Business financial planning explained

Understanding how to create a financial plan is essential for all businesses. It allows you to assess how your business can afford to achieve its objectives and goals, and it can help you stay on track as your business expands and faces new challenges. 

Read on to find out more about the importance of a business financial plan and how to create one. 

Key takeaways

• A financial plan gives you a better understanding of your company’s finances so you can make more informed decisions

• Benefits of financial planning include higher chances of securing funding, better cash flow management, enhanced risk mitigation and increased profitability

• Your financial plan should include your income statement, balance sheet, cash flow statement, sales forecast, income projections, personnel plan, assets and liabilities, and break-even analysis

• You should update your financial plan regularly and consider seeking the support of an accountant or financial adviser

What is a business financial plan?

A business financial plan is essentially the financial section of your business plan. It ensures your business has a roadmap for its finances. 

A financial plan outlines your business’s current position, the goals you aim to achieve, and the strategies for reaching them. It helps you assess cash flow, identify when you may need financing, and spot opportunities for growth.

When creating your business financial plan, you need to make a full assessment of your income, expenses, assets and debts and consider where you want to take your business. You can then work out whether your company goals are realistic and viable. 

Why financial planning is important 

Ultimately, financial planning is key to building and running a successful business. It enables you to have a better understanding of your company finances, allowing you to make more informed decisions and focus on long-term growth.

A well-crafted financial plan helps you predict how different decisions will impact revenue, identify inefficiencies, allocate resources effectively, assess risks, and develop strategies to mitigate them.

Benefits of financial planning

We’ve already mentioned some of them, but you can find more on the key benefits of financial planning below:

Clear financial goals

First, a financial plan helps you establish your key goals for the business. Once you know what these are and whether they're viable, you can stay focused on what you want to achieve and make confident decisions that support these goals.

Cash flow management

It’s important to set clear expectations for cash flow management. It’s natural to spend more money than you make when you first start your business, but you need to ensure you can get your cash flow back on track. 

To do this, you must keep accurate records of the money coming in and going out of your business. This enables you to confidently predict your company’s cash flow needs and ensure you have enough cash to cover bills and other expenses. 

Strategic decision making

A solid financial plan gives you a clear view of your business’s financial health, helping you determine if you have the funds to invest in new equipment, hire staff, or address areas needing improvement. Ultimately, it empowers you to make informed decisions that help your business stay ahead of the competition.

Stronger funding applications

If you’re looking to secure external funding, whether through a business loan or investment, you must have a solid financial plan in place. In fact, it’s likely to be the first thing that any bank or investor asks to see, and it can be key to successfully securing the finance or investment you need.

Your financial plan should outline your growth strategy, potential risks, and how you plan to allocate funds. It should also demonstrate your business’s ability to generate profits and manage finances efficiently.

Enhanced risk mitigation

All businesses face an element of risk, but a financial plan can help you mitigate these risks by considering different situations, assessing the impact and coming up with strategies to overcome these risks. This makes your business more resilient in economic downturns, if it’s affected by a natural disaster, or if you face legal liabilities.  

Business insurance plays a crucial role in risk management and you should include it in your financial planning. 

Increased profitability

Your financial plan can also help you improve profitability by identifying growth opportunities and highlighting areas where you can cut back and make savings. Analysing your sales data can help you find new revenue streams. 

Key components of a financial plan

When creating your financial plan, you should include the following components:

Income (or profit and loss) statement

Your income statement, also called your profit and loss statement, shows the profits and losses your business experienced during a specific timeframe. You might have monthly, quarterly or annual reporting periods, and your statement should outline the following:

• Cost of sales or cost of goods

• Revenue streams

• Operating expenses, including office rent, material costs, utility bills and employee costs

• Gross margin – total net profit or loss

Balance sheet

Your balance sheet provides a snapshot of your business’s current financial position, including what you own and what you owe. It contains three main parts:

• Assets - such as cash, products, property and equipment

• Liabilities - what you owe to suppliers, landlords and creditors

• Shareholder equity – the difference between assets and liabilities, and therefore the amount of money your business generates

Cash flow statement

The cash flow statement tracks how much money has come into your business and how much has gone out over a period of time. You should be able to project your cash flow for the next few months to help you identify cash flow shortages before they occur.

Sales forecast

A sales forecast predicts how much you think you will earn from sales over a set time, and it should match up with the sales in your income statement. For the first year, you should break your sales down by month, and then annually for the following two to five years.

Income projections

This is usually carried out on an annual basis. You should work out how much money your company will make in that time, then subtract your expected expenses to get your income projections. 

Personnel plan

A personnel plan outlines your current workforce and the costs associated with each employee, as well as any potential need for additional hires. It should forecast salaries, benefits, and other related expenses, such as training or travel. This plan helps you determine whether the cost of expanding your team is justified.

Assets and liabilities

Both are included in your balance sheet. Your assets represent everything your company owns, including inventory, cash, investments, equipment, and more.

Liabilities are financial commitments you have to creditors, and you should separate these into current and long-term categories. Current liabilities can include payroll and short-term loans that are due within a year. Long-term liabilities include business loans that you repay over a term of more than a year.

Break-even analysis

This is a measure of how much you need to sell to cover your expenses and is a key indicator of financial health. 

How to create a business financial plan

Once you’re ready to start crafting your business financial plan, follow the steps below:

1. Create a strategic plan

Your strategic plan should outline your business’s key objectives and how you plan to achieve them. Break each goal down to help you identify the resources you require and the steps you need to take – whether that’s hiring more staff or buying new equipment. Consider how each goal is likely to impact cash flow and its effect on your company’s finances. 

2. Assess your current financial situation

To do this, you need to examine your company’s past financial statements, including income statements, balance sheets and cash flow statements. This should give you a clear idea of where you stand and whether there are any areas of improvement. 

3. Create financial projections

Financial projections are an essential part of running a business as they enable you to see what your future financial position is likely to look like and whether you can comfortably meet your goals. 

Historical data is valuable for understanding growth rates and costs, but it's also important to consider market trends and external factors that could impact your business. To prepare for all scenarios, consider creating three projections: optimistic, pessimistic, and most likely.

In addition, it’s wise to set up a reserve fund so that you have this to fall back on if you face unexpected expenses, reducing the need to apply for short-term loans to see you through.

4. Plan for contingencies

Use your cash flow statements to help you plan for when you might have a cash flow shortage. For example, you might decide to dip into your cash reserves or you might use a business line of credit which can enable you to borrow funds fast and flexibly. 

5. Monitor and adjust the plan

Once your financial plan is in place, it’s crucial to review it regularly and make any necessary amendments. Track your progress at regular intervals, whether that’s monthly, quarterly or annually, and compare real outcomes to your predictions. 

Be prepared to pivot if there are changes in your business environment, market conditions or financial performance. You could also consider seeking support from a tax advisor or accountant or a financial advisor who can help you make more accurate financial projections and more informed business decisions.

Financial planning tips

The tips below can help ensure your financial plan is the best it can be:

• Set realistic goals: Your company’s goals should be well-defined and SMART (Specific, Measurable, Achievable, Relevant, and Time-bound). This structure helps you track progress effectively and ensures your plan stays on course.

• Update your plan regularly: You’ll likely need to adjust your financial plan as market conditions or your financial projections evolve.

• Manage cash flow effectively: Even profitable businesses can struggle with cash flow, so it’s vital to know how to manage it and avoid cash flow problems.  

• Stay updated on current financial trends: It’s important to be aware of market trends and economic changes so that you can incorporate these into your financial plan. 

• Collaborate with other departments: Speak to colleagues in other departments, specifically the finance department, human resources, sales team and those in charge of operations, to ensure you’re on the same page and have accurate financial projections.