Great, you have an extraordinary product, but have you considered that a financial plan in entrepreneurship is just as important as an idea or product? Many entrepreneurs dive headfirst into their business’s creative and operational processes, but too many overlook financial planning until it’s too late.
Today, let’s talk about five tips that can help you create a solid financial plan that sets your business up for long-term success.
1. Always put financial planning first.
Without a plan, goals are just wishes. A small-business financial plan should provide the following items for decision-makers.
- Record your current financial situation.
- Clearly define goals and a strategic framework for achieving those goals.
- Create a more detail-rich roadmap for growth.¹
Add the three items together, and you’ll get a reasonably detailed macro- and micro-view of your business’s financial situation in a scalable format.
So, we need a structured plan and action items, but we also need to be realistic about the specificity and the scope of financial planning. Avoid overreach because flawed or incomplete conclusions simply to fill space are more damaging than no information at all.
Remember, a solid financial plan includes accurate financial projections, and its purpose is to maximize long-term gains and reduce the negative consequences of mistakes.²
2. Understand what you can and can’t predict.
Entrepreneurs are risk-takers. We take risks because we are passionate about the service we offer or the product we create. However, blind risk-taking is a recipe for failure. The best way to evaluate the true value of risks is to take an inventory of the knowns and known unknowns.³
“Knowns” are risks that you can quantify and prepare for.
Do you know with absolute certainty that revenue will remain steady and consistent? No. But you know at least a percentage value or approximation. So, if we keep up-to-date accounting practices, then our financials are facts that help us evaluate what we would call “risk.” Here’s what we can use to come up with an idea of the risks we are taking as entrepreneurs.
- Revenue and Income
- Liabilities
- Tax obligations
- Accounting standards
- Cash flow
So, we can reasonably predict what our expenses and liabilities will be when we jump into starting a business—a high-risk, high-reward opportunity.
When we know the risk, we know a little more about what to expect when crises occur.
“Unknowns” are consequences or challenges that are difficult to quantify and prepare.
So, our “unknowns” qualify as uncertainty: the things we know little about and have limited ability to control.
- Macroeconomic conditions, non-standard market fluctuations, and buying seasons
- Unforeseen and critical actions that require additional revenue to fund
- Exit of key team members from injury or personal obligations
When you understand what you can and can’t predict, you can build a financial plan that can realistically adapt to any challenge while maintaining your business’s financial health.⁴
3. Establish a clear budget and manage cash flow.
Business financial planning requires honest budgeting, effective cash flow management, and comprehensive reporting of financial data.⁵
Three important documents are vital to this process:
I. A detailed budget tells you how much cash is available for growth.
An honest assessment of what your business can afford to spend is simply and plainly a necessity—pretty straightforward. Accurate budgeting helps you understand how much cash to spend on assets or when to take additional expenses, where to assign resources, and how to prepare for financial challenges in the future.
II. A profit and loss statement shows whether your business is making or losing money.
The calculation is simple enough: you subtract your company’s total expenses from its total revenue. If your net income is positive, your business is profitable. If your balance sheet shows an unrealistic break-even point, you need to make some tough decisions.
Use real numbers to set realistic financial goals.
III. A cash flow statement reports the changes in your liquid assets over time.
Cash flow statements will be part of your first balance sheet and, for a start-up, the accounting should be relatively simple at first. The important thing is that your cash flow statement shows you how much money you have to spend at a given time.⁶
Step 1: Add together any money that comes into your account over a set period.
A quarterly or annual review is an excellent time to examine your income statement and bank accounts to ensure they tell the same story.
Step 2: Subtract any money that comes out of your accounts over that same period.
Check your financial statements, accounts receivable, and business balance sheet for stray or missing funds.
Step 3: Compare your numbers.
If the total value of your inflows is greater than the total value of your outflows, you have a positive cash flow.
If your outflows are equal to or greater than your inflows, you have a flat or negative cash flow.
4. Create a strategic plan based on strong data.
Once you have a reliable budget, profit and loss statement, and cash flow projection, you can make financial forecasts that accurately anticipate future costs and revenue. Anyone who reads these statements should be able to answer questions such as:
- What is your company’s ability to generate future net cash flows?
- How much external financing does your company need to meet these goals?
- Is your company on track to meet all financial obligations in full and on time? If not, what will be your financial position if you stay on the current course?
Accurate data is key to creating a complete financial plan in entrepreneurship’s early stages, making informed decisions, and setting realistic goals. Financial planning software can help this monstrous task seem more accessible. From your balance sheet to profit and loss statements, meticulous data-tracking is the backbone of comprehensive financial planning.⁷
5. Include accounting and tax planning in your strategy.
Seasoned finance experts understand that successful businesses have to make smart tax moves.⁵ A qualified and trustworthy CPA can help you introduce a financial plan in your entrepreneurship journey and set you up with all the systems you need to execute smart and accurate financial plans.
You should also consult with a tax professional regularly to optimize your tax strategy and avoid costly mistakes.
It’s not hard to start a business, but it can be difficult to make smart money decisions without professional help. Financial planning in entrepreneurship can provide you with the valuable insights needed to make the tough choices that keep your company compliant and profitable.⁸
Secure the future of your business today.
Financial planning is not an option. It’s an imperative. Let’s plan for a profitable and tax-efficient future.
Schedule a discovery call today.
Talk soon,
Jeremy A. Johnson, CPA
Resources
- Small Business Administration. Plan your business [Internet]. Available from: https://www.sba.gov/business-guide/plan-your-business
- Investopedia. Financial plan [Internet]. Available from: https://www.investopedia.com/terms/f/financial_plan.asp
- Harvard Business Review. “Managing Risks: A New Framework.” Available from: https://hbr.org/2012/06/managing-risks-a-new-framework
- Internal Revenue Service. Starting a business [Internet]. Available from: https://www.irs.gov/businesses/small-businesses-self-employed/starting-a-business
- Wang Y, Zhang C, Wang Y, Li Z. Cash flow management and its effect on firm performance: Empirical evidence on non-financial firms of China. PLoS One. 2023;18(5). Available from: https://doi.org/10.1371/journal.pone.0287135
- HBS Online. Cash Flow vs. Profit: What’s the Difference? [Internet]. 2020 Feb 13 [cited 2024 Jun 11]. Available from: https://online.hbs.edu/blog/post/cash-flow-vs-profit
- Matveeva S. Financial planning tips for entrepreneurs [Internet]. Forbes. 2019 Nov 24. Available from: https://www.forbes.com/sites/sophiamatveeva/2019/11/24/financial-planning-tips-for-entrepreneurs/?sh=4a16c4bb316d
- Internal Revenue Service. Emergency preparedness plans for businesses should include financial records [Internet]. Available from: https://www.irs.gov/newsroom/emergency-preparedness-plans-for-businesses-should-include-financial-records