Financial planning and forecasting can be some of the most challenging work for small business owners. However, it is also some of the most important work you will ever do for your startup or firm. Data has shown that 82% of businesses fail due to cash flow issues, with only 40% of businesses proving to be profitable.
With a clear financial plan in hand, you can make more informed decisions on the future of your company or how to sell it effectively. Going about the process can be troublesome, especially if you don’t have a dedicated financial advisor on the payroll. Let’s discuss how writing a financial plan can be helpful for your small business and how you can go about the process smoothly.
The Value of Writing a Financial Plan for your Small Business
Writing a financial plan isn’t a waste of time by any means. Even if you’ve decided to sell your company outright, writing such a document will help you value your assets more precisely.
For others, financial plans can give a clear insight into the company’s position in the market and growth projections. Financial planning is essential whether you want to optimize your workflow, present your company to investors or buyers, or simply keep tabs on company finances.
HBR indicated that entrepreneurs who write formal plans for their businesses are 16% more likely to succeed in achieving their goals. The research also indicated that those who seek financial support from investors, banks, or shareholders are 19% more likely to commit to their initial plans. Before you write off financial planning as a waste of resources, here are some of the most concrete reasons you should consider it:
- More precise decision-making in regards to company cash flow management
- Calculated cash investments and minimized risk of cash flow errors
- Quarterly and yearly forecasting of profits and losses
- Detect possible cost reductions to raise profit margins
- Discover your small business’ break-even point
- Objectively review your small business’ total value for sales purposes
Building a Business: The Financial Plan | Saïd Business School, University of Oxford
1. Take the Elements of a Proper Financial Plan into Account
When it comes to writing a financial plan, you want the document to be as thorough as possible. Luckily, certain elements have become standard affairs in financial plans for businesses. Go through the following points and cover each one at your discretion.
Depending on the scale, manpower, and resources available in your company, some financial planning stages will take precedent over others. If you are not a financial expert yourself, it’s always good practice to seek professional financial help in these affairs. It will ensure that no errors are made in the financial plan and that you can use it to properly value your business before selling.
Statement on Profits and Losses
Your business’ profits and loss statement (or P&L as it is commonly referred to) represents a table of your company’s income and spending. These tables are usually written quarterly (three-month periods), but you can write more comprehensive tables, taking entire fiscal years into account.
Operating expenses should also find their way into your statement on profits and losses, such as insurance, rent, utilities, etc. This part of the financial plan should include the company’s revenue or sales, cost of sale, and gross margin. Combined, this data will show the reader how your business is making money and at what rate.
Statement on the Business’ Cash Flow
Cash flow represents the journey of money on its way through your small business. Income is made and then paid out to suppliers, personnel, operational costs, etc. The end-cash balance at the end of each month will indicate how effectively you are managing your finances.
Your cash flow statement is different from the profits and losses because the former indicates a numeric cash value at the end of each month. Comparing the two will show you how well you’re managing your income and saving money beyond the costs required to keep your business operational.
Balance Sheet Overview
A balance sheet is a momentary indication of how well your business is doing currently. This part of the financial plan should include information on how much clients owe you, how much money there is in the bank, etc. The information you should write into this part of the financial plan is as follows:
- Business’ assets – inventory, hardware, available balance
- Business’ liabilities – loans, credits, credit balances
- Business’ equity – stocks, shares, earnings retained
Forecast for Future Sales
Based on previous quarterly and yearly reports, you should write a segment on your sales projections. If you are planning to sell your company soon, the future owner will want to know that they can turn a profit. You can use the information gathered in your profits and losses report to create a precise projection of potential future income.
If you sell different types of products/services, each category should receive a forecast of its own based on market and client interests. Refer to the cost of sale information mentioned in profits and losses as well to create a more informed overview of the sales forecast.
Existing Personnel Overview
Even though you may be selling your business, the new owner might be inclined to retain some or all of your staff. If you are a solo business that is selling assets and projects to a bigger entity, you can skip this part as you don’t have the personnel to speak of.
Otherwise, include a breakdown of each person’s experience with your company, their pay, and any benefits you provide for them. This will illustrate how essential each person is to the business’ continued wellbeing. You can also mention any expansion or onboarding plans you may have had for future employees for the sake of transparency.
Analysis of Business Ratios
Business ratios represent a compare-and-contrast section of the financial plan which considers all previous segments. Once you’ve written segments on profits and losses, cash flow, balance sheet, and sales forecast, you can write a table of ratios between them.
These are useful to determine the business’ gross margin, returns on sales and assets, as well as ROI for the new owner. While a potential owner may bring their financial advisor on board to review your financial plan, including business ratios in the document upfront is a sign of good faith.
2. Schedule Financial Planning to Help your Business Thrive
If you are planning to sell your business in the next few years, writing financial plans quarterly is extremely helpful. Scheduled financial planning will give you a clear overview of how your business is performing throughout the year. Once you come in contact with a potential buyer, they will want to know a bit about your business's financial history beyond the past three months. To achieve that, start writing financial overviews as early as today to prepare for the inevitable sales talks later on.
3. Writing Financial Plan Templates Will Make Future Planning Smoother
To keep your financial records as clean and legible as possible, you should always use the same writing style and formatting. A financial plan template will help make your writing process faster and easier, not to mention any future comparisons you may want to make. Buyers who notice that your financial plan documents aren’t neatly organized quarter-to-quarter might get a bad feeling. Avoid that by standardizing your financial planning format early on.
4. Asking for Second Opinions from Accountants/Financial Experts is Beneficial
Second opinions matter when it comes to financing management, especially if you are ready to sell the business. Get in touch with a finance specialist, accountant, or other professional business advisors who can review your financial plans. They will give you a good insight into how to value your business correctly and what its strengths are. This information will be useful in negotiations as you will be able to get more out of the sale than you would otherwise.
5. Store and Cross-Analyze New Financial Plans with Previous Finance Overviews
Lastly, you should create a break-even analysis and business ratios between existing financial overviews in preparation to sell your company. The more concrete information you provide potential buyers with, the more likely they will be to make a tangible offer. You will also be able to spot unnecessary costs or profit losses that way and further increase your business’ value. Asset value may also change over time, so compare your new financial plan with previous ones to make good forecasts for your upcoming sales efforts.
Deciding to sell your business is a difficult decision, regardless of how much you stand to earn. After pouring your heart and soul into the business, you want to make sure that you get your time’s worth out of it. Writing a financial plan to give potential owners a good overview of its situation will bring you closer to sealing a good deal.
With a concrete financial plan in hand, you will never undersell your business and even be able to raise the price if a buyer is excited about your assets. Take the time to review your finances, profits, losses, assets, and liabilities before settling on a realistic price. However, be open to negotiating if you want to sell your business quickly and are in dire need of monetary resources.
Author’s bio. Jessica Fender is a copywriter and blogger at UnemployedProfessors with a background in marketing and sales. She enjoys sharing her experience with like-minded professionals who aim to provide customers with high-quality services.