Key Elements of a Financial Plan for Small Firms

You can fully grasp all your investments and how they relate with one another if you have a financial plan. You can also set realistic goals, respond more effectively to any setbacks, and start creating a strategy for expanding your business that is based on your financial statements. Financial planning is essential for managing a profitable firm, obtaining funds (by securing investors and loans), and making long-term strategies.

How is a financial plan put together?

Your financial plan should contain the following seven crucial components, which we will go over in more detail below: your revenue projection, personnel plan, cash flow statement, balance sheet, cash flow statement, and profit and loss statement. It should also include your business ratios and break-even analysis.

 

1: Profit and Loss Statement (P&L)

The profit and loss statement, also known as an income statement, analyses your revenue and expenses to determine whether your small business will be profitable or incur losses over a specified time period (usually three months).

• Revenue, which should not be confused with profit, is the entire amount of money that your company brings in via regular business operations. The money you spend on things like paying your staff, utilities, and the cost of items supplied is what's referred to as an expense (also called COGS).

• Operating costs for a business exist regardless of its sales volume. These costs are typically fixed.

• Your inventory and sales determine how much your cost of goods sold changes. These are regarded as variable expenses.

 

2: Operating Income

Gross margin minus operating expenses equals operating income. You may determine your operating income using the information in your profit and loss statement. To calculate your operating margin, deduct your operational costs. EBITDA, or earnings before interest, taxes, depreciation, and amortization, is the common name for operating income. Your gross profit is expressed as the amount of money you made in profit before accounting and tax responsibilities.

3: Net Income

Operating income minus interest, taxes, depreciation, and amortization results in net income. Your bottom line is your net income, which is distinct from your operating income. Knowing your operational income is necessary to figure out your net income because net income is calculated as operating income less interest, taxes, depreciation, and amortization costs. Net is significant since it provides the most straightforward indication of how lucrative your company is.

4: Cash Flow Statement

Your cash flow statement details how much money your company made and spent, as well as how you arrived at your ending cash balance (usually, this is calculated on a per month basis). Your cash flow statement can help you better understand how much money your company has on hand, where the money comes from, what you are spending it on, and how often. Because you can be successful but not have enough cash on hand to carry out daily or monthly activities, the cash flow statement gives you crucial information about your company. On the other side, you can be operating your business at a loss and being unprofitable while yet having money in the bank. Understanding cash versus accrual accounting is crucial if you want to better comprehend your cash flow statement.

5: Balance Sheet

As it details the amount of cash you have on hand, the amount you are owed, and the amount you owe, your balance sheet gives you a snapshot of how your firm is doing at any one time. Your assets must match your liabilities + your equity in order to create a balance sheet. Let's examine these three components of the equation in more detail:

• Assets: These include your cash in the bank, inventory, accounts receivable (money owed to you, generally by clients), etc.

• Liabilities: These include your accounts payable (amounts you owe others), outstanding credit card bills, loan payments, etc.

• Retained Earnings: The amount of net income that remains for your company's use after dividends have been distributed to shareholders.

Last but not least, your break-even analysis will enable you to determine how much merchandise you must sell in order to pay for all of your costs and maintain a loss-making business. Although merely running at break-even is not ideal for your business (since you want to be making a profit), it is a figure you as a small business owner should be aware of because it is better than operating at a loss. Divide your fixed expenses by your contribution margin to determine your break-even threshold (your contribution margin is your sales price per unit minus variable cost per unit).

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