Financial planning for small business owners is the first step in moving away from gut-level decision-making toward a data-driven and strategic approach to growth. It’s about more than just budgeting. It’s about seeing what’s happening inside your business and putting financial resources to work in the right places at the right time.
Financial planning is one of your most powerful tools as a business owner.
By using it effectively, you can navigate uncertain times and create a roadmap for success. Let’s start with “why.”
You need financial planning to acquire the information you need to grow your business. It’s not just about having the numbers. It’s about knowing how you can use those numbers. Basically, financial planning takes data and turns it into actionable information for making decisions.
Before you make a financial plan, define a set of goals.
Before you can make a clear plan, you need to determine your goals. Your financial plan will be guided by a set of three to five goals. Be specific and make sure that the goals are impactful and realistic.
Mature businesses create short- and long-term financial plans.
I find it’s most helpful to think about three financial plans, separated by period:
- annual
- bi-annual
- five-year
Let’s examine each financial plan, from annual to five-year, and start with the basics.
An annual financial plan has six components.
An annual financial plan is a short-term overview that will help you stay on track throughout the year. It is the foundation of financial planning for small business owners.
1. Goal setting
As mentioned, you should have three to five goals lined up. It’s important to keep them in mind throughout the financial planning process.
2. Resource allocation
Here, you’ll outline a budget, assign roles to staff, and allocate resources to ensure smart spending.
3. Cash runway management
Cash runway is the amount of time in months your business has before running out of cash. Knowing your cash runway well can help you anticipate when funds will run out and when you’ll need to secure additional capital.
4. Organizational alignment
The financial plan should outline each team’s specific goals and ensure they support the company’s overall targets. It should be updated regularly to stay aligned and on track.
5. Contingency planning
You need to be prepared for potential challenges so any setbacks don’t hit you too hard. Contingency planning helps you anticipate risks and have backup strategies in place.
6. Investor relations
A section of your annual financial plan should specifically address investors and stakeholders. Highlight key metrics, growth projections, and funding needs so they can see how their investment will be used.
A bi-annual review of your financial plan is an opportunity to make adjustments.
Mid-year reviews are a chance to evaluate your progress and make changes so you can still meet your goals or adjust them if necessary. There are three aspects to a bi-annual review.
Evaluate your performance.
You’ve had six months to collect information on how your business has performed. Compare those results to your projections. If there is a significant deviation between the two, take a closer look at your numbers and the method you are using to differentiate between success and failure.
If your team fails to identify the source of the deviation, there may be issues with your accounting or planning. Think about consulting a third party or reducing the scope of your financial plan.
Look for changes in cash flow and revenue that might require revisiting your budget.
Update your budget to reflect current realities. If revenue is lower or higher than expected, you’ll need to change your spending accordingly to ensure the basic financial health of your business.
Reassess targets, goals, and underlying data.
If you’re on track to meet your goals, that’s great. If you’re not on track, it’s not the end of the world. Remember that goals and benchmarks are formulated from data and defined according to various other factors, some of which you may later find to be infeasible.
Review your goals. Revisit the data and processes that led your leadership team to believe these goals were attainable. Then, determine whether they’re still realistic.
If necessary, shift to more achievable targets. The key is to not be overwhelmed at the end of the year.
A five-year financial plan with leadership and employee buy-in is the gold standard.
Here’s the other side of financial planning: the long-term plan. A five-year plan gives you a broader perspective and helps you prepare for major milestones and extended growth.
A five-year plan will be less detailed in its presentation, but its success depends on quality annual or bi-annual planning. Yes, we’re setting the overall direction of your business, but details matter. Let’s look at three key elements.
Identify long-term goals or outcomes.
Think about where you want your business to be in five years, then write down that vision. Unlike goals for a one-year financial plan, these should be a bit broader and more flexible.
Assess your current situation.
Review your current cash flow, expenses, assets, and liabilities. Identify strengths, weaknesses, and areas in which improvement is needed.
Create a system of budgeting that’s flexible to change as your business grows.
List your expected income and expenses, including regular costs and ones that may change. Look at ways to spend that support the growth of your business, but still make sure you have money set aside for unexpected expenses and emergencies. Figure out how you want to allocate funds so you can build long-term value for your business.
Get a partner with tax, accounting, financial, and business advisory.
Financial planning is complex, and it only grows in complexity as your business grows. A proactive CPA and business advisory firm is going to bring knowledge of tax planning, accounting and budgeting, and financial analysis to your leadership team and then synthesize these elements into a plan that makes sense financially and operationally.
So, what is financial planning? It’s one key activity that helps business owners make consistent decisions in pursuit of a clearly defined goal.
Let’s schedule a discovery call today to discuss how we can help you achieve that with effective annual, bi-annual, and five-year plans.
Talk soon,
Jeremy A. Johnson, CPA