How to Create a Financial Plan for Your Small Business

What is the Financial Plan in a Business Plan?

The financial plan in a business plan outlines your company's financial goals, strategies, and projections. It includes detailed forecasts of revenues, expenses, cash flow, and capital requirements. A well-crafted financial plan not only helps you understand the financial aspects of your business idea but also plays a vital role in convincing investors and lenders of the viability of your business. 

These are the most important contents that your financial plan must contain:

1. Executive Summary

Briefly describe how your business intends to make money. Outline key financial goals and milestones.

Example: Coffee Shop

• Business Model: Revenue from selling coffee, tea, pastries, and eco-friendly merchandise. Emphasis on sustainability, with products sourced from local, organic farms.
• Financial Highlights: Achieve profitability within the first year, expand to a second location within three years (Goals). Break-even within the first six months, secure a loyal customer base of 1,000 regulars by the end of year one (Milestones).

2. Sales Forecast

Analyze your target market and expected share. Provide monthly or quarterly sales forecasts for at least the first two to three years. Be realistic and base your projections on market research.

Example: Custom T-shirt Printing Business

• Target market: Local businesses, schools, and events. Expected market share: Capture 10% of the local market within the first year.
• Sales Projections: Monthly sales of 500 units in year one, increasing by 20% annually.

3. Expenses Budget

List all initial expenses before starting operations (e.g., equipment, licenses, initial inventory). Detail ongoing expenses (e.g., rent, utilities, salaries) and categorize them into fixed and variable costs.

Example: Mobile App Development Company

• Startup Costs: Licensing for development tools, initial software purchases, legal fees for business formation, website setup.
• Operating Expenses: Rent for office space, utilities, salaries for two developers and one designer, marketing budget.

4. Cash Flow Statement

Project your cash flow on a monthly basis, highlighting the timing of inflow from sales and outflow for expenses. This helps in understanding liquidity needs. Indicate how much cash is expected to be on hand at the end of each period.

Example: Online Specialty Grocery Store

• Inflows and Outflows: Monthly inflows from online sales, outflows for purchasing inventory, shipping, and marketing.
• Cash Balance: Expected cash on hand at the end of the first year: $30,000.

5. Income Projections (Profit and Loss Statement)

Estimate the revenue based on your sales forecast. Calculate the direct costs associated with the production of goods sold by your company (Cost of Goods Sold (COGS))

Example: Landscaping Services Company

• Revenue: Revenue based on an average of 40 landscaping projects per month.
• COGS: Direct costs include labor, materials (plants, soil), and fuel for equipment.

6. Gross Margin

Subtract COGS from revenue to determine gross margin. Detail all operational expenses. Subtract operating expenses from gross margin to find net profit before taxes. Calculate and subtract taxes to find net profit after taxes.

Example: Landscaping Services Company

• Revenue: Revenue based on an average of 40 landscaping projects per month.
• COGS: Direct costs include labor, materials (plants, soil), and fuel for equipment.
• Net Profit: After subtracting operating expenses, projected net profit before taxes in year one is $50,000.

7. Break-even Analysis

Summarize your total fixed costs. Determine the average price of your product or service. Calculate the average cost to produce your product or service.

Example: Boutique Fitness Studio

• Fixed Costs: Rent, utilities, salaries for instructors, and insurance.
• Break-even Point: Needs to sell 300 monthly memberships at $100 each to cover costs.

8. Break-even Point

Use the formula to calculate how many units you need to sell to cover all your costs. Provide a detailed five-year projection of income, cash flow, and balance sheet. This helps in understanding the long-term financial health and investment needs of your business.

Example: Pet Grooming Service

• 5-Year Projection: Year-over-year revenue increase of 15%, with plans to expand services and hire additional staff.

9. Funding Request

Specify the amount of funding you need over the next five years and how you plan to use it (e.g., capital expenditures, working capital). Outline plans for debt repayment or future rounds of funding.

Example: Tech Startup Developing a New Software Product

• Funding Requirements: $500,000 needed for product development, marketing, and staffing. Use of funds detailed for investors, including timelines and milestones.
• Future Financial Plans: Plan to seek additional funding or explore acquisition opportunities in year three after achieving market penetration and stable revenue streams.