Key Elements to Consider while Preparing a Financial Plan


Key Elements to Consider while Preparing a Financial Plan

Finance management plays a crucial role in any business, especially for its smooth functioning and sustainable financial stability. As a significant and integral part of financial management, financial planning works like a medium that helps business owners ensure better utilization of finances in order to keep their company financially secure for the future.

From an owner's point of view, financial planning provides numerous short and long-term advantages, which brings the need to alter the plans during different phases of business growth or expansion. A well-prepared financial plan also proves to help manage taxes and other financial liabilities. On the whole, it is an essential tool that you, as a business owner, can use to manage your expenditure well so that to minimize your dependence upon external sources of funding, even amidst an emergency.

Breaking Confusions
Many people confuse financial plans with budgets, whereas both terms mean different. While a budget is limited to spending and can be categorized into smaller parts for specific departments and processes, a financial plan consists of a budget that also includes crucial financial information such as comprehensive, itemized division of your business's income, revenue anticipation, cash flow, asset management, and other vital data providing a clear view of your company's financial health. In addition, financial plans usually include long-term goals such as revenue-boosting targets, challenges to these goals that must be met to obtain those objectives.

Why does your business need a financial plan?
While a financial plan might not be necessary for all types of businesses, it can literally benefit all kinds of businesses.

Let's put it into simple words. Growth doesn't come out of anywhere; it is often achieved via a lot of planning and hard work. Without these, you might not meet your goals even after putting in your best effort. Similarly, creating a financial plan not only enables you to become aware of your current financial situation but also helps you understand your future goals and how to obtain them.

A financial plan that includes liability and asset calculations, investment strategy deployment, a documented budget, and other essential factors is necessary for your business to aid financial stability.

Key elements you should include in your financial plan:

Crucial financial statements
The most fundamental financial statements you need to start preparing a financial plan are:
Income Statement
The income statement, which is also called P&L or profit and loss statement, provides information on revenue and expenditure. Revenue runs your business; it is the money earned during a specific accounting period. For instance, if you are in the construction business, revenue is money you receive per project. Expenses include costs like inventory expenses, payroll, taxes, insurance premiums, and loan-payment installments. By subtracting expenses from revenue, you can determine if your business is in profit or loss.

Balance Sheet
Business owners consider the balance sheet one of the crucial financial statements that show a clear picture of their financial strength. It reveals what your company owns and what it owes with accurate information on its assets, liabilities, equity at a certain point in time. As a result, this helps to find out your business's financial performance.

Cash Flow Statement
As the term itself says - cash flow shows how much money flows into and out of your business checking accounts. With this particular statement, you can examine how well your company manages its cash and cash position, for instance, how well it manages collections, payment obligations, operating expenses, and investments.

Forecast sales opportunities
Another critical element of your financial plan should be sales forecasting that helps you determine your future sales. You might be managing your inventory and cash flow fairly, but to manage it accurately, you must have a clear picture of your future sales opportunities.

Sales forecasting might sound a little complicated to you, but with the help of a financial professional, you can do it pretty well. Remember, sales forecasting can be challenging, but running a business without it can be way more complicated than that.

Prepare a budget for expenses
Having a budget for expenses will help you determine how much it will cost you to convert the forecasted sales into reality. Therefore, the expenses you should include in your budget are rent, payroll, utilities, marketing, and to name a few. Now you can further divide them into two major categories - fixed costs and variable costs.

Fixed costs include rent and employee salaries, while variable costs include marketing and additional services you acquire temporarily on a project basis. Once you divide them into these categories, you can further work on building an expense budget in a fast and easy way.

Perform break-even analysis
Calculating finances to determine when your company will profit (depending upon your products and services) is called break-even analysis. When performed correctly, the analysis will reveal the number of products you need to sell or services you need to provide in order to cover your costs.

Remember, when you break even, your business will neither make nor lose any money; however, costs will be covered. The formula for finding your break-even point is - variable costs subtracted by fixed costs divided by average price.

Build a payroll plan
If you are a small business owner who is operating the business single-handedly, you need not do this. However, if you have a team, you should determine how their salaries affect your business's overall financial situation.

Preparing a payroll plan can be the best medium for you to examine each employee's necessity. You may start by describing your employees' roles, their expertise, knowledge, and training requirements. Based on this information, you can set their compensation and plan payroll pretty much effectively.

Review your strategic plans frequently
As any other business owner, you might also have strategic plans for your business's success. It is an excellent practice to take some time to formulate or review your existing strategic plans. This will not only help you have a clear picture of your financial requirements to appropriately execute the strategic plans but also support you in improving these plans according to the changing economic conditions of your business as well market.

Plan your taxes
If you oversee tax calculation, your company's gross income can depict its financial situation inaccurately. Companies are obliged to pay federal taxes with a 21% tax rate, and state corporate taxes can go as high as 11.5%.

Considering these rates, your company might be paying almost one-third of its total income. Knowing that amount in advance via tax assessment and planning can considerably help you prepare your final financial plan.

Build a financial reserve as an emergency fund
According to the Federal Emergency Management Agency report, 40% of businesses fail to reopen after a disaster. Additionally, 25% of businesses fail within one year. While several factors are responsible for a business failure, running out of funds is one of the most common and significant reasons.

Although it is challenging, you can minimize your firm's chances of going bankrupt by preparing a financial plan with an emergency fund as a key element. That way, you will have enough cash with your firm to withstand specific disruptions caused by unwanted events or calamities.

Get your business insured with the right policy
In order to tackle challenges caused by a negatively affecting event, business insurance plays a crucial role similar to an emergency fund reserve. For example, if your company office is in a region that has been hit by an earthquake or floor and damaged your business premises too, you can use your insurance policy to claim compensation for covering the cost of recovery.

You can choose from various policies such as property insurance, business interruption insurance, etc., whichever suits you according to the area your company is settled in, the level of risk exposure vulnerability, and future predictions of natural calamities.

Plan for debt management
It hardly matters how much you try to get rid of business debts as soon as possible because paying off debts takes time, especially on huge loans with high-interest rates and extended repayment periods.

In order to prevent your loans from becoming a burden, you should always first determine the amount of loan you can manage without any significant difficulty. Or, if you already have repayments to be done against a few loans, you need to prepare a debt repayment or management plan, according to which you may consider prioritizing paying off high-interest debts first and then lowest-interest ones.

Regularly review your income and expenses
Even if your firm experiences excellent revenue streams, it might be at risk if you ignore its insufficient cash flow or inconsistent cash flow patterns. Therefore, it is always recommended to keep an eye on your earning and spending using some accounting methods. Here, if you lack accounting knowledge or expertise or do not have qualified and experienced accounting professionals in place, you may choose outsourced accounting services just like many other business owners do.

With this, if you detect additional expenses (that can be eliminated) in specific business areas, try to cut those costs and add to your savings. That way, reviewing your income and expenses helps you prepare a financial plan where you have savings and the least chances of running out of capital.

Prepare the final financial plan and stick to it
Once you prepare a comprehensive and effective financial plan, do not diverge from it. Instead, try your best to stick to it and spend within the limits you described in that plan. Nevertheless, doing this is not always easy because you are often faced with unexpected expenses, for instance, urgent hiring requirements or the need to replace outdated computer systems.

Therefore, if you face such expenses that make you go beyond your plan, you can simply record those transactions and tag them, describing the reason why it was a necessary expense and how you can plan the same in the future.

Keep your financial plan readily accessible
Most business owners put a lot of effort and spend a considerable portion of their precious time preparing a financial plan; however, many overlook it after some time or the initial implementation phase. Ensure you don't do that. It would be great to review your plan regularly and make any adjustments whenever needed.

Besides, you need to keep it handy because you never know where you meet an angel investor who would most probably be interested in seeing your financial plan - the updated one. Yes, you should have your plan readily accessible at all times with the latest changes updated.

By now, you must have understood the importance of having a financial plan and become aware of its key elements. Another critical thing to know here is that you can make changes to your plan but avoid making big ones and prioritize longer-term planning over short-term planning because smaller savings might not bring a difference in your financial health, but long-term damages can.

Therefore, prepare the plan wisely and strategically. Since it will require good accounting knowledge, and if you are not good at it, you may look for virtual accounting services. These service providers can help you with the accounting work, providing you with the numbers you essentially need to prepare the best possible financial plan for your business.

Meet The Author:

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Cathrine Troyer

Cathrine Troyer is a content strategist and business tech writer working at Cogneesol - a leading firm in the accounting services landscape. She is passionate about writing on finance and accounting, small business growth, and entrepreneurship. In addition, she is contributing her skills, knowledge, and experience by helping business owners (from new, small businesses to large-size firms) via her informative and fact-full articles and blog posts.

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