How to Create a Financial Plan for your Small Business

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We’ve all heard the cliché that if you fail to plan, you plan to fail. Nowhere is this more true than in business. Small businesses have to navigate several known and unpredictable challenges to survive. The ones that do and move on to become successful are the ones that a) have done their due diligence beforehand and know the viability of their businesses and b) have considered the challenges and planned for them.

A financial plan can be both a stand-alone document and a part of your business plan. It’s often used for budgeting and funding/investment, but, as you’ll discover below, a financial plan for your small business serves multiple needs. Ideally, you’ll want to have your financial plan prepared by a firm that specializes in accounting services for your small business. This guarantees you have accurate numbers as you rely on your financial plan in the startup, operating and future development phases of your business’s lifespan.

What is a Financial Plan for a Small Business?

Simply put, a financial plan for a small business is a set of financial statements that help you:

  • Calculate how much capital you’ll need at startup.
  • Know the current financial health of your business.
  • Create an acceptable tax plan that reduces the amount payable as much as possible without raising red flags with the CRA. This is best prepared by a small business tax accountant who is intimately familiar with Canadian tax laws.
  • Identify financial inefficiencies and opportunities for growth.

The statements used in a financial plan help you understand your finances and how they interact, allowing you to set realistic goals, adapt to challenges and strategize for the future and growth of your small business based on hard data.

What Should be Included in a Financial Plan for Your Small Business?

These are some of the most common financial statements businesses and small business accountants draft as part of a financial plan for a small business.

Cash Flow Statement

Cash is the lifeblood of every business, and not knowing exactly how cash flows in and out of your business every month is one of the mistakes to avoid when starting a business.

It’s crucial to keep track of where your small business’s cash is, as it’s possible to have a profitable business but not have enough cash to pay your expenses to keep your business afloat. It’s also possible to be unprofitable but still have enough cash on hand to keep the business running until you can start turning a profit (as is the case with many startups.)

To do this, you simply use either the cash or accrual method to account for how much cash is received and spent by your business, typically on a monthly basis. Whether you are cash flow positive or negative, it’s vital to know the reasons, how sustainable a negative cash flow is and what adjustments to make if your cash flow statement shows a worrying trend. 

Canadian bills and coins ($50, $10, loonie, quarter, toonie, dime)

Income/Profit & Loss Statement

An income, or profit & loss (P&L), statement shows the amounts and sources of your small business’s revenues and expenses over time.

If your small business isn’t currently profitable, an income statement as part of your business/financial plan should extrapolate the numbers to show when you expect to be.

Preparing an income statement requires you to calculate your expenses (cost of goods sold) and subtract them from your sales or revenue. The result is your gross margin, which you need to know to calculate your operating income and net income.

Operating Income

From your income statement, you can calculate your operating income by subtracting your operating expenses from the gross margin. Operating income, or gross profit, is also referred to as your EBITDA, earnings before interest, taxes, depreciation and amortization. This number shows how much money you made in profit before accounting and tax obligations. You calculate it this way:

Operating income = Gross margin − Operating expenses

Net Income

Net income is calculated by subtracting interest, taxes, depreciation and amortization from your operating income, or:

Net income = Operating income – Interest + Taxes + Depreciation + Amortization

Your net income is your “bottom line,” literally and figuratively, as it shows how and whether your business will become profitable and will appear as the last line in your income statement.

Balance Sheet

A balance sheet is a snapshot of your small business’s performance at any given moment. It shows you the amount of cash on hand, how much you owe and how much is owed to you. In accounting terms, a balance sheet is an equation that shows how your:

Assets (accounts receivable, inventory, equipment, etc.)  = Liabilities (debts: accounts payable, loans, credit cards, etc.) + Equity (shares owned by shareholders or owner’s equity, net earnings, stock proceeds, etc.)

Sales & Revenue Projections

Along with applying for investment or funding and other calculations with respect to your small business’s future, having accurate sales projections is necessary for inventory planning and future cash flow. Your projections should be based on actual sales numbers and organized into segments that make sense for your business, e.g., one-time sales vs monthly subscriptions.

Reviewing Your Small Business Financial Plan

Aside from organizing your business finances at startup, take its financial temperature at any given moment and help you plan for and make decisions that will affect your small business’s future; a financial plan also helps you assess your small business’s performance in achieving goals you’ve set out for it.

To do this, however, you must schedule times to periodically review your business finances and determine:

  • If your small business is hitting monthly, quarterly, or yearly targets.
  • That your numbers reconcile and that your accounts/books are balanced.
  • If your insurance policies currently cover your operations and products/services. If you’ve changed the way you operate or your product/service offerings, you may need new policies and/or cancel ones that no longer apply. It’s also important to periodically shop around to ensure that you aren’t overpaying for your coverages.

Finally, you need to continually assess the goals you’ve set and that your financial operations align accordingly. Business goals change over time, which means that your financial practices may have to as well. For example, an expansion or new marketing campaign designed to increase revenue and/or market share may force you to cut spending in other departments. If a financial plan for your small business uses a budget based on outdated goals, you must readjust it as needed.