Guide to Business Financial Planning

Lauren WardUpdated September 13, 2022

Share this article:

Editor’s note: Lantern by SoFi seeks to provide content that is objective, independent and accurate. Writers are separate from our business operation and do not receive direct compensation from advertisers or partners. Read more about our Editorial Guidelines and How We Make Money.

Small business financial planning is the process of determining how to best use a company’s financial resources to achieve its short- and long-term goals. Having a financial plan for your small business or startup can be key to its growth and long-term success. It also shows outsiders, such as lenders or investors, that you are committed to meeting your financial obligations and spending wisely. If you’re interested in making a financial plan for your company, but simply don't know where to start, read on. Below, we break business financial planning down into a simple, step-by-step process.

What Is Financial Planning for Businesses?

A financial plan for a business looks at where a company currently stands, predicts future earnings and spending, and pinpoints what steps it needs to take to maintain and grow operations. A business financial plan will look at every aspect of a business, including personnel, inventory, and research and development, and identify where the company should concentrate its resources for maximum effectiveness in building revenues and managing costs.For example, does the company have the capital to invest in new equipment or expand its office space? Is now a good time to get a business loan? How will bringing in a new client impact revenue? How will the company adapt if things don’t go as planned? A business financial plan answers all of these questions.

How Does Financial Planning Work?

As a business owner, It can be a good idea to create a financial business plan for your company every year, ideally at the beginning of the calendar or fiscal year. This helps ensure that you have a clear and accurate picture of your business’s finances, as well as a realistic view on future growth or expansion. Creating a business financial plan typically requires research, strategic planning, as well as preparing a number of financial statements, including a balance sheet, income statement, cash flow projection, sale forecast, and income projections.

Is There Any Reason Not to Make Financial Plans?

No. In business, as in life, making things happen generally requires a plan. A well-thought-out business financial plan can help you pinpoint exactly what you need to do to achieve your business goals and how best to allocate resources moving forward.

What Goes Into Making Business Financial Plans

A small business financial plan should include the following financial statements.

Balance Sheet

A business balance sheet is not a forecast but, rather, tells you exactly where your company stands right now. It lists all of a company’s assets, liabilities, and equity (the amount of money generated by the business). A balance sheet includes a list of such things as:

Assets
- Equipment
- Real estate
- Inventory
- Cash
- Company vehicles
- Outside investments
- Accounts receivable
- Business tax refunds
Liabilities
- Taxes
- Loan payments
- Utilities
- Payroll
- Accounts payable

You then use this formula to calculate your balance sheet:Shareholder Equity = Assets – Liability

Income Statement

An income statement, also called a profit and loss (P&L) statement, is a list of all revenues and expenses incurred from either operating or non-operating activities. It shows whether your company experienced profit or loss over a specific period, and includes:

Operating revenue
Non-operating revenue
Gains
Expenses and losses

The “bottom line” of an income statement is the company’s net income.

Cash Flow Projections

A cash flow projection tells you how much money you have and how much money you expect to make from future activities. It includes:

How much cash you currently have
How much cash you expect to spend and where you expect to spend it
How much cash you expect to receive and from where

While it's not always possible to predict the future, if you know that a new client is starting on a certain date, or you are anticipating a short-term dry spell, you can plan accordingly.Cash projections can also help you determine if you’ll have funds to pay back a loan or if you should hold off on financing. Banks and lenders will also look at cash flow projections when you apply for different types of business loans.Recommended: How to Calculate Cash Flow

Sales Forecasts

A sales forecast attempts to predict how much you will sell in a fiscal period. If you have multiple locations, you may want to create a separate forecast for each location. Sales forecasts are an important part of financial planning because they tell you how much cash you will likely have coming into the business.

Personnel Plan

A personnel plan examines existing positions and what each employee currently costs, including salary and benefits, and how those costs will change over the next few fiscal years. It also identifies whether bringing on more employees is worth the cost, and, if so, whether they should be full- or part-time or work on a contract basis.

Break-Even Analysis

A break-even analysis is how much your business needs to sell in order to cover all of its expenses. To do this type of analysis, you need to come up with your contribution margin, which involves subtracting the costs of producing a good or service from the amount the customer pays for it. By determining your fixed costs, you can get a better understanding of how to price your goods or services, and how much you need to sell to stay in business or turn a profit.Recommended: Cash Flow vs. Profit Compared

Income Projections

This statement looks at how much money your company is expected to earn in a given period, often a year. It then subtracts all anticipated expenses to come up with your company’s income projection. In some cases, income projections are folded into the income statement. If you’re producing a financial plan to woo investors, you’ll want to make sure that you don’t artificially inflate any predictions.Recommended: The Complete Guide to Angel Investors for Your Business

4 Steps to Making a Financial Plan

As you create a financial plan for your business, you’ll want to make sure you go through these four essential steps.

1. Coming Up With a Strategy

Even before looking at your company’s numbers, it can be a good idea to think about what you want your business to accomplish over the next year and set some specific and realistic goals. You can then make a list of all the things that will be needed to achieve those objectives. Will you need to hire more staff? Purchase more equipment? What other kinds of resources will you need?

2. Making Financial Projections

Once you’ve pinpointed what you want to do and what you’ll need to do it, you can research all the costs involved. You’ll also want to consider how the changes you are planning will impact future sales. This can help you determine how you’ll cover the added expenses and whether or not you’ll need to seek outside funding.

3. Expecting Unforeseen Variables

Plans don’t always unfold exactly as you expect them to. That’s why it can be a good idea to look at your cash flow statement and assets, and create a plan for what you will do if earnings slow or business takes an unexpected turn. How will you pivot? What assets could be sold? Do you have enough cash reserves to cover a downturn or large unexpected expense? Does it make sense to get a business line of credit as back-up? Make a contingency plan for when things don’t go as planned.

4. Tracking Your Goals and Progress

A financial plan isn’t a one-and-done proposition. It’s important to compare actual results to your initial projections and, if necessary, make some tweaks along the way. You can do this by periodically checking your cash flow statement and income projections to see if you are on target, or will need to make some adjustments.Recommended: Guide to Financial Projections

The Takeaway

A business financial plan outlines what your company’s next steps should be and how much you expect to both spend and make in the coming fiscal periods.Rather than adapting and reacting to every roadblock that comes your way, a financial plan aims to anticipate and circumvent them. It’s an exhaustive list of every possible expense you may have, and realistically explains how you’ll pay for each and every one. Whether you’re looking to secure outside financing or just monitor your business growth, understanding and creating a financial plan can help ensure your company’s future success.

3 Small Business Loan Tips

Online lenders generally offer fast application reviews and quick access to cash. Conveniently, you can compare small business loans by filling out one application on Lantern by SoFi.
If you are launching a new business or your business is young, lenders will consider your personal credit score. Eventually, though, you’ll want to establish your business credit.
If you need to borrow money to cover seasonal cash flow fluctuations, a business line of credit, rather than a term loan, provides the flexibility you likely need.

Frequently Asked Questions

What are the steps to take when making financial plans for a business?

What are the different types of financial planning?

What is the most important step in the financial planning process?

Photo credit: iStock/Hispanolistic

LCSB0822010

About the Author

Lauren Ward

Lauren Ward is a personal finance expert with nearly a decade of experience writing online content. Her work has appeared on websites such as MSN, Time, and Bankrate. Lauren writes on a variety of personal finance topics for SoFi, including credit and banking.

Share this article: