How to create a financial plan for your business

To create a financial plan for your business, start with what the last 12 months produced in revenue, margin, and cash. Set three or four goals that each have a number and one owner, build a budget and a 13-week cash forecast around them, and compare the plan with real results every month.

A financial plan usually becomes urgent because someone else asks for one. A lender wants projections, a partner wants to know what the company can afford, or the year is about to turn and the only plan is a spreadsheet plus what you remember.

Without a plan, each decision gets made one invoice at a time. With one, you can hire, buy equipment, or take on a loan against numbers you have already tested, and you can say what the business will do if sales come in below target.

What does a financial plan include?

A financial plan is four pieces that agree with each other: goals, a budget, a cash forecast, and a monthly review.

These words get mixed up, so here is how this article uses them. A budget is what you intend to spend. A forecast is what you now expect to happen. The plan is what you decide to do about the gap between them.

How to create a financial plan for your business, step by step

Work through five steps in order: take stock of where you are, set goals with numbers, build the budget, add a 13-week cash forecast, and test the whole plan against your cash.

Take stock of where the business stands

Start with 12 months of actuals: the income statement, the balance sheet, and the cash flow statement, plus a list of what customers owe you and what you owe suppliers. The U.S. Small Business Administration asks established businesses to include those three statements for the last three to five years in a business plan, so it pays to keep them together in one folder.

Then look for what the totals hide: which customers or products produce your margin, and which months run short of cash. Those two answers shape every goal that follows.

Set goals with a number, an owner, and a checkpoint

A goal is useful when you can tell, on a set date, whether you reached it. "Grow revenue" cannot be checked. "Reach $4.2 million in revenue by December 31, with gross margin at or above 38%" can. The numbers are an example, and gross margin is the share of each sale left after the direct costs of delivering it.

Each goal needs three things:

• A number and a date: revenue, gross margin, a minimum cash balance, or days to collect from customers.
• One owner, by name, who reports on it.
• A checkpoint for each month, so the annual figure is broken into the amount you expect to see at the end of every month on the way there.

Pair every growth goal with a margin or cash goal. Revenue can rise while gross margin slips, and the plan should show that before a lender or buyer does. Three or four goals are enough to track every month; more than that turns the review into a status meeting.

Build the budget

A budget turns the goals into spending limits by month. It decides which priorities get the limited cash and which wait, and it gives each manager a limit to own. It also sets the benchmark you compare results with each month, and it shows a lender or partner that your numbers hang together.

Build it in this order. Start with revenue by month, from your contracts, your pipeline, and your history. Add the costs that do not move with sales, such as rent and salaries, then the costs that do, such as materials and commissions, as a percentage of revenue. Put every planned hire and equipment purchase in the month it will hit.

Add a 13-week cash forecast

Profit and cash are different numbers, and the budget shows only the first. A 13-week cash forecast shows the second: opening cash, plus the money you expect to collect, minus the money you expect to pay, equals closing cash, week by week.

Use real due dates: when each invoice should be paid, when each bill and payroll runs, and when tax and loan payments fall. Here is the shape, with made-up numbers:

Week 4 runs $5,000 short. Seen three weeks ahead, that is a call to a slow-paying customer or a supplier. Seen on the day, it is an overdraft.

Update the forecast every week: replace the week that just ended with the real figures and add a new week at the end, so it always looks 13 weeks ahead. If cash is the tighter problem, how to improve cash flow for your business covers the levers.

Test the plan against your cash

Before you commit to a growth goal, find out what it costs before it pays. Add the inventory, hiring, and marketing the goal requires to the cash forecast, then look for the lowest closing balance.

Next, run a downside case, and pick it from your own history: your worst month in the last two years, or your largest customer paying 30 days late. If the cash forecast goes negative in that case, change one of three things before the shortfall arrives: the timing of the goal, the spending behind it, or how it is financed. The financing options for small businesses are worth reading at that point.

How do you keep the plan current?

Review it every month, and re-plan between reviews when something material changes.

Hold the review on the same day each month, once the previous month's accounts are closed. Compare revenue, gross margin, and closing cash with the plan, find the reason behind the three largest gaps, and decide one thing: keep going, change a spend, or change a goal. The few figures worth bringing to that meeting are in key financial KPIs every business owner should track.

Re-plan before the next review when you win or lose a major customer, when a main cost moves, or when results miss the plan two months in a row.

A rolling forecast makes the update routine. An annual budget is set once, so it drifts from reality as the year goes on. A rolling forecast always looks 12 months ahead: when a month closes, you replace it with actuals and add one more month at the end. How to do financial forecasting walks through the method.

What to do next

1. This week, put the last 12 months of the income statement, balance sheet, and cash flow statement in one folder.
2. Write three or four goals on one page, each with a number, a date, and an owner, and share the page with your leadership team.
3. Build the 13-week cash forecast first. It takes the least time and finds problems soonest.
4. Draft the monthly budget from the goals, and put the first review on the calendar for the week after the books close.

To get help with the model or the monthly review, you can work with a fractional CFO, a senior finance leader who joins your team part-time. See how Surfside Capital Advisors supports owners with financial planning and analysis (FP&A) and fractional CFO work.

Questions owners ask

Do you need planning software?

Not at first. A spreadsheet is enough while you have one way of making money and a short list of customers. Move to planning software when refreshing the model takes more than a day, or when two people overwrite each other's versions.

Who should own the financial plan?

You sign off on it, because the goals are yours. One person keeps the model current: a finance lead or a fractional CFO. Each goal then has its own owner, who reports on it at the monthly review.