So you’ve got a great business idea – nice!
And a general plan for how the business will operate – fantastic!
But there’s another important element to consider: a small business financial plan.
Around 20%1 of businesses fail within their first year. That’s a worrying statistic.
But here’s the good news: Financial planning for small businesses can help your business succeed.
Below, I share the best financial planning tips for small business owners. Act on all of them, and you’ll give your awesome business idea a real chance to prosper!
Table of Contents
What is Financial Planning for Small Businesses?
Financial planning for small businesses is all about understanding your current financial situation, then setting financial goals for the months and years ahead.
Basically, you need to ask yourself, “Where am I at?” Then use the answers to decide, “Where am I going?”
At its best, financial planning for companies is a data-driven process. You need to know exactly what your costs are and exactly how much you’re bringing in.
As you gather that information, you can set short-term and long-term goals.
And finally, you reach the fun part: creating a small business financial plan that will set you up for future success!
10 Best Tips for Small Business Financial Planning
Financial planning for small businesses can seem overwhelming.
I get it.
That’s why I’ve compiled a list of actionable tips. Follow these, and you’ll have no trouble creating a successful small business financial plan!
1 – Set Clear Goals
Before creating a roadmap, you need to know where you’re going. That’s why goal setting is such an important part of financial planning for companies.
There’s one financial goal that probably stands out above all the rest: Earning large profits.
But that objective is too general. You need smaller, more manageable goals that will add up to give you the larger profits you’re looking for.
Here of some goals to consider:
- Boosting your revenue
- Increasing your profit margins
- Optimizing your pricing
- Decreasing costs
- Maintaining consistent cash flow
And for each of these goals, make sure you’re setting numerical targets. “Get more revenue” is vague and practically meaningless, but “Increase revenue by 25%” gives you a concrete target to aim for. If you're not sure what kind of business to start to generate revenue, take a look at our list of the best businesses to start with 10k.
2 – Determine Your Credit Score
The higher your business’s credit score, the easier it will be to attract investors, secure loans, and cut deals with other companies.
And checking your business’s credit score is super easy. With Experian, one of the major credit bureaus, all you have to do is enter your company’s basic information online. You’ll have to pay $49.95 for the report, but it’s worth it to know where your credit stands.
Of course, simply knowing your credit score isn’t enough. You also need to improve it.
One important factor is to pay your bills on time. You can also get a business credit card, use it to make purchases, and then consistently pay off your balance. That shows credit bureaus that your business is trustworthy, and your score will increase as a result.
Check out my detailed list of the best business credit cards.
3 – Find Funding
Running a business isn’t cheap. So make sure you explore all the funding opportunities at your disposal.
Some entrepreneurs get funded by investors, while others successfully apply for grants. I’d give those methods a shot, but you might end up having to borrow money for your business.
And as a borrower, it’s best to consider all your options:
- Loans from a friend or relative
- Loans from a bank
- Business credit cards
- Buy now, pay later plans (BNPL)
If you think you’ll need a loan, then read my in-depth explanation of the best ways to borrow money.
And check out my review of the best small business loans to learn more about your specific borrowing options.
4 – Track Expenses
Tracking revenues is fun – cha-ching! – but tracking expenses is a little less exciting. I mean, who wants to count the money leaving their business?
But understanding costs is a vital part of financial planning for small business owners. There’s no other way to know exactly where your money is going.
Luckily, expense tracking is easier than ever, thanks to digital technology. You can read my list of the best small business accounting software, then choose the system that matches the specific needs of your business.
And once you know how you’re spending money, you can look for ways to cut costs.
5 – Perform a Cash Flow Analysis
Cash flow is the money coming in and out of your company. It’s a central component of financial planning for small business managers.
Start by calculating your cash inflow, including:
- Payments from sales
- Loan proceeds
- Investment income
- Funds from investors
- Proceeds from grants or awards
Then, figure out your cash outflow, including all expenses:
- Operating expenses like rent or payroll
- Purchases of equipment
- Debt service (the money you’re paying back, plus interest)
- Tax payments
And make sure you’re tracking cash flow during a specific period, like a quarter. Cash flow isn’t the same as profit because it refers to the actual cash available at any given time.
While your profits might increase from one giant windfall in the future, your cash flow will depend on the money coming in on a regular basis – and having cash on hand is vital to keeping your business going.
6 – Identify Risks
Your business might be a guaranteed success in a perfect world, but the real world is far from perfect. That’s why identifying risks should be a part of every small business financial plan.
Ask yourself what types of things could go wrong. Consider potential problems like:
- The sudden appearance of a new competitor
- Increased costs for essential goods or supplies
- Rent increases
- Changing laws or regulations
- Failed technology or equipment
- Personnel problems (employees quit or retire)
Once you’ve identified risks, you can decide how to manage them. Maybe you could decide on potential promotions to stave off competition, or develop tweaks to your business model that would help you stay ahead of changing regulations.
The specific plans depend on your business, but all entrepreneurs should recognize risk assessment as a key part of financial planning for companies.
7 – Plan Ahead for Taxes
Taxes stink – but they’re inevitable. Your job as a small business owner is to understand from the start how much you’ll have to pay and then run your company accordingly.
Start by researching tax laws in your specific location. Then, use your expected revenues to predict how much you’ll owe. It might take time, but it will save you from a nasty surprise down the road.
And you can make calculating tax obligations a lot easier by using digital tools. Check out my list of the best small business account software as you weigh your options.
8 – Build an Estate Plan
Estate planning might seem like more of a personal concern, but I think it’s 100% part of financial planning for small businesses.
When you pass on, you want your business to fall into the right hands, right? And to make that happen, you’ll have to think ahead.
There are a few estate planning documents to get in order:
- A succession plan. This document spells out the plan for your business if you’re incapacitated, die, or simply decide to retire.
- Last will and testament. This explains what will happen to your assets after you’re dead – and your business is one of those assets.
- Living trust. This isn’t necessary, but it allows you to name a trustee who will manage your assets if you die or are incapacitated.
- Financial power of attorney. This allows someone else to make financial decisions about your business if you’re unable to.
9 – Set Up Retirement Accounts
As a small business owner, you’re completely in charge of creating your own retirement accounts. There’s no employer taking care of it for you, so you’ll want to be proactive.
Some experts suggest setting aside 15% of your income for retirement. The money will likely come from your business’s profits – but where should it go?
I’d recommend an individual retirement account (IRA), which is a special account that allows you to save on taxes. And if you have employees, you can do them a favor by setting them up with retirement accounts, too.
10 – Create an Exit Plan
I know, I know. You’re super excited about starting your business, and the last thing you want to think about is how it all could end. But nothing lasts forever, and creating an exit plan is actually a crucial part of financial planning for small business owners.
There are three ways to call it quits:
- Pass the business on to someone else (following your succession plan)
- Close the business down
- Sell the business
Selling the business is the most profitable option, but in order to get the most out of the deal, you’ll need a solid idea of your business’s value. And you never know when a sudden change of circumstances could make you decide to sell. That’s why knowing the market value of your business is another important aspect of financial planning for companies.
Common Questions About Financial Planning for Small Businesses
Why is Financial Planning for Small Businesses Important?
Financial planning for small businesses lets you make the most of your great idea. Without a plan, you could end up failing because of financial issues. But if you set goals, track expenses, and analyze your cash flow, your business should have real financial stability.
How Do I Set Up a Financial Plan for a Small Business?
To set up a small business financial plan, establish clear financial goals. Then, measure important metrics like expenses, funding, and cash flow to see your progress. You can use that information to make further plans for growing your business.
What Are The 4 Basics of Financial Planning?
The 4 basics of financial planning are:
- Assess your current financial situation.
- Set financial goals.
- Create a plan that will help you meet your goals.
- Meet your goals by following through on your plan.
What Are The 3 Rules of Financial Planning?
The 3 rules of financial planning are:
- Set clear goals.
- Track important metrics like income and expenses.
- Identify risks and plan for the unexpected.
What is a Financial Plan for a Small Business?
A financial plan for a small business is a document that:
- Sets clear financial goals
- Measures key financial metrics
- Lays out a plan for meeting the goals based on the metrics
Best Small Business Financial Advisor?
To find the best small business financial advisor, start by asking for referrals from other entrepreneurs in your area or industry. If that doesn’t work, you can look online. Just make sure you end up with an advisor you’re sure you can trust!
How to Make a Financial Plan for a Business?
Financial planning for small business managers is a 3-step process:
- Step 1: Set clear financial goals.
- Step 2: Track key metrics like revenues, expenses, and cash flow.
- Step 3: Based on the metrics, create a plan that will help you meet your financial goals.
Importance of Financial Plan in Business Plan?
Every business plan should include a detailed financial plan. After all, you can’t run a business without money! Financial planning for small business owners is all about stability, which allows your business to get off the ground and prosper.