Many of us have dreamt of starting our own business and making it a household name. We look up to successful entrepreneurs like Steve Jobs, Jeff Bezos, Jack Ma, and Elon Musk who have made it big.
Quite often, though, we forget that they started as small business owners before becoming industry disruptors.
Many small business owners encounter challenges such as lack of access to consultants like financial advisors, limited funding opportunities and lack of trained resources; these factors can often become an impediment to their growth plan.
Small & growing businesses try and create financial plans to counter these challenges and to be financially prepared for volatile and unpredictable market conditions.
According to industry statistics, 91 out of 100 small businesses in the US have failed within a decade of initiating operations. It is unfortunate that most small business owners forge ahead without effective financial planning and find themselves failing in the long run.
This article aims to help small business owners understand the big ‘financial’ picture and embark on creating a comprehensive financial plan to survive and thrive; even in a competitive marketplace.
How Small Business Owners Can Create an Effective Financial Plan So, let’s start with the basics-
What Exactly is Financial Planning?
Financial planning is the prioritization of your business’ finances as well as your personal finances to help your business grow the right way, be as prepared as possible to face risks, and ensure that you manage cash flows effectively.
In effect, Financial Planning can play a key role in helping small businesses secure a spot among the top disrupters in your industry.
Effective Financial Planning helps you with these aspects-
- Assessing your financial situation- income, liabilities, and assets.
- Understanding your investments and tax situation.
- Prioritizing your goals and setting realistic timeframes.
- Implementing strategies and financial tools to leverage strengths and addressing weaknesses effectively.
- Restructuring your business plans, when required.
So, how does a small business owner start a financial planning exercise?
As an owner of a startup or an existing business, you should understand the critical components that form a part of any comprehensive financial plan before putting pen to paper.
The Critical Components of a Financial Plan
1. Financing the Business
Business financing (a.k.a. capital) is what a business owner uses to start a business or infuses into an existing business when the need arises.
It can further be divided into three categories–
a. Debt Financing
Nothing says ‘skin in the game’ like Debt financing. Debt financing is where business owners invest in their businesses by borrowings from banks, infusing savings, selling assets, and such. When planning for debt financing, figure out (approx.) how long it will take your business to hit break-even.
b. Equity Financing
After debt funding, you can look at equity financing. Equity is the amount infused into the business by investors and business partners. Equity comes into play after a growing business shows sustained growth and can approach venture capitalists to invest in the business.
Usually, equity funds stay in the business permanently.
c. Working Capital
Regardless of the industry or niche, you will need working capital for everyday operations of your business such as everyday overheads and maintenance. Working capital can also include asset financing such as buying equipment and motor vehicles for business use.
Kylas Pro Tips
- Always start financial management with a budget.
- Want to know ‘How to Build Business Resilience in Times of Crisis?’ Check out our blog.
2. Cashflow Planning
Cash flows can be defined in two ways:
In other words, cash flow planning is an estimation of the amount of money that flows into the business as income and flows out as expense over a specific time period.
To create such estimations, you will need to check if projected cash receipts (cash inflow) can cover projected expenses (cash outflow) like working capital.
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Unless inflows can cover the outflows properly and then some, your business will be deemed unprofitable. Cash flow planning is a great starting point to set sales goals and reconsider expenses.
A cash flow projection however will help you arrive at projected timelines, analyze your investment requirements, and plan for the future.
Kylas Pro Tips
- If you are a startup, don’t expect to reach break-even right away. Business investments are a long-term game and require patience to realize goals.
- You will need a bookkeeping software to help keep track of all cash inflows and outflows by way of periodic Profit & Loss (P&L) accounts.
3. P&L Forecasting & Periodic Evaluations
Your financial plan provides you with a snapshot of your business. Remember, your plans need to change as per situations, and it isn’t any different in financial planning.
Update your financial plans periodically to understand how your business has performed and what you can expect in the future.
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A common saying, ‘the future can be planned only to a certain degree’.
But plan, you must!
On the topic of planning for the future, here are a few questions on forecasting that you can ask to arrive at the best answers.
- Business Finance Forecast 1- What will my expenses be?
- Business Finance Forecast 2– How much can I expect as revenue? (with credit)
- Business Finance Forecast 3– How much profit can I make?
- Cash Flow Forecast 1– How much cash inflow can I expect? (without credit)
- Cash Flow Forecast 2– What can I expect my working capital to be?
- Balance Sheet Forecast– What will my Profit & Loss situation look like?
- Liquidity Forecast– What is my business liquidity situation? What are my top sources to maintain liquidity?
4. Tax Planning
Taxes are an everyday part of life for businesses and individuals. Tax planning is a must to keep the business in the clear by following regulations, and planning for tax-saving.
Also, one must know what type of business they are creating or investing in to expect rebates based on the same.
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For example– Limited Liability Partnership (LLP) or Limited Liability Company (LLC)
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While tax planning normally requires the help of consultants, many organizations offer online tax services at affordable prices.
Kylas Pro Tip– Start the exercise early to ensure that you keep on top of tax dates, rates and procedures.
5. Risk Management & Insurance Planning
Unlike large corporations, a small business needs to properly assess and respond to risks, internal as well as external, as there is little leeway for mistakes. While it is impossible to identify all risks, it is possible to stay as prepared as possible to mitigate them.
What an owner of a growing business needs in a risk assessment plan is-
- Identify potential internal risks. Ex.- Key resources leaving, paying salaries when the market is down, etc.
- Identify potential external risks. Ex.- Low demand for your products or services.
- For growing businesses– Develop worst-case crisis scenarios based on your past experience.
- For startups– Develop worst-case crisis scenarios based on industry case-studies.
- Identify warning signs. Ex.- Customer behavior, etc.
Once done with risk management, go on to insure your business. Many startups and growing businesses don’t buy insurance for reasons like “My company is too small” or “Insurance costs a fair bit. It would be better if I invest it back into the business.”
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The thing is, you never know what the economy will throw at you and which part of your business needs saving.
This will require your business to stay protected with these common insurance policies like-
- Liability insurance
- Asset insurance
- Insurance for extended overheads
- Worker compensation and health insurance
Kylas Pro Tips
- Rule of thumb: Always set 10% aside to cover unexpected requirements.
- Try to identify risks as well as opportunities (ideation, innovation, and commercialization).
- While you probably will not need any of them, it is better to prioritize the ones you need for sure like Workers’ compensation and health insurance.
6. Asset Planning
Unless you are a startup, you will have at least a few valuable assets linked to your growing business. Could be anything, from as small an asset like a printer or furniture to something a bit larger like a tractor, or even larger assets like property and land.
There will come a time when you might want to sell them advantageously, keep aside for the next generation to take over, or even pull the proverbial shutter down and retire.
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Regardless, allocating and setting up an asset plan to reduce taxes, plan for liquidity, and a rainy day as well is a necessity.
Kylas Pro Tips
- Pay close attention as you plan this and ensure that you keep revisiting the plan every quarter to keep it updated.
- You will need a lawyer to make your asset plans legal with documentation like a will, medical directive, creation of a trust, and a power of attorney.
Ratios (for Reference)
It is very easy to go wrong if you start on it just for the sake of it. A financial plan will provide you and business investors with your business performance and liability.
Add some commonly used ratios for quick references like working capital ratio, liquidity ratio, debt ratio, and margin percentage.
Be a Growing Business That Defies the Odds
All this information can be a bit much. Still, it is best to stay prepared in every way possible.
If you are a small business owner or planning on launching a startup, download our financial planning template and get going.
While it is super easy to fall down the rabbit hole and become a part of the crowd, small businesses like you can secure your spot in the top bracket by prioritizing business finance.
Moreover, you can also improve your chances of success with a FREE CRM software like Kylas, designed to help startups and growing businesses manage sales better.
Ready to try out Kylas CRM?
