gives you a roadmap on how to handle your business in the future.

By observing, recording, and tracking your financial progress, you’re better placed to make future predictions. You could already have non-financial goals for different departments, but a financial plan adds more detail to those.

For instance, if your sales team has “units sold” as their key performance indicator, a financial plan adds monetary value to that. Therefore you’ll have revenue projections as well as net profit projections.

Making growth predictions also becomes much easier. You’ll have a point of reference to base your estimates on. For instance, you can project a 10X growth in revenue over the next 5 years based on what your business makes this year.

With a financial plan, you’ll always re-evaluate everything on the go. This is one of the benefits of financial planning that help you manage your operations better.

Of course, projections aren’t always accurate. However, as long as you’re tracking your finances, you can always make adjustments.

6. Stay Motivated and Committed

Running a business could be hectic and oftentimes, you’ll need the motivation to keep going. One of the benefits of financial planning is that it keeps you motivated by showing you what to expect.

Here’s how.

Say in a quarter, you were able to track your finances and cut down costs by a huge margin, thanks to proper financial planning.

Wouldn’t that make you want to work even harder, and save more?

Also, when you have a financial plan, your uncertainties are minimized. If you’re facing a crisis, you’ll already have a counter-strategy. That keeps you motivated.

Now about commitment.

You’ll have your goals clearly stated, which we’ve discussed as one of the many benefits of financial planning. Goals keep you grounded because you’re working towards something specific.

With that, both you and your employees will remain committed to that course. At least until you achieve it and set other goals. Objectives also remind you of your short-term course, just in case you lose sight of your goals that may seem far away.

• Zoho Books Review 2024: Key Features and Pricing Details
• Top 8 Challenges of Financial Accounting Businesses in 2024

7. Raise Funds for Your Business

As discussed earlier, businesses sometimes end up spending more than they earn. For this reason and many more, such as expansion, your business will need funding at some point.

This could be in the form of:

• Long-term debt

You’ll need financial projections and estimations to raise debt funding. Banks ask for your financial statements to determine how creditworthy your business is. This is one of the other benefits of financial planning.

That’s not all, if you opt to approach investors, your financial plan will be your proof of sustainability. Investors will want to know your turnover, your market share and projections, your profits, and more.

So your financial plan will help you quickly raise adequate funds for your business.

Also, once you’ve found investors, you’ll need to keep them in the loop about your business’ performance. So you’ll need your financial plan for that as well.

8. Track and Measure Business Performance

Another of the many benefits of financial planning for small businesses is that it allows you to accurately measure your business performance.

By simply tracking your finances, you can tell how your business is performing.

You can compare your financial projections to your actual performance. You can also determine whether or not you met your goals using your financial plan.

With this, you’re better placed to change your strategies to something more effective.

The more regularly you reassess your financial plan and readjust your goals, the more beneficial it becomes.

• How to Develop a Financial Plan for a Small Business: A Guide
• 9 Benefits of Using Accounting Software for Small Businesses

9. Set a Budget

The last, but not least, benefit of financial planning is that it helps you with budgeting.

Knowing what funds go where and reallocating them isn’t enough. You need to set a strict budget for each department according to their relevance to the business.

This builds a structure around your cash outflow. Each function needs to have a limited financial scale within which to operate. And this can only be altered if a reasonable case is presented.

This breakdown is easier than monitoring company resources as a whole. It’s also more effective.

Now that you understand the benefits of financial planning, let’s discuss exactly what a financial plan should have, in the next section.

10. Reduces Unnecessary Costs

Besides helping you define how much you will spend on your business through a budget, financial planning will also help you identify cost savings ahead of time. 

Let’s say your business has been in operation for some time and you’re creating a financial plan for the coming year. In this case, you can look back on how you’ve spent your resources in the past.

By referring to past spending when creating your financial plan, you will be able to identify inflated and unnecessary costs along the way. With this information, you can adjust the next year’s budget and put your funds to better use, improving your business finances. 

This activity is known as spend control and it will help you keep your business spending in check. Regular reviews will almost always reveal areas you can cut unnecessary spending and save money.

11. Maximizes Profits

Helping businesses maximize profits is one of the key benefits of financial planning. That’s because a great financial plan may include strategies to reduce expenses and increase income. 

For example, your financial plan can suggest ways to make your manufacturing process more efficient so you can cut your production costs. This can include replacing old and inefficient machines with modern ones that use less energy. 

It can also suggest expanding into new markets to grow your revenues or implementing targeted campaigns to attract more clients and make enough money. 

These investment strategies will see you generate more profits for the business than before. And as you implement the changes, make sure you track everything so you can quantify the impact of the new strategies.

Components of a Financial Plan

To help you better understand the benefits of financial planning, here’s a summary of what goes into a financial plan.

Image via SmallBusinessHQ

• Income statement: Also known as the profit and loss statement, the income statement is used to determine the profitability of a business. It includes records and forecasts of your income and expenses to help you gauge if you’re making profits or losses. 
• Cashflow statement: This is a statement showing your cash inflows and outflows. As a business, your cash inflows can come from cash sale revenue, income from investments, interest received, and royalties, among other sources.
• Conversely, your cash outflows may include cash payments for general business expenses and interest paid for business loans. The cashflow statement will identify gaps in financing and what’s causing them.
• Statement of financial position: Also known as the balance sheet, this is a statement showing a business’s assets, equity, and liabilities. Balance sheets from different financial years can be compared to unearth trends that will help the business make better financial predictions. 
• Sales forecast: Shows projections of your sales and how that is set to grow in the future. Sales forecasts are crucial for any business because they help with budget formulation. By predicting sales for the coming year, businesses can make plans to get adequate inventory. 
• Personnel plan: Outlines your employment plan and the costs that go towards that. Businesses can identify staffing shortages and make financial plans to hire the right workers in the coming year. 
• Break-even analysis : This shows your costs against their benefits, and helps your business reach a break-even point. It normally involves calculating how many units you need to sell to cover your fixed and varied costs. 
• Ratio analysis: These gauge your business’s profitability, efficiency, stability, and liquidity. They do so by comparing financial statements from different years to reveal trends. 
• Exit strategy: This plans for the scenario where a business fails and needs to cut its losses and exit. The strategy outlines the owner’s plan to sell the business to investors while taking care of the main business financials. 
• 23 Best Invoicing Software for Small Businesses in 2024
• Inc Authority vs Incfile [2024]: Which is a Better Choice?

1. Why is the financial planning process important for small businesses?

Every small business needs a financial plan as it provides numerous benefits. This is because financial planning provides direction, helps a business understand its goals, and enables it to track its performance.

2. What are the benefits of financial planning?

The benefits of financial planning can be summarized as:

• It provides clarity on goals and objectives
• Helps manage company cashflow
• Helps manage investments
• Mitigates risks
• Provides a blueprint for the business
• Helps you raise funds
• Helps you measure performance
• Makes budgeting easy
• Reduces unnecessary costs
• Maximizing profits

3. What is financial planning for a small business?

Financial planning refers to the process where businesses track their current monetary situation and use that to make future financial projections. It helps assess a business’s financial health and provides a roadmap to its financial future.

4. What are the 7 components of a financial plan?

The components of a financial plan are:

• Income statement
• Cashflow statement
• Statement of financial position
• Sales forecast
• Personnel plan
• Break-even analysis
• Ratio analysis

5. What does financial planning include?

Financial planning includes setting goals, having a budget, and keeping track of all your monetary transactions. It also involves making future estimates depending on current and historical trends.

6. How do I write a good financial plan?

Writing a good financial plan involves including every detail about:

• Investments
• Liabilities

7. Can I do my own financial planning?

Yes, you can. It requires vigilance, but you don’t necessarily need to hire a financial advisor or financial planner to create a financial plan for your business.

8. What are the types of financial planning?

Some types of financial planning include:

• Investment management
• Cashflow management
• Tax management
• Debt management

9. What is the most important element in financial planning for a small business ?

Every element of a financial plan is important. However, a sales forecast focuses on the core operation of the business. It helps you estimate your revenue and determines how your business is performing. It also helps you raise funding.

10. What does a financial plan provide for achieving your financial goals?

A financial plan provides you with clarity on your goals and objectives and a roadmap for future operations.

Ready to Realize the Benefits of Financial Planning?

Hopefully, by now, you’d be clear on the benefits of financial planning and why you need a financial plan for your small business/

It’s time to start taking financial planning seriously, especially if you’re a small business. It may seem unnecessary, but as you can already see, there’s so much to gain in the long run.

You’ll be clear about your goals, manage your funds better, acquire funding easily, and enhance your commitment. All this is integral to every business that intends to constantly grow.

And the time to make a financial plan is now. All the best for getting your finances in order.

Brett Shapiro

Subscribe to our mailing list and get interesting stuff and updates to your email inbox.

OTHER POSTS

• 13 Best Accounting Software for Nonprofit Organizations in 2024

13 Best CRM for Startups in 2024 (Reviews & Pricing)

• 13 Types of Checking Accounts and Their Details

• 11 Best QuickBooks Alternatives to Navigate Finances in 2024

• 16 Best Accounting Software for Startups in 2024

15 Best Accounting Software for Self-Employed Professionals

Popular posts.

Do you need help?

Our marketing experts and proven strategies can improve your:

• Website Traffic
• Leads and Sales
• Branding (PR)
• 13 Best CRM for Startups in 2024 (Reviews & Pricing)

SEE MORE POSTS

Leave a reply cancel reply.

Save my name, email, and website in this browser for the next time I comment.

It’s Time to Demystify Small Business Banking

As a small business owner, you must know how to go about opening your bank account and managing your finances through business banking. Here’s a comprehensive ebook for it.

Get the ebook to learn how you can ace small business banking.

Level Up Your Small Business Accounting Game

Don’t start your business while remaining in the dark when it comes to finances. This ebook is a tell-all guide that will help you learn accounting basics.

Claim your free copy now!

Know the Nitty-Gritty of Getting a Business Credit Card

Before you go ahead and opt for a credit card for your small business, make sure you know if it’s worth getting one. Learn all about the advantages and risks in this ebook.

Download your copy now.

What Does it Take to Create a Successful Business?

Grab a free copy of this comprehensive guide to developing your business from scratch.

Fill in your details and the ebook will make its way into your inbox. Hurry!

Want to join an exclusive list to get great content?

Our newsletter will keep you updated on the latest content we post to help small businesses succeed.

Fill in your details and subscribe to our newsletter.

No, I’d rather miss out on this opportunity

Find All the Information You Need

We cover all insurance-related topics helpful for small business owners.

Subscribe and get access to exclusive content on insurance and related topics.

Yes, I Want In!

Fill out your contact details.

Yes, I Love Reading Good Content

You can see how this popup was set up in our step-by-step guide: https://wppopupmaker.com/guides/auto-opening-announcement-popups/

Accounting Software

Small business.

Reasons Why Financial Planning is Necessary for Business

It is not easy to develop a business plan as many elements need to be included and considered. Financial planning is a major part of preparing a feasible business plan. If you have never done financial planning for businesses before but want to learn about it, you have come to the right place. In this post, we will discuss the importance of financial planning for almost all businesses. In your first attempt, you might hit a few roadblocks. But with the right guidance and practice, you can learn how to prepare a practical and effective financial plan for starting and working on your business initiative.

What is Financial Planning?

Financial planning refers to building a brief about funding sources, expected cash inflows and outflows, and reinvestment strategies into the company for business growth. It also includes the budget allocated for different purposes and explains how and why it is divided.


A business needs to split and allocate a budget for production, human resources, marketing , and unexpected crises. When all of this is written down and compiled in a document, it helps the company focus on its operations in the right manner.

A financial plan also helps the business owners communicate clearly to the staff and investors why the company is moving in the right direction.

Financial planning is highly essential for building and growing a modern and transparent business. That’s why the financial plan is included as one of the major sections in a business plan. It tells the business how to carry out its financial management . It applies real financial projections and data and must put all business operations in context.

A financial plan is typically forward-looking. Although the accounting figures used to compute the data are the existing ones, most of the plan is about forecasted estimates and future projections. That’s why it requires a little bit of experience to do financial planning. You cannot just copy and paste figures to prepare a financial plan. You need to know and analyze your business goals and describe how your budget allocation matches your strategy to achieve those goals. In other words, you need to explain the level of investment that you plan to make for achieving your business goals.

Remember that this does not mean your financial plan has to be ‘made up’. This section of a business plan is actually the most grounded in reality. In fact, a business plan is only conceptual until you include your financial planning numbers in it. The other sections, such as the marketing plan , are interesting to read but don’t mean anything unless you justify them with the figures computed in the financial plan.

When you approach investors or other funding sources for your business, it is your financial plan that you need to show. Even if your business does not require external sources of financing, you still need to compile a financial budget and forecast to successfully execute your business marketing strategy .

8 Benefits of Financial Planning

Here are eight benefits of financial planning, particularly if you are starting a new business.

1. Clarity of Company Goals

Financial planning helps you clarify your company goals and communicate them to your employees and other stakeholders. This means a financial plan is actually the starting point of running your business operations . You can steer your efforts in the right direction only when you know what you need to achieve by the end of the quarter. At the beginning of your startup, your financial plan would need to establish grounds for the existence of your business. Thus your plan would have to define your product/market fit. Some companies have to spend years justifying their product/market fit before moving on to further business growth. When a business is in this phase, it doesn’t make sense to set lofty sales targets and huge marketing KPIs. Hence, financial planning at this phase mainly involves allocating a sufficient budget for product development and small marketing campaigns to build brand awareness.

2. Sensible Cash Flow Management

Financial planning allows you to set clear expectations regarding your cash flow. It does make sense for a business to spend more money in its earlier days, as that’s the time you need to invest all the capital budget required to build your brand. But you need to refer to your financial plan to determine the acceptable level of expense you spend as your capital expenditure . Your financial document also needs to determine how you plan to stay on track after spending the initial funds.

Image taken from Strikingly user’s website

Another thing that financial planning allows you to figure out is measuring your cash flow on a daily and monthly basis. Some companies hire seasoned finance experts for this purpose, while others keep referring to their initial financial plan to efficiently keep track of where the money is going.

3. Smart Budget Allocation

Financial planning for businesses ensures smart budget allocation. This is closely related to proper cash flow management , as mentioned above. When all your staff clearly understands how the funds have to be spent, they can efficiently manage the cash through sales. The financial plan helps you figure out how you should be spending all the cash that comes in.

4. Necessary Cost Reductions

Financial planning also allows a business to spot saving opportunities early, apart from identifying how much and where the money needs to be spent. Building a financial plan always involves looking back at your past expenses and analyzing how you can cut costs by changing how you handle your present and future operations. These cost reductions need to be implemented according to your business expansion strategy. If you plan to grow your business fast, you might have to actually spend more in the present than you did in the past.

You may still be able to identify any unnecessary or over-inflated costs that you incurred in the past. When you have all the figures computed in front of you and all the matters of your business sorted out, it is easier to spot events where you can save your budget. When it is time to prepare your next year’s budget, you can make the necessary adjustments again.

5. Risk Mitigation

A critical role of financial planning is to help a business mitigate risks. One of the purposes of a financial plan is to help the company avoid and navigate risks to be protected from financial fraud. Many types of risks are hard to predict, but some can be seen coming and avoided through careful financial planning.

A financial plan must have room for business insurance expenses, resources for unexpected costs, and losses incurred through risky inefficiencies. When the business goes through turbulent times, the financial forecasts really help show different outcomes the business might face if it implements different strategies. This, in turn, helps the business avoid making financial mistakes .

6. Crisis Management

When a company goes through a crisis, the management first reviews and reconstructs the plans. This, of course, means you need to have a solid business plan, to begin with. If you do not have a proper business and financial plan, your response to any crisis would just be to improvise.

The current pandemic has forced many organizations worldwide to strategize and rebuild their financial plans. But in doing that, the original financial planning measures have definitely come in handy.

7. Smooth Fundraising

Whether it’s a small business , a brand new startup, or a large and established organization, it will need some cash injection at some point in time. That’s when you need to start looking for investors. If your financial planning is all well sorted out, you can attract better-quality investors and fundraisers in a shorter period.

8. A Roadmap for Growth

Financial planning helps a business build a roadmap for its growth and expansion. It provides estimates on what will be affordable for the company in the foreseeable future and what will not. This makes it easier for the business owner and top management to make more informed decisions about their expansion strategies. They might, for instance, be able to foresee that they can afford to grow into a global business within the next five years.

Concluding Remarks

Now that you know the importance of financial planning, you can build one. In this day and age, you definitely need to budget for your business to build a solid online presence for your brand. The best way to do this is to create a professional website to showcase your products or services and represent your overall business.

But the good news is that you do not need to allocate a large budget for this purpose. By building your website on Strikingly , you will be spending (if any) a minimal amount on your web development because you wouldn’t need to hire a web designer or developer. All you need to do is select from among our ready-to-use website templates and key in your website content all by yourself. We promise you wouldn’t need to write a single line of code in the process.

Effective financial planning opens doors for businesses to capitalize on such fantastic and cost-effective opportunities.

Most Viewed

Financial Management Explained: Scope, Objectives & Importance

In business, financial management is the practice of handling a company’s finances in a way that allows it to be successful and compliant with regulations. That takes both a high-level plan and boots-on-the-ground execution.

What Is Financial Management?

At its core, financial management is the practice of making a business plan and then ensuring all departments stay on track. Solid financial management enables the CFO or VP of finance to provide data that supports creation of a long-range vision, informs decisions on where to invest, and yields insights on how to fund those investments, liquidity, profitability, cash runway and more.

ERP software can help finance teams achieve these goals: A financial management system combines several financial functions, such as accounting, fixed-asset management, revenue recognition and payment processing. By integrating these key components, a financial management system ensures real-time visibility into the financial state of a company while facilitating day-to-day operations, like period-end close processes.

Video: What Is Financial Management?

Objectives of Financial Management

Building on those pillars, financial managers help their companies in a variety of ways, including but not limited to:

• Maximizing profits: Provide insights on, for example, rising costs of raw materials that might trigger an increase in the cost of goods sold.
• Tracking liquidity and cash flow: Ensure the company has enough money on hand to meet its obligations.
• Ensuring compliance: Keep up with state, federal and industry-specific regulations.
• Developing financial scenarios: These are based on the business’ current state and forecasts that assume a wide range of outcomes based on possible market conditions.
• Manage relationships: Dealing effectively with investors and the boards of directors .

Ultimately, it’s about applying effective management principles to the company’s financial structure.

Scope of Financial Management

Financial management encompasses four major areas:

The financial manager projects how much money the company will need in order to maintain positive cash flow, allocate funds to grow or add new products or services and cope with unexpected events, and shares that information with business colleagues.

Planning may be broken down into categories including capital expenses, T&E and workforce and indirect and operational expenses.

The financial manager allocates the company’s available funds to meet costs, such as mortgages or rents, salaries, raw materials, employee T&E and other obligations. Ideally there will be some left to put aside for emergencies and to fund new business opportunities.

Companies generally have a master budget and may have separate sub documents covering, for example, cash flow and operations; budgets may be static or flexible .

Static vs. Flexible Budgeting

Managing and assessing risk.

Line-of-business executives look to their financial managers to assess and provide compensating controls for a variety of risks, including:

Affects the business’ investments as well as, for public companies, reporting and stock performance. May also reflect financial risk particular to the industry, such as a pandemic affecting restaurants or the shift of retail to a direct-to-consumer model .

The effects of, for example, customers not paying their invoices on time and thus the business not having funds to meet obligations, which may adversely affect creditworthiness and valuation, which dictates ability to borrow at favorable rates .

Finance teams must track current cash flow, estimate future cash needs and be prepared to free up working capital as needed.

This is a catch-all category, and one new to some finance teams. It may include, for example, the risk of a cyber-attack and whether to purchase cybersecurity insurance , what disaster recovery and business continuity plans are in place and what crisis management practices are triggered if a senior executive is accused of fraud or misconduct.

The financial manager sets procedures regarding how the finance team will process and distribute financial data, like invoices, payments and reports, with security and accuracy. These written procedures also outline who is responsible for making financial decisions at the company — and who signs off on those decisions.

Companies don’t need to start from scratch; there are policy and procedure templates available for a variety of organization types, such as this one for nonprofits.

Functions of Financial Management

More practically, a financial manager’s activities in the above areas revolve around planning and forecasting and controlling expenditures.

The FP&A function includes issuing P&L statements, analyzing which product lines or services have the highest profit margin or contribute the most to net profitability, maintaining the budget and forecasting the company’s future financial performance and scenario planning.

Managing cash flow is also key. The financial manager must make sure there’s enough cash on hand for day-to-day operations, like paying workers and purchasing raw materials for production. This involves overseeing cash as it flows both in and out of the business, a practice called cash management.

Along with cash management, financial management includes revenue recognition, or reporting the company’s revenue according to standard accounting principles. Balancing accounts receivable turnover ratios is a key part of strategic cash conservation and management. This may sound simple, but it isn’t always: At some companies, customers might pay months after receiving your service. At what point do you consider that money “yours” — and report the good news to investors?

Finally, managing financial controls involves analyzing how the company is performing financially compared with its plans and budgets. Methods for doing this include financial ratio analysis, in which the financial manager compares line items on the company’s financial statements.

Strategic vs. Tactical Financial Management

On a tactical level, financial management procedures govern how you process daily transactions, perform the monthly financial close, compare actual spending to what’s budgeted and ensure you meet auditor and tax requirements.

On a more strategic level, financial management feeds into vital FP&A (financial planning and analysis) and visioning activities, where finance leaders use data to help line-of-business colleagues plan future investments, spot opportunities and build resilient companies.

Importance of Financial Management

Solid financial management provides the foundation for three pillars of sound fiscal governance:

Strategizing

Identifying what needs to happen financially for the company to achieve its short- and long-term goals. Leaders need insights into current performance for scenario planning , for example.

Decision-making

Helping business leaders decide the best way to execute on plans by providing up-to-date financial reports and data on relevant KPIs.

Controlling

Ensuring each department is contributing to the vision and operating within budget and in alignment with strategy.

With effective financial management, all employees know where the company is headed, and they have visibility into progress.

What Are the Three Types of Financial Management?

The functions above can be grouped into three broader types of financial management:

Capital budgeting

Relates to identifying what needs to happen financially for the company to achieve its short- and long-term goals. Where should capital funds be expended to support growth ?

Capital structure

Determine how to pay for operations and/or growth. If interest rates are low, taking on debt might be the best answer. A company might also seek funding from a private equity firm , consider selling assets like real estate or, where applicable, selling equity.

Working capital management

As discussed above, is making sure there’s enough cash on hand for day-to-day operations, like paying workers and purchasing raw materials for production.

#1 Cloud ERP Software

What Is an Example of Financial Management?

We’ve covered some examples of financial management in the “functions” section above. Now, let’s cover how they all work together:

Say the CEO of a toothpaste company wants to introduce a new product: toothbrushes. She’ll call on her team to estimate the cost of producing the toothbrushes and the financial manager to determine where those funds should come from — for example, a bank loan.

The financial manager will acquire those funds and ensure they’re allocated to manufacture toothbrushes in the most cost-effective way possible. Assuming the toothbrushes sell well, the financial manager will gather data to help the management team decide whether to put the profits toward producing more toothbrushes, start a line of mouthwashes, pay a dividend to shareholders or take some other action.

Throughout the process, the financial manager will ensure the company has enough cash on hand to pay the new workers producing the toothbrushes. She’ll also analyze whether the company is spending and generating as much money as she estimated when she budgeted for the project.

NetSuite: Financial Management for Startups and Beyond

At the outset, financial management responsibilities within a startup include making and sticking to a budget that aligns with the business plan, evaluating what to do with profits and making sure your bills get paid and that customers pay you.

Financial management gets more complicated as the company grows and adds finance and accounting contractors or staffers. You must ensure your employees get paid with accurate deductions, properly file taxes and financial statements, and watch for errors and fraud.

This all circles back to our opening discussion of balancing strategic and tactical. By building a plan, you can answer the big questions: Are our goods and services profitable? Can we afford to launch a new product or make that hire? What might the coming 12 to 18 months bring for the business? Solid financial management provides the systems and processes to answer those questions.

Financial management challenges can be daunting for both startups and growing businesses. This is where NetSuite's financial management software comes into play. With its comprehensive, cloud-based solutions, NetSuite ensures that your financial data is accurate, up-to-date, and accessible anytime, anywhere.

From automating complex financial processes to offering real-time visibility into performance, NetSuite is the go-to solution for businesses aiming for seamless integration and efficient financial operations. As your company expands, NetSuite scales with you, ensuring you have the right tools to make informed strategic decisions at every stage. Make the smart choice for your business's financial future with NetSuite.

Financial Management

What is Financial Contingency Plan? A Step-by-Step Guide to Creating One

Creating a financial contingency plan is a wise move for any business. Crises and setbacks can strike suddenly, from natural disasters to economic downturns, technical failures, partner bankruptcies and customer…

More On This

Trending Articles

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.

Before you go...

Discover the products that 37,000+ customers depend on to fuel their growth.

Before you go. Talk with our team or check out these resources.

Want to set up a chat later? Let us do the lifting.

NetSuite ERP

Explore what NetSuite ERP can do for you.

Business Guide

Complete Guide to Cloud ERP Implementation

Does your business plan need a push?

Writting a business plan can be a springboard exercise for your business, and it's not as difficult as people think. All it takes is a bit of method, and some efficient tools. The good news our free articles and paid course have you covered!

Resources on Business Plan Writing :

An article of the Accelerated MBA written by:

Antoine Martin (Ph.D) | Business coach

Is this article relevant? Share it & help someone!

In this article:

Financial projections: how to write the financial plan in business plan.

So, you’ve decided to write a business plan? Good for you! It’s an important document that will help you outline your business goals, strategies, and tactics.

But it’s not just a document for you, as the business owner in charge of everything – it’s also important for potential investors and lenders.

In particular, one of the most important sections of your business plan should be your financial plan or, in other words, your overall financial projections for the next few years – understand, three to five years – distilled in a specific and highly codified format.

Why? Because the financial projections in a business plan are the numbers’ version of your pitch – if something doesn’t add-up, that’s where you see it.

Now, we know that numbers can be impressive (not to say daunting), so in this post, we’ll explain to you how to write a financial plan in your business plan.

We’ll also explain the logic you are supposed to follow to do things right (because financiers expect you to follow a very specific logic).

And we’ll explain what your business plan absolutely needs to include from a financial standpoint.

If that makes sense to you, then let’s get going!

By the way…

Before we dig into the financial projections’ discussion, let us give you a tiny bit of background!

We are professional business coaches, and our job is to push entrepreneurs and business owners to their next steps.

Business planning and business plans are part of that, obviously, therefore we have written a series of free articles on how to write a business plan – of which this page is a part.

We are on a mission to make entrepreneurship fun and accessible, so we provide about 80 percent of our content for free – including a free business plan template to be downloaded down this page.

Still, in case that’s not sufficient, we’ve also created our Business Plan Builder Module , which has been designed to make your life super easy.

Shameless plug: it gives you access to:

• a complete and solid business plan writing work-frame tool
• automated financial tables that take the hassle away (yayyy!)
• two designer-made templates (comprehensive + pitch deck)
• and two hours of tutorial videos recorded with a business coach to explain all the logic you’ll need to master if you plan on writing a business plan that converts.

There’s simply no way to make things easier!

Now, having said that, let’s get going.

As a reminder, what is a business plan about?

To start the discussion, remember that a business plan is about much more than just numbers. As we’ve explained in our article What are Business Plans For? , the role of such a document is to show that beyond a nice business plan pdf nobody really cares about, you have a real business and a plan to get it somewhere.

First, a business plan’s purpose is to help you explain what your project is about. In that sense, the document you need to write should be written as a storytelling instrument, designed, and formulated to tell people a story they will want to read AND remember.

Second, it should give you a way to showcase your main business objectives for the next few years, as well as the strategy you will put into place to get there and deliver on your promises.

Third, your business plan should also provide a market analysis, and a description of your main target segment. That gives the reader a better understanding of your ecosystem’s potential, but more importantly the exercise forces you to look around, open your eyes and do some meaningful research.

You wouldn’t want to drive blindfolded, would you?

Of course, your document should also have a financial component – which is the topic of this article – and there the challenge is to ensure that your financial projections make sense, that they are clear, accurate and easy to follow.

Long things short, investors and bankers expect you to match a very specific business plan outline and format (there’s a code!) and you don’t have much wiggle room there – so be careful in your approach!

What is a Financial Plan & what should it include?

Now, let’s get into the core of this article: financial plans and financial projections. What are they, why are they important – there is a lot to explore.

First things first, what is a financial plan? How important is it in a business plan? And what type of elements is it made of? What are the projected financial statements you need to provide? Oh, and what do we mean by ‘financial projections’ in the first place, by the way?

What is the role of a financial plan in business plan?

A financial plan is the financial part of your business plan. Its purpose is simple: explain to the reader what should be the ins and outs of your project from a financial perspective, and help them see if their own business projections are aligned with yours.

On the one hand, the idea is to put numbers on your project, to make it tangible and show that your vision includes the end and the means.

On the other, it is also to show that you are capable of defending your big idea as well as the projected financials that need to come with it – something that many wannabe entrepreneurs are actually unable to do…

As a side note, and as silly as that might sound, this means that your business plan should include a lot more than just a financial plan and a smart cash flow projection!

That point brings us back to the one we made earlier when we said that a business plan should follow a specific structure (go read that article!), but we mention it again because we want things to be very clear: your business plan should be a matter of storytelling, not just a matter of financial projections!

Typically, we often see accountants work on business plans, and what they produce is rarely enough because they only deliver financial estimates that make no real sense to non-accountants (even less to the entrepreneurs at stake) and leave aside the rest of the topics – particularly the storytelling!

Said differently? The numbers are one aspect of the story, but you still have to come up with the pitch – which is where the rest of the business plan comes in handy.

Make sure to deliver an easy-to-read mix!

Your financial plan must provide your financial projections

To get into the technical part of the discussion, the financial plan in your business plan should include your financial projections, organized in a very formal format.

That makes two distinct points to consider!

On the one hand, you should be able to show with clear numbers what money should come in and when (that’s the income forecasts), for this year but also for the next, the ones after that for three to five years.

On the other, you should also be able to show what money needs to go out to make the business roll. What are the production costs, the fixed and variable expenses, the salaries, and of course the various marketing expenses needed to generate the development you are planning on getting to.

On that point, remember that your cost of client acquisition should also be part of the formalized projections – otherwise your numbers will be flawed (and doomed).

Ultimately, you need to be very clear as to when your new business (or existing business) should break even, as to when should profits be expected, as to when lenders and investors will get their money back, so forth and so on.

It must include specific financial documents people will expect to see

From a very formal perspective, you shouldn’t be trying to make one single projection sheet. Nope! Your readers will expect to see three important financial documents in the financial section of the business plan you will introduce to them.

• A profit and loss statement – also known as your P&L statement, or as an income statement
• A cash flow statement
• And a balance sheet.

First, the P&L table or income statement should show what money is expected to come in or go out, but it should also show if and when the business will make a profit or a loss, year by year, for the next five years.

The sales forecast and the operating expenses should be easy to understand at that stage, and you should also be able to provide your estimated gross profit, your gross margin, as well as your net profit and net margin.

In case you are wondering, your gross profit corresponds to your sales minus your cost of production. Your net profit corresponds to the gross profit minus all the remaining costs.

It’s okay to read that twice…

Not being profitable is also okay, by the way. That’s the game. However, you must be able to explain why you won’t be profitable in a given year, and how you plan on filling the gap in the bank – otherwise your business dies, right?

Second, the cashflow statement should explain your cash flow management strategy and indicate when you will need to fill the bank account in, and why.

For instance, important account receivables could justify a temporary cashflow need, but the gaps left from the previous years should also be visible. Obviously, the funding needs should also be there and aligned with the financial situation of the business.

Third, the balance sheet is a summary of the previous two tables, except that it shows the various elements in terms of assets or liabilities. For instance, the account receivables we mentioned just before would be an asset (because some money is owed to the business) while account payables would be a liability (since the business owes money to someone else).

Does all this sound a little complex?

That’s because it is.

No need to worry, though. We have you covered and will provide all the templates and tools you need further below. For now, just keep reading.

So, what’s the financial plan in a business plan for?

To conclude, the financial plan in business plan should act as a financial cartography of what you have in mind for that business of yours.

• The financial plan should illustrate the plan you have for the business in terms of numbers
• It should include precise financial projections of what you think can be achieved
• It should clearly illustrate your cashflow management strategy
• And it should summarize the information clearly
• All of this through highly standardized tables financiers will understand very easily

What documents should a financial business plan contain?

Getting your financial business plan right is a lot simpler than it seems.

Now, when you’re pitching that business of yours to potential partners, investors or lenders, you’ll need to provide them with a series of financial statements.

Yet, how to produce those documents without jumping into a living nightmare? How to come up with cash flow projections that make sense instead of being purely random?

Word of caution: financial planning for businesses is typically complex.

The question is not only fair, but it is also super-duper common and literally blocks tons of entrepreneurs and small business owners on a daily basis.

Because financial planning for businesses is typically complex.

Because most people aren’t comfortable with numbers.

And because the vast majority of small business owners simply don’t know where to start.

That’s probably why you were looking for either a financial plan pdf template or an example of financial plan for small business owners a few minutes ago, isn’t it?

Typically, here is what happens.

Some try and do their best, but then they don’t feel confident with pitching and defending their financial analysis, so they keep delaying and nothing happens.

Others end up having recourse to external help, even though external business plan consultants usually aren’t a good idea at that stage.

And the rest gives up.

That’s a shame, especially if consider that financial planning for a small business and building a financial plan for a business plan are only a matter of having access to the right method and tools!

Yes, a big (big) part of the work is to guestimate, but the rest is about trusting the process with the right logic, method and tools – and there’s nothing you can’t manage here.

Especially with the right tools!

How to build your financial forecasts?

Now that you understand the different sections of a financial plan, let us talk about how to build financial forecasting.

In plain English, this part of the exercise is where you’ll estimate your company’s income and expenses for the next few years. Therefore, you should keep a few things in mind.

One, you need to have a good understanding of your business in order to create realistic forecasts.

Sounds silly? Maybe, but this is a mistake people make way too much, and when they fail at justifying their financial projections, everything else goes down.

Two, you absolutely want to make sure that your projections can explore various trends, i.e. your pessimistic, optimistic, and most likely scenarios.

• If everything goes extremely well, we’ll get there.
• If everything goes wrong, we’ll get there.
• But… we should reasonably expect to achieve this and that if we obtain the funding we need…

Can you see the idea?

Be sure to also factor in any potential changes or risks that could affect your business.

For example, if you’re expecting a new competitor to enter the market, you’ll need to account for that in your projections. By being realistic and accounting for as many variables as possible, you’ll give yourself the best chance of success so give it some thought!

Pragmatically, how do I come up with reasonable financial forecasts for my business plan?

It’s all a question of common sense, really.

• How much do you plan on selling?
• What are your short, medium and long term financial goals?
• What would be the cost of production?
• What margin does that leave you with?
• What fixed costs would you expect?
• How about variable costs?
• Have you included transaction fees and credit card fees in your costs?
• What is the cost of insurance premiums?
• Will there be any debt to repay?
• What type of budget do you need for marketing purposes?
• What is the cost of acquisition of the client?
• What operational margin does it leave before the taxman comes in?
• What kind of money do you need to meet your long term goals?
• Have you planned for any emergency fund at all?

Right, that’s a long list. But! Answering those questions should give you a strong basis to build financial projections that make sense, because that’s literally how you would read your income statement in the end.

If you were trying to translate boring numbers into a meaningful story, that’s exactly where you would start!

Again, we have you covered with all this.

If you are looking for a concrete and practical financial plan example, make sure to download our business plan template down the page. It will give you the basic pro forma financials you’ll need.

If you need to understand the logic behind the template and would rather use an automated spreadsheet to get everything done, however, then it’s time to stop struggling.

The Impactified Business Plan Builder will provide everything you need: the automated tables and two hours of business coaching videos designed to explain all the logic you’ll need – what are you waiting for?

Why Are Financial Projections so Important in the end?

So, overall, why is creating financial projections so important? Are there various types of financial projections anyway? There are several things to keep in mind here.

First, your financial projections are important because they give bankers and investors the numbers they need (to make an informed decision) in a format they expect to see.

Second, your projections show whether your strategy is aligned with the means at your disposal to achieve it and whether you are aware of the financial engineering required to make your business roll.

Third, and in a related way, forecasts will give you, as the entrepreneur in charge, an opportunity to show if you understand the business for real (or if someone else not present during the discussion wrote the plan for you).

All of these documents are important, but you (nobody else!) will need to be able to tell a story around them.

Investors aren’t just looking for numbers! They invest in teams and people before investing in projects, so they want to know that you understand your business and that you have a plan for the future!

So, make sure your financial projections are accurate and be prepared to answer any questions investors have about them.

Understanding the investment process

To understand how to handle the exercise properly, understanding the investment and funding process in general is important.

What do bankers and investors expect when they are looking at a business plan? How do they decide whether to invest or not? And how do the financial projections help them make that decision?

In short, investors are looking for a return on their investment. So, they want to know what they can expect to earn from their investment, and how that compares to the risks they’re taking.

Your projected income statement is important there, but so are your cashflow projections!

Your financial estimates should therefore show how your business will grow and what profits you’ll generate, both in the short-term and long-term. This information will help investors determine whether or not your business is a good investment.

In contrast, bankers have a much lower risk tolerance and are not interested in funding you – they lend money to those who have money to repay the debt (or some assets to engage as collateral in case something goes wrong). Hence, what they look for is not a high return on investment based on risk, but a repayment capacity based on predictability and wise financial management.

Said differently? You need to create financial projections that make sense and adapt your financial pitch to your audience accordingly.

Show investors that there is a great opportunity to make money at a later stage and show bankers you will be able to start repaying as soon as possible.

Again, if you need to explore the question of investors’ mindsets, we elaborate on that in our video module – it’s time to give it a try!

Business valuation and exit thinking

Last but not least, understanding the investment process means that you also need to start thinking in terms of valuation and exit.

Or, said differently, the financial plan in your business plan must lead you to think about what your business will be worth a few years from now, and about how you will be able to make money (for you and your investment partners) by selling it.

On the one hand, exit thinking relates to the idea that investors invest in a business with the expectation that the business will raise more money later on, at which stage a larger investor will come in and buy the existing investors out.

To make your investors some money, therefore, you have to start thinking in terms of exiting the business at some point – which means progressively turning the business into an asset that works on its own, for you and as much as possible without you.

This mindset is absolutely key – think about it!

On the other hand, the discussion leads us to think in terms of business valuation – understand, how much is the business worth, and how much could it be sold for.

That topic is probably getting too technical for this article’s discussion, so we’ll explore it in another post.

Meanwhile, make sure to listen to the exit & valuation video in The Business Plan Builder module . We explain all this and even go as far as giving you an automated valuation calculator in the financial tables part of the tool – again, you have no excuse!

Avoiding the typical mistakes small businesses make with financial planning

To finish with the discussion, what should you keep in mind if you wanted to turn your financial plan into an asset that generates money rather than frustration?

Like it or not, but small business financial planning isn’t an intuitive thing and people tend to make very typical mistakes you should avoid at all costs!

Know your business

First piece of advice, you really (really, really) want to know your business from every angle.

When you are writing the financial plan in your business plan, it’s important to remember that your projections should represent an estimate of future performance. That’s how investors and lenders will read your numbers anyway.

So, your financial projections and forecasts should be based on realistic assumptions and calculations that you should always be prepared to adjust as needed.

In order to make accurate projections, it is therefore extremely important to have a good understanding of your business and the industry it operates in. You should also consult with industry experts and other professionals who can help you make informed decisions about your business.

Do the exercise yourself!

When you’re writing your financial plan, it’s important to avoid making common mistakes. One of the most common errors is underestimating how much money your business will need to operate.

Another is to rely on business plan consultants to write your financial projections without being able to understand the numbers yourself. This can lead to mistakes if the numbers are incorrect, and it can lead to embarrassing ahem! moments if you can’t explain how this or that number ended up in the document.

The best way to ensure accuracy is to do the exercise yourself with the right tools in hand and the brainstorming support of someone you trust to challenge your thoughts and conclusions.

This can be done with your acting CFO or close financial advisor if you have one, or with a fellow entrepreneur if anyone around you has the right mindset to dig into the discussion with you.

Alternatively, hiring a business coach is another way to brainstorm and challenge yourself – follow the link to find out more about that.

Don’t be a tourist. That’s stupid.

Third piece of advice: don’t enter into a discussion with a potential partner as a tourist – this is stupid, and that could very well kill you.

We have seen countless entrepreneurs walk into a room (let alone into a large startup event) saying that they were raising money for their startup. Yet, more often than not, their financial targets are not set or beyond approximative, which means they can’t explain why they need money and how they are going to spend it.

When you do that, the only thing you do is be stupid and make sure everyone knows about it.

First, because they won’t take you seriously. Would you invest money into someone who can’t tell you how they’ll use it and with what return on investment expectations?

And second, because the people you talk to will most likely ask you to come back to them once you have more information to provide. Which either means “don’t come back before six months to a year” or “please don’t come back at all, I have better things to do with my time and more competent people to talk to”.

Don’t be a tourist or you’ll just burn yourself. That’s stupid.

Turn your numbers into a story

The fourth piece of advice is going to be a repeat from earlier, but it’s important so let’s be redundant.

Now that you’ve written your financial projections, it’s time to go beyond the numbers and start telling your business story. The financial plan in your business plan is a great place to start but remember that it’s just one part of your overall pitch.

You’ll also need to be ready to pitch your idea, product, or service, and be ready to defend your financial plan against questions from investors or lenders.

Think holistically and build a story people will want to listen to, remember and act on. Period!

TL;DR: Get your financial projections right!

Now that you understand the different components of a financial plan, it’s time to learn how to write it. The key to writing a good financial plan is to be realistic. Don’t make assumptions that are unrealistic or impossible to achieve.

Start by estimating your sales and expenses for the first year of business. Be as specific as possible, and remember to include both fixed and variable costs. From there, you can create a cash flow statement that shows how your business will generate and spend money over time.

The goal of a financial plan is to paint a realistic picture of your business’s financial future. So make sure to update your plan as your business changes and grows. With careful planning and accurate numbers, you can ensure that your business will be successful for years to come.

What should your business plan financial plan include?

• A profit and loss statement – also known as your P&L statement, or as an income statement
• A cash flow statement showing if your business plan financial projections are realistic

What is the purpose of your business plan’s financial projections?

• To how the plan you have for the business in terms of numbers
• To show a financial overview of what you think can be achieved, by when, with what means
• To show you have a cashflow management strategy that makes sense
• To show you understand the standardized expectations and know how to play by the book
• To show that, overall, your business proposal makes sense whatever the angle!

Need a reliable template and video tutorial to get your financial business plan & financial projections right?

It’s built around over 2 hours of explanatory videos and comes with everything you’ll need to:

• Figure out what you need to figure out – powerful, uh?
• Understand the business plan code!
• Write a top business plan – with just the right amount of words and pages!
• Build your financial estimates – with an automated financial projections template excel spreadsheet!
• Create a visually appealing pitch deck people will want to read thanks to our designer-made templates!

If you want to stop wasting your time, this is THE most simple business plan template, and you can’t afford to miss it!

Wanna’ start with something free? Our free business plan template is also here to help !

Psss! Share this Article!

Topics related to Financial Projections: How to write the financial plan in business plan:

• Financial plan in business plan coffee shop
• Financial plan in business plan template

Need help with building & scaling your business?

At Impactified , we are on a mission to make you build, grow, and scale businesses you can be proud of, and we do that by making our business coaching expertise available to you, in person and through kick-ass self-coaching modules. You will love the experience either way, the only question is, what makes the most sense to you?

More Insights on Business Plan Writing

Hey coach! I’m writing a business plan and I’m wondering how to build the financial projections part of the document. What’s the importance of financial projections exactly – I mean, isn’t it absolute BS? How do I write the financial plan in business plan, and even more importantly, how can I make sense of all those messy tables? Can you help me understand this? Thanks in advance!

Do I Need a Business Plan Consultant? No, You Don’t!

Hey there Coach! I’m a small business owner and I need to find some support with my business plan. People suggested that I find a business plan consultant near me, but that’s a big cost and I’m not too sure about what to expect from that. What’s your opinion about business plan consultants in general? Is there any alternative you would highly recommend? Thanks!

How Much Does a Business Plan Cost? Just Under $100!

Hey coach! I was wondering – how much does a business plan cost? I need one, and I’m thinking about having it written for me, so I’d love your insights. Also, I’ve heard business plan writers cost a lot of money, so I’m interested if you have tips for writing a low-cost business plan! Thanks!

The #1 Growth & Scale Facilitation Platform for Entrepreneurs

Building & scaling a business is tough, so we’ve built easy-to-use tools & programs you can leverage anytime to make your business rock. The rest is up to you!

Get Started

• Book a Call!
• Pitch Your Biz!
• Read our Entrepreneurs' blog!

Business Facilitation

• Why Hire a Facilitator?
• Entrepreneur Training
• Our Brochures
• Team performance Survey
• The FREE Coaching Newsletter
• Impactified News
• Get in touch

© 2019-Present - All Rights Reserved - Impactified.com

• Search Search Please fill out this field.

What Is Financial Analysis?

Understanding financial analysis, corporate financial analysis, investment financial analysis, types of financial analysis, horizontal vs. vertical analysis.

• Example of Financial Analysis
• Financial Analysis FAQs

The Bottom Line

• Corporate Finance
• Financial statements: Balance, income, cash flow, and equity

Financial Analysis: Definition, Importance, Types, and Examples

Financial analysis is the process of evaluating businesses, projects, budgets, and other finance-related transactions to determine their performance and suitability. Typically, financial analysis is used to analyze whether an entity is stable, solvent , liquid , or profitable enough to warrant a monetary investment.

Key Takeaways

• If conducted internally, financial analysis can help fund managers make future business decisions or review historical trends for past successes.
• If conducted externally, financial analysis can help investors choose the best possible investment opportunities.
• Fundamental analysis and technical analysis are the two main types of financial analysis.
• Fundamental analysis uses ratios and financial statement data to determine the intrinsic value of a security.
• Technical analysis assumes a security's value is already determined by its price, and it focuses instead on trends in value over time.

Investopedia / Nez Riaz

Financial analysis is used to evaluate economic trends, set financial policy, build long-term plans for business activity, and identify projects or companies for investment. This is done through the synthesis of financial numbers and data. A financial analyst will thoroughly examine a company's financial statements —the income statement , balance sheet , and cash flow statement . Financial analysis can be conducted in both corporate finance and investment finance settings.

One of the most common ways to analyze financial data is to calculate ratios from the data in the financial statements to compare against those of other companies or against the company's own historical performance.

For example, return on assets (ROA) is a common ratio used to determine how efficient a company is at using its assets and as a measure of profitability. This ratio could be calculated for several companies in the same industry and compared to one another as part of a larger analysis.

There is no single best financial analytic ratio or calculation. Most often, analysts use a combination of data to arrive at their conclusion.

In corporate finance, the analysis is conducted internally by the accounting department and shared with management in order to improve business decision making. This type of internal analysis may include ratios such as net present value (NPV) and internal rate of return (IRR) to find projects worth executing.

Many companies extend credit to their customers. As a result, the cash receipt from sales may be delayed for a period of time. For companies with large receivable balances, it is useful to track days sales outstanding (DSO), which helps the company identify the length of time it takes to turn a credit sale into cash. The average collection period is an important aspect of a company's overall cash conversion cycle .

A key area of corporate financial analysis involves extrapolating a company's past performance, such as net earnings or profit margin , into an estimate of the company's future performance. This type of historical trend analysis is beneficial to identify seasonal trends.

For example, retailers may see a drastic upswing in sales in the few months leading up to Christmas. This allows the business to forecast budgets and make decisions, such as necessary minimum inventory levels, based on past trends.

In investment finance, an analyst external to the company conducts an analysis for investment purposes. Analysts can either conduct a top-down or bottom-up investment approach. A top-down approach first looks for macroeconomic opportunities, such as high-performing sectors, and then drills down to find the best companies within that sector. From this point, they further analyze the stocks of specific companies to choose potentially successful ones as investments by looking last at a particular company's  fundamentals .

A bottom-up approach, on the other hand, looks at a specific company and conducts a similar ratio analysis to the ones used in corporate financial analysis, looking at past performance and expected future performance as investment indicators. Bottom-up investing forces investors to consider  microeconomic  factors first and foremost. These factors include a company's overall financial health, analysis of financial statements, the products and services offered, supply and demand, and other individual indicators of corporate performance over time.

Financial analysis is only useful as a comparative tool. Calculating a single instance of data is usually worthless; comparing that data against prior periods, other general ledger accounts, or competitor financial information yields useful information.

There are two types of financial analysis: fundamental analysis and technical analysis .

Fundamental Analysis

Fundamental analysis uses ratios gathered from data within the financial statements, such as a company's earnings per share (EPS), in order to determine the business's value. Using ratio analysis in addition to a thorough review of economic and financial situations surrounding the company, the analyst is able to arrive at an intrinsic value for the security. The end goal is to arrive at a number that an investor can compare with a security's current price in order to see whether the security is undervalued or overvalued.

Technical Analysis

Technical analysis uses statistical trends gathered from trading activity, such as moving averages (MA). Essentially, technical analysis assumes that a security’s price already reflects all publicly available information and instead focuses on the  statistical analysis of price movements . Technical analysis attempts to understand the market sentiment behind price trends by looking for patterns and trends rather than analyzing a security’s fundamental attributes.

When reviewing a company's financial statements, two common types of financial analysis are horizontal analysis and vertical analysis . Both use the same set of data, though each analytical approach is different.

Horizontal analysis entails selecting several years of comparable financial data. One year is selected as the baseline, often the oldest. Then, each account for each subsequent year is compared to this baseline, creating a percentage that easily identifies which accounts are growing (hopefully revenue) and which accounts are shrinking (hopefully expenses).

Vertical analysis entails choosing a specific line item benchmark, then seeing how every other component on a financial statement compares to that benchmark. Most often, net sales is used as the benchmark. A company would then compare cost of goods sold, gross profit, operating profit, or net income as a percentage to this benchmark. Companies can then track how the percent changes over time.

Examples of Financial Analysis

In the nine-month period ending Sept. 30, 2022, Amazon.com reported a net loss of $3 billion. This was a substantial decline from one year ago where the company reported net income of over $19 billion.

Financial analysis shows some interesting facets of the company's earnings per share (shown above. On one hand, the company's EPS through the first three quarters was -$0.29; compared to the prior year, Amazon earned $1.88 per share. This dramatic difference was not present looking only at the third quarter of 2022 compared to 2021. Though EPS did decline from one year to the next, the company's EPS for each third quarter was comparable ($0.31 per share vs. $0.28 per share).

Analysts can also use the information above to perform corporate financial analysis. For example, consider Amazon's operating profit margins below.

• 2022: $9,511 / $364,779 = 2.6%
• 2021: $21,419 / $332,410 = 6.4%

From Q3 2021 to Q3 2022, the company experienced a decline in operating margin, allowing for financial analysis to reveal that the company simply earns less operating income for every dollar of sales.

Why Is Financial Analysis Useful?

The financial analysis aims to analyze whether an entity is stable , liquid, solvent, or profitable enough to warrant a monetary investment. It is used to evaluate economic trends, set financial policies, build long-term plans for business activity, and identify projects or companies for investment.

How Is Financial Analysis Done?

Financial analysis can be conducted in both corporate finance and investment finance settings. A financial analyst will thoroughly examine a company's financial statements—the income statement, balance sheet, and cash flow statement.

One of the most common ways to analyze financial data is to calculate ratios from the data in the financial statements to compare against those of other companies or against the company's own historical performance. A key area of corporate financial analysis involves extrapolating a company's past performance, such as net earnings or profit margin, into an estimate of the company's future performance.

What Techniques Are Used in Conducting Financial Analysis?

Analysts can use vertical analysis to compare each component of a financial statement as a percentage of a baseline (such as each component as a percentage of total sales). Alternatively, analysts can perform horizontal analysis by comparing one baseline year's financial results to other years.

Many financial analysis techniques involve analyzing growth rates including regression analysis, year-over-year growth, top-down analysis such as market share percentage, or bottom-up analysis such as revenue driver analysis .

Last, financial analysis often entails the use of financial metrics and ratios. These techniques include quotients relating to the liquidity, solvency, profitability, or efficiency (turnover of resources) of a company.

What Is Fundamental Analysis?

Fundamental analysis uses ratios gathered from data within the financial statements, such as a company's earnings per share (EPS), in order to determine the business's value. Using ratio analysis in addition to a thorough review of economic and financial situations surrounding the company, the analyst is able to arrive at an intrinsic value for the security. The end goal is to arrive at a number that an investor can compare with a security's current price in order to see whether the security is undervalued or overvalued.

What Is Technical Analysis?

Technical analysis uses statistical trends gathered from market activity, such as moving averages (MA). Essentially, technical analysis assumes that a security’s price already reflects all publicly available information and instead focuses on the statistical analysis of price movements. Technical analysis attempts to understand the market sentiment behind price trends by looking for patterns and trends rather than analyzing a security’s fundamental attributes.

Financial analysis is a cornerstone of making smarter, more strategic decisions based on the underlying financial data of a company. Whether corporate, investment, or technical analysis, analysts use data to explore trends, understand growth, seek areas of risk, and support decision-making. Financial analysis may include investigating financial statement changes, calculating financial ratios, or exploring operating variances.

Amazon. " Amazon.com Announces Third Quarter Results ."

• Terms of Service
• Editorial Policy
• Privacy Policy
• Your Privacy Choices

SUBSCRIBE TODAY!

• Taxes and Finance

Why Having A Financial Plan Is More Important Now

Having a financial plan in place has always been important for a farm operation, but in years predicted to have thin margins, it’s essential. And while predictions for exactly what the growing season will bring are unclear, Mike Gunderson, chief credit officer at Farm Credit Illinois, says it’s no excuse to avoid going through your financials.

“One piece of pushback I get from farmers when I talk to them about budgeting is they don't know how many bushels they're going to grow this year, the weather or what price they're going to receive. And I just remind them, it's a budget, not an income statement,” he says.

Gunderson says the plan you make serves as a starting point, not a finishing point. It is bound to change throughout the year, but it’s key to understand how to minimize costs while maximizing production. If you aren’t sure where to start, he recommends finding a template from a source such as Purdue University or FarmDoc at the University of Illinois.

What To Include As you begin putting the plan together, Tanner Hoffman, associate vice president at Clutch and a Nebraska farmer, advises to take even the smallest component seriously this year – even if you don’t think you have the time to. 

“It's important every sort of variable is considered with a little bit more scrutiny, because it could be death by 1,000 paper cuts if you miss a little bit of marketing, a little bit on financing, a little bit on inputs and a little bit on timing in the field,” Hoffman says. “All those things add up now and there's just not enough margin to keep you going.”

He suggests starting at the operations level, and then figuring out your costs and breakevens on a field- or crop-level basis.

“Think beyond the seed, fertilizer and chemical inputs. That’s your insurance, equipment and labor expenses. These things can be the true difference between profit and loss,” he says. “Another important consideration is family living expenses. You’ve got to pay your mortgage, put food on the table and take care of all of the family bills. If you don’t include that, it can be really tough.”

Hoffman adds some operations want to look at the operation’s profit and loss by itself and carve out a separate family budget, but says it should still be considered either way.

Once all of your costs are taken into account, Gunderson says to look at your last few years of average yields, or the USDA’s current yield projections, alongside commodity prices to get an idea for income. 

Where to Make Room If the operation’s budget is looking grim at this point, Gunderson shares three places he would take a closer look at:

1. Cash rents He says the first place to start when making more room in the annual budget is cash rent values.

“I know those aren’t our favorite conversation to have, but if landlords renegotiated rents up while money prices were climbing, then we ought to be able to have a serious conversation about cash rents that are in line with the market environment we're in today,” Gunderson says.

2. Equipment upgrades Next is to optimize your equipment fleet.

“If you’ve been accustomed to buying new equipment every year, there might be an opportunity to pare down on those purchases – especially if your fleet is appropriately sized for the scale of the operation,” Gunderson advises.

3. Ask your agronomist Gunderson’s third step is to talk to the experts who know your operation well.

“There's going to be a combination of seeds, fertilizer and chemicals that will influence the productivity of that crop on that particular farm and its soil,” he says. “I could reduce fertilizer expenses, but if the soil is in need of nutrients that might not be the best place for to cut back.”

At the same time, Tony Jesina, senior vice president of insurance for Farm Credit Services of America, says risk management is an important piece to avoid scaling back on.

“Risk management is an area some people may be tempted to cut back and say ‘well I'll just take less crop insurance’,” Jesina says. “I think that’s pretty dangerous. We're already going to struggle to cover breakevens the way it is, and so trying to save your way to prosperity is pretty tough.”

Whether it’s for help making your plan, updating it, or cutting back, the experts recommend keeping your team of advisors in the loop.

“Stay in close conversation with your financial officer and your crop insurance agent. They should be your informal board of directors,” Jesina says. “As the year evolves, they are going to be instrumental in helping you evaluate the situation.”  

Latest News

Oliver Sloup, Blue Line Futures, says the USDA Ag Outlook Forum set the benchmark showing a nearly 4 million acre increase in soybeans and 3.6 million acre decrease in corn. So that is already priced into the markets.  

Costs are the main obstacle to increasing the use of sustainable aviation fuel (SAF), Exxon Mobil Senior Vice President Jack Willams said Friday.

Rising interest rates in the past few years have squeezed their margins for error. Higher operational costs, volatile markets and even more volatile weather make doing the Biggest Job on Earth harder than ever. 

Quickshot is Helena’s newest entrant in the field, which provides seed fluency in addition to crop nutrient package. For 2024, it’s available in limited quantities.

A recap of the week's price action with outlook for the next 5, 30 and 90 days.

Farm attorney Matt Folz shares the pros and cons of creating a charitable remainder trust.

• Election 2024
• Entertainment
• Newsletters
• Photography
• Personal Finance
• AP Buyline Personal Finance
• Press Releases
• Israel-Hamas War
• Russia-Ukraine War
• Global elections
• Asia Pacific
• Latin America
• Middle East
• March Madness
• AP Top 25 Poll
• Movie reviews
• Book reviews
• Personal finance
• Financial Markets
• Business Highlights
• Financial wellness
• Artificial Intelligence
• Social Media

What to know about the SAVE plan, the income-driven plan to repay student loans

FILE - Wheaton College students stop to chat on the Norton, Mass. campus, Feb. 13, 2024 as snow falls. More than 75 million student loan borrowers have enrolled in the U.S. government’s newest repayment plan since it launched in August. (Mark Stockwell/The Sun Chronicle via AP, File)

• Copy Link copied

NEW YORK (AP) — More than 7.5 million student loan borrowers have enrolled in the U.S. government’s newest repayment plan since it launched in August.

President Joe Biden recently announced that he was canceling federal student loans for nearly 153,000 borrowers enrolled in the plan, known as the SAVE plan . Forgiveness was granted to borrowers who had made payments for at least 10 years and originally borrowed $12,000 or less.

The SAVE plan was created last year to replace other existing income-based repayment plans offered by the federal government. More borrowers are now eligible to have their monthly payments reduced to $0, and many will qualify for lower payments compared to other repayment plans.

For Lauran Michael and her husband, the SAVE plan has reduced student loan payments by half.

Since getting married, they’ve both been paying off her husband’s student loans, which would have amounted to about $1,000 a month when payments resumed after a pause during the pandemic. Under the SAVE plan, their payments are now $530 a month.

“We don’t want our loans dictating our life choices, and us not being able to do other things because we’re paying so much money. The SAVE plan is definitely a game changer for us,” said Michael, a 34-year-old interior designer in Raleigh, North Carolina.

Michael’s family is paying for daycare for their two children using the money they saved from not making payments during the pandemic and the reduced payments under the SAVE plan.

If you are interested in applying for the SAVE plan, here’s what you need to know:

WHAT IS AN INCOME-DRIVEN REPAYMENT PLAN?

The U.S. Education Department offers several plans for repaying federal student loans. Under the standard plan, borrowers are charged a fixed monthly amount that ensures all their debt will be repaid after 10 years. But if borrowers have difficulty paying that amount, they can enroll in one of several plans that offer lower monthly payments based on income and family size. Those are known as income-driven repayment plans.

Income-driven options have been offered for years and generally cap monthly payments at 10% of a borrower’s discretionary income. If a borrower’s earnings are low enough, their bill is reduced to $0. And after 20 or 25 years, any remaining debt gets erased.

HOW IS THE SAVE PLAN DIFFERENT?

More borrowers in the SAVE plan are eligible for $0 payments. This plan won’t require borrowers to make payments if they earn less than 225% of the federal poverty line — $32,800 a year for a single person. The cutoff for other plans, by contrast, is 150% of the poverty line, or $22,000 a year for a single person.

Also, the SAVE plan prevents interest from piling up. As long as borrowers make their monthly payments, their overall balance won’t increase. Once they cover their adjusted monthly payment — even if it’s $0 — any remaining interest is waived.

Other major changes will take effect in July 2024. Payments on undergraduate loans will be capped at 5% of discretionary income, down from 10% now. Those with graduate and undergraduate loans will pay between 5% and 10%, depending on their original loan balance.

The maximum repayment period is capped at 20 years for those with only undergraduate loans and 25 years for those with any graduate school loans.

WHO QUALIFIES FOR THE SAVE PLAN?

The SAVE plan is available to all student loan borrowers in the Direct Loan Program who are in good standing on their loans.

Read more about the SAVE plan here .

HOW DO I APPLY FOR THE SAVE PLAN?

Borrowers can apply to the SAVE plan using the Income-Driven Repayment Plan request through the Education Department’s website.

HOW WILL I KNOW THAT MY DEBT HAS BEEN CANCELED?

If you are one of the borrowers who is benefitting from forgiveness under the SAVE plan, you will receive an email from the Education Department.

WHAT ARE OTHER PROGRAMS THAT CAN HELP WITH STUDENT LOAN DEBT?

If you’ve worked for a government agency or a nonprofit , the Public Service Loan Forgiveness program offers cancellation after 10 years of regular payments, and some income-driven repayment plans cancel the remainder of a borrower’s debt after 20 to 25 years.

Borrowers should make sure they’re signed up for the best possible income-driven repayment plan to qualify for these programs.

Borrowers who have been defrauded by for-profit colleges may also apply for relief through a program known as Borrower Defense.

If you’d like to repay your federal student loans under an income-driven plan, the first step is to fill out an application through the Federal Student Aid website .

WILL THERE BE FUTURE FORGIVENESS?

Several categories of borrowers would be eligible for relief under Biden’s second try at widespread cancellation after the Supreme Court rejected his first plan last year.

The proposed plan includes relief for borrowers who have been paying their loans for at least 20 or 25 years, automatic forgiveness for borrowers who are eligible for income-driven repayment plans but are not enrolled, and loan cancellation for borrowers who attended a for-profit college that left them unable to pay their student loans, among others.

Whether any of the relief will materialize is a looming question as conservatives vow to challenge any attempt at mass student loan cancellation. The new proposal is narrower, focusing on several categories of borrowers who could get some or all of their loans canceled, but legal challenge is almost certain.

Currently, borrowers who are eligible for forgiveness under the SAVE program will get their loans discharged on a rolling basis, according to the Education Department.

This story was first published on March 10, 2024. It was updated on March 18, 2024, to correct the number of borrowers who have enrolled in the government’s newest repayment plan.

The Associated Press receives support from Charles Schwab Foundation for educational and explanatory reporting to improve financial literacy. The independent foundation is separate from Charles Schwab and Co. Inc. The AP is solely responsible for its journalism.

House Republicans want to raise the Social Security age. It could hurt those who 'work their whole lives and die sooner,' the agency's head says.

• House Republicans proposed raising the age for receiving Social Security benefits.
• Social Security benefits are already facing funding issues over the next decade.
• The proposed change has sparked criticism from both Democrats and some Republicans.

House Republicans have a plan to raise the age at which Americans receive Social Security benefits — and the agency's leader isn't on board.

Earlier this week, the Republican Study Committee unveiled their fiscal year 2025 budget proposal — called Fiscal Sanity to Save America — which consisted of nearly 200 pages of funding priorities for key issues, including taxes , higher education , and healthcare.

The budget also addressed an issue that has long been contentious across both parties: Social Security. According to the proposal, the committee wants to "make modest adjustments to the retirement age for future retirees to account for increases in life expectancy." The proposal did not specify the exact age they're eyeing for Americans to receive their benefits, but it would likely be above the current threshold of 67 years old.

The committee's chairman Kevin Hern emphasized in the budget that "we cannot be clearer: we WILL NOT adjust or delay retirement benefits for any senior in or near retirement."

Still, the proposal has some administration officials concerned for future retirees. During a House Ways and Means Committee hearing on Thursday, Social Security Commissioner Martin O'Malley said that "we have to be mindful of people who really do hard work, hard labor, their whole lives, and who die sooner than those of us who are privileged enough to do work that is not as taxing on our bodies and our physical well-being."

Related stories

Full Social Security benefits are already in jeopardy over the next decade. In March 2023, the Social Security and Medicare Board of Trustees estimated that the Old-Age and Survivors Insurance (OASI) Trust Fund might only be able to pay out full benefits over the next decade, which is earlier than anticipated.

"My dad had an expression, 'Don't tell me what you value. Show me your budget, and I'll tell you what you value.' The Republican Study Committee budget shows what Republicans value," President Biden said in a statement on the RSC budget. "This extreme budget will cut Medicare, Social Security, and the Affordable Care Act. It endorses a national abortion ban. The Republican budget will raise housing costs and prescription drugs costs for families. And it will shower giveaways on the wealthy and biggest corporations. Let me be clear: I will stop them."

Even some Republican lawmakers have been critical of the House's budget proposal. GOP Sen. Josh Hawley called the plan "the stupidest thing I ever heard," according to The Hill, and GOP Sen. Mitt Romney warned his House colleagues of the consequences of putting forth this plan during an election year.

"Talk about a gift to the Democrats," Romney said . "Seems like people have lost their political ear if they think any adjustments to the benefits of Social Security makes sense to talk about at any time, let alone during an election year."

Retirement is already looking bleak for some seniors, who are facing lower incomes and high healthcare and housing costs . A little over half of Americans over the age of 65 are earning under $30,000 a year, according to Census Bureau's Current Population Survey . And for many Americans, Social Security is a financial lifeline in their later years. Among typical retirees , just under 80% say Social Security is a source of income — a far greater share than retirement savings or wages.

Biden said that his "budget represents a different future," one where "we protect Social Security so the working people who built this country can retire with dignity."

"I see a future for all Americans and I will never stop fighting for that future," he said.

Watch: Surprising misconceptions about Trump and Biden ahead of the 2024 election

• Main content

We've detected unusual activity from your computer network

To continue, please click the box below to let us know you're not a robot.

Why did this happen?

Please make sure your browser supports JavaScript and cookies and that you are not blocking them from loading. For more information you can review our Terms of Service and Cookie Policy .

For inquiries related to this message please contact our support team and provide the reference ID below.