“Life moves pretty fast. If you don’t stop and look around once in a while, you could miss it.” -Ferris Bueller

Let’s take a quick glimpse into the life of a business owner: endless tasks and never-ending to-do lists! It’s inevitable that we get wrapped up in the day-to-day and forget to step back and look at the bigger picture. 9 out of 10 times our financial picture takes that back seat.

It requires effort, continual and consistent data and a solid forecast. These items don’t always affect your day-to-day and therefore keep getting pushed until your finances are fully neglected. Before you know it, the year is over and you’ve thrown a dart in the dark, hoping you come out of the year with more money than you started with.

Creating and following a financial plan is a foolproof way to end the year with more than you started with. It is a guiding light into the future state of your financial health. Let’s dive into a 7-step process of creating your financial business plan.

What is a Financial Plan?

A financial plan is a comprehensive evaluation of a business’s current revenue, expenses and future financial state. The plan projects whether the company will have enough money to maintain its operations and meet its financial obligations or not. It also assesses if the business is on track to achieve specific financial goals, such as paying off loans or meeting revenue targets.

It can help you to identify potential problem areas and take steps to avoid them as well as provide a roadmap to follow as your business grows. Lastly, it can also help with securing funding from investors, a bank loan, or a line of credit.

The Financial Planning Process

Creating a financial plan can be overwhelming as there are so many different aspects to consider. Where do I start and what makes a good plan? How do I know my plan will actually set me up for success and what if I miss something? These are thoughts that will likely go through your head as you create your own financial plan and we hope to provide some guidance with the below steps.

1. Goal Setting: The Tool for Measuring Success

When starting a financial plan, it’s important to have 2 or 3 end goals in mind. We usually start by asking “From a financial perspective, what would make you happy at the end of the year?” Here are some ideas to get you started:

• A certain amount of Profit or Cash Flow
• Being able to pay myself a certain salary
• Being able to hire x amount of employees
• Being able to give x% raises to my employees
• Growing Revenue by x% from the prior year
• Being able to invest in new products or equipment
• Most importantly, be creative and decide on goals that are important to you.

2. Revenue Projections

There are two types of Projections:

• Top-Down: Project realistic revenue and work down to understand your cash flow
• Bottom-Up: Start with the desired cash flow and determine the revenue required to support your business.

This process discusses the Top-Down method as most businesses I work with have historical data to drive decision-making and I find that the end results tend to be more realistic.

I encourage revenue estimates to be conservative so as to not over-inflate what you expect to earn. Beating your revenue projections is always better than not being able to keep up. We plan our expenses based off of planned revenue, so over-inflating has a trickle-down effect on our Net Profit and Cash Flow. Here are a few things to consider when estimating your revenue.

First, understand your revenue model. How do you charge your customers?

• Recurring Revenue – Think Saas or subscription-based models (ARR/MRR)
  • If so, Year over Year (YoY) or Month over Month (MoM) projections are useful
• Seasonal/Cyclical Revenue
  • Looking at specific periods in the past will be the most helpful
• One-Time Sales
  • This is likely based on marketing and sales performance and is likely tied to your marketing and ad spend
• What other types of revenue could you have and what factors determine that revenue?

Secondly, consider adding some goals to your revenue projections, but remember to not over-inflate!

• What if we increase our product pricing by 10%?
• What if we double the amount we spend on Google ads?
• What if we hire new customer support or sales rep?
• What if there is an increase in the churn rate?

3. Cost of Goods Sold

Once you have estimated your revenue, you will need to estimate your cost of goods sold (COGS). This includes the cost of materials, labour, and any other direct costs associated with producing your product or service. If the cost of your supplies or labour is rising, you should update the expenses for future months in your plan to reflect the changing cost.

It is important to analyze your profit margins to make sure that the difference between what you charge your customers and your cost is acceptable and has enough margin to cover your overhead expenses while providing a significant Net Profit. If you find that your overhead costs are too high, you can either come back and adjust your COGS or trim your overhead expenses to fit within your budget.

4. Fixed Expenses

“Fixed expenses” do not refer only to expenses that are the same each month (like your phone bill). We consider fixed expenses to be those bills that are required each month. For example, a utility bill could vary drastically throughout the year, but you are responsible for paying that bill on a monthly basis. Here are the accounts we normally put under Fixed Expenses:

• merchant/credit card fees
• insurance
• rent
• utilities

5. Headcount

Often, the most expensive item to consider is headcount. This includes the salaries of all your employees, as well as any benefits they may receive. If you are an S-Corp, your W-2 salary is also included in this section along with other contractors, if you have any (just because they may not be W-2 employees, we often consider them as headcount in small businesses).

One of the most common questions among all business owners is: “Can I hire and can I give a raise?”

Being able to plan future hires and raises while seeing how that affects your overall profit and cash flow from a monthly and annual perspective is invaluable information. You’ll know in an instant if you can afford your hiring decisions or if you need to raise revenue or make other cuts to bring on someone new.

6. Variable Expenses

Variable expenses are those that fluctuate from month to month and are generally the easiest to adjust. Examples of variable expenses include advertising, travel, and software subscriptions. Though you will experience most of the expenses at some point during the year, you may not pay them each month, and the amount may vary considerably.

Depending on your business and as you grow, variable expenses can be harder to predict each year. We like to inflate these expenses as much as possible to account for unpredictable situations, given we are still able to maintain healthy Profit and Cash Flow Levels.

7. Long-Term Liabilities and Equity

While Net Profit is important, Cash Flow is King when it comes to financial planning for small businesses.

The steps listed above only affect the Income Statement and therefore, your Net Profit. With a few simple adjustments, you can take into account other items that affect your overall Cash Flow, such as your owner’s draw and principal payments on loans. Accounting for these cash-flow items gives you the whole picture and not just your Net Profit.

In the end, analyze your monthly and annual Cash Flow, Net Profit and the initial goals you made for yourself. At this point, it is much easier to go back, adjust and make sure you have realistic numbers while hitting all of your goals.

Financial planning is an exercise that requires both data and projections, as you can’t completely rely on each individually, but it’s also not guesswork. Consider it an art and a skill. Make sure to follow the above-mentioned practices and make it a recurring part of your business. If you have specific questions or just want more advice about the topic, reach out to me, at ben@pintofinancial.com.