Business Financial Planning: A Step-by-Step Guide for SMBs

Business financial planning is the discipline of establishing clear financial objectives, developing a structured financial budget, and putting in place a strategy that will inform and support all major financial decisions a small or medium-sized business makes and for SMBs, this is the difference between reacting to business and taking the proactive steps to grow it. A solid financial plan can provide direction, discipline and help your business adapt to change without losing pace, whether you’re starting a business or you are looking for ways to make a business more structured.

What Is Business Financial Planning and Why Is It Important for SMBs?

Business financial planning is the organized way of determining where your business is going financially, where you want your business to go financially, and creating an organized pathway for your business to get where you want it to go. This process is the budgeting, cash flow management, tax planning and long term growth strategy for small and medium businesses. Most SMBs do not have a financial plan, so they make decisions based on the present instead of the future (for the next year, three years or five years). A plan does just the opposite.

Creating a base for sustained growth.

A financial plan provides SMBs with the framework to purposefully distribute resources, proactively manage risk and make growth decisions based on information instead of intuition essentially creating stability, which enables sustainable, long-term growth.

How should SMBs make an effective financial plan?

It doesn’t need to be complicated to be effective in financial planning. A ‘realistic plan’ can proceed in a logical sequence from knowing where they are now, through to setting targets and systems for the future, for most SMBs. It’s best to set small business financial goals based on the facts and review them frequently, rather than set and forget.

Guidelines for Building a Structured Planning Process

 

• STEP 1: Evaluate current financial situation. Examine the income, expenses, debt and cash flow over the last 12 months. It would be impossible to plan in advance if you don’t have a clear idea of where you’re at now.
• Step 2: Set specific, measurable, attainable, realistic, and time-bound financial objectives. Small business financial goals must be measurable, specific and have a timeframe. Revenue goals in quarterly increments, expense saving percentages, or cash reserve targets are measurable and can be specified with a timeframe, while a vague goal cannot.
• Step 3:  Create a reasonable annual budget. Your budget should include the true cost of your operation, revenue that you expect, and a contingency reserve. Planning involves a budget that takes into account worst-case scenarios.
• Step 4: Create a cash flow projection. Outline cash flow in/out for each month. One of the most common reasons for financial problems in SMBs is cash flow gaps, so it’s important to spot these gaps early on and be able to act on them before it becomes too late.
• Step 5: Check and update quarterly. A financial plan is not a one-time thing. The market environment, company performance and tax conditions are constantly changing throughout the year and your plan needs to be relevant at all times.

What is the value of a budget for small businesses when it comes to cash flow and expenses?

The most effective instrument in the financial planning process is a budget; your budget turns your financial objectives into specific spending and income targets that you can use to make spending and income decisions throughout the year. If there is no budget, there’s the tendency to spend what you have, not plan for how to spend it.

The business needs to have a cost control mechanism and resource allocation system. Having a solid budget in place allows small businesses to detect overspending early, invest in growth areas, and have a healthy cash buffer in place to cover unforeseen expenses and avoid any undue strain on financials or additional debt.

What is the role of financial forecast in business planning?

Financial forecasts extend the financial planning process to what’s anticipated to occur, providing SMBs with a forward-looking perspective to help make the best purchasing, hiring, expansion and tax planning choices. Without forecasting, small business financial goals are goals with no direction. You might know where you want to go, but you don’t know the way.

Estimating income, outgo, and improvement

• Revenue forecasts provide an analysis of expected revenue by product, service line or client segment, providing SMBs with a distinct idea of where growth is going to occur and where it may need to be created.
• Expense Forecasting: It is a way to anticipate cost trends that are likely to become issues. If expenses are calculated in conjunction with revenue, business owners can identify margin compression at an early stage and adapt their business accordingly before this impacts profitability.
• One of the most economical aspects of a business financial plan is tax forecasting. When SMBs know what to expect as taxable income, they can make some strategic decisions throughout the year, making the most of their annual tax position, such as making purchases, contributions or distributions at the right time.

Multi-year forecasting is less about the short-term and more about planning for the future, helping businesses to develop scenarios for growth, determine financing requirements, and make decisions to match their financial goals. Financial advisors, such as Epicwayz Advisors, go further, tailoring multi-year financial plans to industry standards, growth objectives, and risk tolerance based on the client’s unique circumstances, infusing a personal touch and strategic precision that cannot be replicated by any financial plan template.

Conclusion

While a financial plan is a good basis for any SMB, making and keeping it accurate, tax-compliant and adapting to the changing nature of the business takes more than a spreadsheet.

If you’re a small or medium-sized business in Plano that is looking for that level of support, firms like Epicwayz Advisors offer Fractional CFO Services, Tax Services, Accounting Services, and Business Advisory Services specifically designed for you and your business, where you are, and where you need to be.