Financial Plan for a small business

Posted by SkillMaker in Jan, 2017

What is a Financial plan?

A financial plan for a small business is a document that evaluates how well the business is financially achieving its strategic goals, now and into the future. In other words, it assesses how profitably the business is currently operating (or not) and whether or not this situation is likely to continue. The evaluation takes account of the business’s assets, revenue, expenses (including tax liabilities), cash flow, business objectives and future retirement plans.

A financial plan is often a key part of a small business’s business plan, along with other documents such as the operational plan, marketing plan and mission statement. There is no formal requirement for its look and shape. Most financial plans, however, include the following key components:

Supporting documentation, likely to be appended to a financial plan, may typically include items such as bank statements, insurance policies, tax statements, accounting ledgers and documents related to stock.

Considered together, the various parts of a financial plan enable managers to see where the business income comes from, how the business spends it, and — on the basis of this information — whether it is financially self-sustaining and likely to remain so.

Most small businesses will use the professional services of an accountant, tax professional or investment advisor in preparing their financial plans.

What are the Important considerations in developing a financial plan?

Preparing financial plans is more than just collating data. It also requires thoughtful analysis. The financial plan is a very important document when it comes to securing funds and investment; bodies approached in this regard are not likely to risk their money on a business whose financial plan indicates poor or uncertain performance. Such reviewing bodies will be interested in an array of financial ratios (see the ‘Financial performance’ topic) to assess a business’s financial viability; they will look for the information needed to compile these ratios in the financial plan.

The break-even point is very important — the point from which (expenses having been balancing by incoming revenue) a business starts making a profit. This key point is derived from data in the income statement.

Any financial plan, however well prepared, represents the situation of a business only at a point in time. Circumstances will change. Hence, it should always be regarded as a ‘living document’ that is regularly reviewed and adjusted where required.

What are the benefits of having a financial plan?

A financial plan is an important management tool. Among other benefits for a business, it:

signals changes that may need to be made in the best interest of the business’s staying financially viable (e.g. reducing expenses, reassigning assets, staff redundancies and so on)
provides feedback on whether business goals and objectives are being met from a financial perspective; this information can then function as a performance indicator by way of staff bonuses and so on
enables realistically achievable financial targets to be set for future operations.