In the United States, there are 32.5 million small businesses, but only 48.9% of these businesses will survive five years or more. One of the biggest reasons why businesses fail is because they have cash flow problems.
As a business owner, you must make a financial plan to help you prepare for the future and for unexpected circumstances. This will protect you and will help you survive even the toughest times.
Do you want to learn more about how to make a financial plan for a small business? Keep reading this guide for everything you need to know about small business budgeting and financial planning.
Calculate Set-Up Costs
Calculating your business set-up costs is one of the first things you need to do when opening a small business. There are many different items that you will need to start your business, depending on what industry you work in.
Learning more about these up-front costs will help you prepare financially for opening a business. It will also help you determine whether or not you need to take out a loan or borrow funds to cover the costs.
Some of your set-up costs will include rent and utilities, equipment, registration for a business, and more.
Create a Profit and Loss Statement
A profit and loss statement is also known as an income statement or P&L. This is a statement that explains how your business made a profit or a loss over a certain amount of time.
It is typically in table form and will list all of your revenue streams and expenses. At the end of your profit and loss statement, it will show the total net profit or net loss for the time period.
Include a Cash Flow Statement
Even if you make a profit from your business, you can still run out of cash when running a business. This is especially common when you own a business that has a busy season, as you may not make a profit until your busy season starts.
A cash flow statement will help you determine what funding you need for your business or can help you determine whether or not you have enough cash to run your business without additional funds.
Make sure you have a cash flow statement to show how much your ending cash balance is at the end of a typical month.
Make a Balance Sheet
Next, you should make a balance sheet for your business. This sheet includes all of your assets and liabilities and provides you with a snapshot of your business’s finances for the first year of operation.
It will help you determine whether or not your business will be successful or if it is too risky to attempt.
Create a Sales Projection or Forecast
To accurately estimate your income and profits, you need to create a sales projection or forecast for your business. This is an estimate of how much product you think your business can sell in a certain amount of time.
This projection is vital when you have business investors or lenders, as they will want to know how well your business will perform before they invest.
Track Your Break-Even Point
When it comes to financial planning, new business owners must track their break-even points. This is essential, as it shows you how much money you need to make to cover all of the costs of opening your business.
Once you have covered all of these costs, your business will be able to turn a profit.
Your break-even point is important when it comes to your financial forecasts and will help you determine if your business plan will be effective or feasible. When you are calculating your break-even point, make sure you test several different scenarios and have realistic sales estimates.
Monitor Your Actual Spending
Not only do you need to create a financial plan for your business, but you need to monitor your actual spending. This way, you can see how accurate your projections were and find ways to adjust if necessary.
By monitoring your finances, you will be able to spot early signs of financial problems before they get worse.
Plan for Contingencies
As much as planning is important for your business, there are things that can affect your financial plan that is out of your control. Because of this, you must plan for contingencies. This way, you will know what to do if your finances deteriorated suddenly or if you have some type of business emergency.
For example, businesses that opened before the COVID-19 pandemic likely didn’t realize how much that would impact their sales.
One way you can plan for these unforeseen circumstances is by having an emergency fund to cover your business expenses.
Get Professional Help
Finally, you should get professional help. While you can attempt to complete all of these steps on your own, you may not create an accurate financial plan if you are a beginner in business finances.
Hiring an accountant or a financial planner can help you better understand the financial position of your business and can help you plan for the future.
They will walk through each step of your financial plan with you to see if there is anything that was left out. This way, you can feel confident that your financial plan for your small business is as accurate as possible.
Professional financial advisors can also help with other aspects of your business, like tax planning services.
Need Help Creating a Financial Plan for a Small Business?
Small business planning is necessary for any company and can help you avoid financial difficulties and other problems with your business. By following each of these tips, you can create a financial plan for a small business to help you grow.
If you need help with small business finances, Bennett Financials can help! We provide financial services for businesses including bookkeeping, tax planning, and CFO services.
Contact us today to learn more about our services and to get help creating a financial plan for your business.