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Developing a financial plan is an essential piece of building and running your business. Knowing how to create a financial plan, its core components, and how to use it can position your business for success.?

What Is a Business Financial Plan??

A business financial plan is a forward-looking projection of what your income and expenses are likely to be in the coming months. It can help with determining your cash flow, pinpointing needs for financing, and identify when to take on new initiatives or projects.?

When developing a new business, a financial plan can help determine if your concept is viable. At all times, the plan helps to monitor your financial health and progress and prevent problems.?

A financial plan is a core part of a business plan that frames your business concept, leadership, market, and competition. It¡¯s a key element of documents used, along with financial statements, to help secure funding from investors or private lenders.?

It can also help you understand cash flow to help you determine where to place valuable financial resources.?

Elements of a Financial Plan?

Financial projections can be tricky to develop. This guide shows you the key components and how to get started.?

Income Statement?

The income statement details the profits and losses your business experienced during a specific time frame. It can be common to have monthly, quarterly, and annual reporting periods, depending on your business goals. Also known as a profit-and-loss statement, the income statement includes the following elements:?

• Cost of sales or the cost of goods, e.g. how much it costs to produce your goods or services?
• Revenue streams?
• Operating expenses, such as rent and utilities?
• Gross margin ¨C the total net profit or loss?

Balance Sheet?

The balance sheet is a look at the current state of your business. It includes:?

• Assets, such as cash, products and resources you have available?
• Liabilities, including what you owe to suppliers, employees, landlords, and creditors?
• Shareholder equity, which is the amount of money your business generates (assets minus liabilities)?

Personnel Plan?

If you employ staff in your business, it¡¯s important to look at the expenses and needs of your personnel. A personnel plan lays out the positions you have, the costs associated with each, and helps identify where you may need to bring on additional employee resources.?

The plan forecasts the salaries or wages, benefits, and other costs associated with personnel, including training, travel, along with their ability to generate revenue. This analysis helps to determine when and where to hire new staff.?

Business Ratios?

Business ratios give you clear indications of where your business stands. There are a variety of ratios you can calculate. Here are some common ratios used by businesses to gauge progress:?

• Working capital ¨C Presents a clear picture of current financial strength.?
• Quick ¨C Demonstrates your ability to meet current financial obligations if something unexpected happens.?
• Inventory turnover ¨C Shows how frequently you convert inventory to sales and the efficiency of your inventory management.?
• Debt-to-worth ¨C Indicator of overall health and often used by lenders.?
• Return on investment ¨C A higher ROI demonstrates that your business generates income from your investments.?

Sales Forecasts?

A sales forecast is integral to your planning, because it projects cash flow and your overall financial health. The sales forecast predicts how much you will sell in each period and should align with sales in your profit-and-loss statement. It also should segment sales by each type of good or service sold.?

Cash Flow Projections?

These projections show how cash moves into and out of your business, indicating what cash you have on hand today, where it will be allocated, the sources of your cash, and scheduling of outflows.?

Income Projections?

Typically done on an annual basis, income projections show how much the business earns minus expected expenses.?

Assets and Liabilities?

Both assets and liabilities are core elements of the company¡¯s balance sheet.??

Assets comprise what your company owns, such as cash, along with inventory and accounts receivable that could be converted into cash.?

Liabilities are financial commitments your company has to creditors, including current and long-term obligations. Current liabilities include payroll, short-term loans, and taxes due, usually within a one-year window. Long-term liabilities include debt such as loans that mature a year or more from present.??

Break-Even Analysis?

Your break-even point is a key indicator of financial health and is a measure of how much you need to sell to cover your expenses. Knowing your break-even point helps shape your sales volume and revenue goals.?

What are the Key Steps to Create a Financial Plan??

With so many components to a financial plan, it can seem daunting to consider creating one. Here are four steps to take to get started.?

1. Build a Business Strategic Plan?

Starting with a strategic plan for your business can help to frame some of your projections. The strategic plan helps you develop clear answers to core questions, such as who your typical customers are, your market, and what needs your products or services address. Think of the strategic plan as your roadmap that helps you direct the business towards meeting your goals..?

2. Create a Marketing Strategy?

How are you going to differentiate your products and services? Having a compelling and effective marketing plan that creates messages, ads, promotions, emails and other communications that spur action, address needs and demonstrate value help to build a customer base and understand what resources are necessary to do so.?

3. Understand the Competition?

Having a clear sense as to your competition helps you plan financially. At what price point are they selling the same items? What customers are they targeting? Are they in the same sectors or regions as you? Knowing your competition helps you position your brand differently and create effective and compelling strategies to attract business.?

4. Be Prepared to Pivot?

Businesses, markets and customers are constantly changing. A sound financial plan prepares for these eventualities, with forward-looking analysis that spots trends and can adjust accordingly.?

Tools for Financial Planning?

SAP »ÆÉ«¶ÌÊÓƵ provides powerful tools for automating business processes, helping your business reduce costs, save money, work more efficiently, and plan. Technology like SAP »ÆÉ«¶ÌÊÓƵ solutions help you manage invoices and company expenses, access real-time data, integrate finances with other business systems, and drive success.?

Learn more about SAP »ÆÉ«¶ÌÊÓƵ solutions today and how they can help your business thrive.?