Making a Financial Plan for Your Small Business

A financial plan is one of the most critical steps in a successful business plan. It can help you secure funding, pitch to investors, and grow your company. Having a well-designed financial plan can help you avoid costly mistakes and improve the efficiency of your business.

Although it's not necessary for you to have a degree in accounting to create a financial plan, it's still important to know the ins and outs of it. In this article, we'll discuss the essential components of a financial plan to help you launch your business.

Profit & Loss Statement

A profit and loss statement is a type of financial document showing how your company has performed over time. It can be divided into three categories: income statement, profit and loss statement, and pro forma income statement.

A profit and loss statement is a table showing your company's financial activities, such as its revenue streams and expenses. It also displays the total amount of money that the company has lost.

In addition to the revenue streams and expenses, the operating expenses section shows your company's costs while running its business. These are the expenses that are not directly related to the sale of your business.

Cash Flow Statement

The cash flow statement is also a vital part of any company's financial operations, showing how much money the company has to spend. It can estimate how much money the company has brought in and how much it has paid out. Without this information, raising funds for your business is impossible.

One of the most common types of accounting is the accrual method, which is a method that allows a company to track its expenses and sales at the same time. For instance, if a company has a big order for a new product, it typically takes a while to account for all of its sales revenue. The matching principle is also the basis of this method.

The cash method is also a common type of accounting that allows a company to track its expenses and sales simultaneously. It eliminates the need for the company to match its costs with its sales. Although the cash method may seem like a more streamlined method of accounting, it's not the best idea for your small business. It will still show the same expenses and income as the profit and loss statement.

Balance Sheet

Your balance sheet is vital to any company's financial operations, as it shows how well you're doing at a particular moment. It can also estimate how much money the company has available to spend. During the accounting year that ended in December, your total profit and loss will be added or subtracted from your retained earnings, a component of your company's equity. This makes your total profit and loss since the company's inception.

If you are a sole proprietor or a pass-through entity, then your retained earnings won't be affected by "retained earnings." All your losses and profits are passed through to the owners and aren't rolled over or retained as they would be in a corporation.

Sales Forecast

Your sales forecast is vital to any company's financial plan, showing how much you plan to sell in a given period. It's also integral to any business planning process, especially when investors or lenders are involved. This type of forecast is essential, as it can help you track how your company is performing and how much money you have available to spend.

One of the most critical factors you should consider when creating a sales forecast is that it should be consistent with the number you use in the profit and loss statement. A sales forecast is not a one-size-fits-all method, as every business has different needs. You should also segment and organize your sales forecast according to your company's specific needs. For instance, you might want to create a list of segments that are helpful to your marketing and planning efforts.

Business Ratios

The company's financial documents, including its balance sheet and profit and loss statements, should be included in a financial plan. You need to calculate these numbers to run a successful business. Having these documents in a business plan is also a good idea, especially if you're planning on creating an internal one.

Most of the time, bankers and business owners use multiple ratios to calculate a company's financial situation. These include debt-to-equity, gross margin, and return on investment.