Of all the research and planning that goes into starting and running a small business, financial plans probably trip up the most budding entrepreneurs.
No matter how solid your business idea may be, it’s hard to predict revenue and expenses from the get-go.
But just as keeping a budget and reconciling your accounts are crucial for keeping an eye on your business financials, planning is essential to make true progress growing your business.
Seeking small business funding?
A financial plan not only helps you identify and work toward goals; it also helps you attract investors if you choose to seek outside funding. Your pitch to a potential investor must address how your company generates revenue and manages expenses. Plus, you’ll need to be comfortable enough with your company’s finances to know how much money to ask an investor for, and explain how you intend to use that funding.
SCORE client USA Gypsum saw the benefit of focusing on its financial plans. Together with his mentor Lou Davenport, company President and General Manager Terry Weaver developed financial projections and organized the business’ balance sheet before approaching banks. After reviewing his strong reports, every bank Weaver approached approved the company’s request for a line of credit.
“By pointing out things in the financial statements that I needed to focus on, such as honing in on my gross profit and cost of goods sold, he showed me how to improve the bottom line,” Weaver said.
Your financial planning equation
There’s no one magic number that will make or break your financial plan. Rather, it’s a mix of figures that come together to give you a bigger picture of your business progress.
Not sure how to turn spreadsheets into a plan? Start by analyzing the following:
- Cash flow runway: Regardless of sales and income, how much cash is in the bank right now? How long could it last to cover your business expenses?
- Cash flow forecast: Do you have enough cash on hand to meet the demands of your business cycles and seasons? Looking not just at this month’s bills but also at what’s coming down the line this season or next can help you plan for times of financial uncertainty.
- Accounts receivable and accounts payable: When you first start your business, it’s nearly impossible to know how promptly your customers will pay you. Start by tracking the due dates on your accounts payable, so you know when you’ll need cash on hand. Then, as you gain customers or clients, track their payment habits. This will give you a better idea of how quickly money flows into your business.
As you begin to review your finances and plan for the future, be sure to talk with your business partners or trusted advisors like a SCORE mentor. By verbalizing how your business is doing financially right now, it’ll be easier to put into words how you plan to grow those finances and your overall business.