Whether or not you currently plan to seek financing from a bank or funding from an investor, having a solid strategic financial plan is a necessity for a new business. Even if yours has been established for a while, creating a strategic financial plan now can set the course for where you’ll take your business in the future.
These tips can help you ensure that you align your financial plan with your business goals and put your company in the best light, should you decide to seek financing.
1. Start with the End in Mind
Working backward can be helpful with your financial plan: if you know what you hope to achieve, you can build your plan around that goal.
Let’s say you run a startup and want to finance so that you can open a production facility. You need to ensure that your company looks appealing to potential lenders, venture capitalists, and angels. Your plan would focus on that goal of opening a production facility and the potential growth that move would create.
2. Know Your Financing Options
Even if you’re not currently looking for financing, it’s a good idea to educate yourself about your options so that, should the day come, you are prepared with the option that’s the best fit for your needs.
For a little help covering business expenses like a new computer or office supplies when cash flow is blocked, consider getting a business credit card. If you need thousands of dollars—or even millions—a small business loan or an investor might be your best bet. Knowing the best course for seeking the financing you require can help you as you shape your financial plan.
3. Calculate ALL Your Expenses
You can’t plan for the future until you know what you’re spending now. Understanding your business expenses can help you create forecasts for how much money you will need to bring in revenue so that you can hit profit goals. Investors want to see how much profit margin you have, so start by identifying what you’re spending.
Certainly, some expenses will be temporary, as there are more costs associated with starting a business than managing it. Don’t overlook your own salary! It’s important to pay yourself, even if it’s just a pittance as you get the business up and running.
4. Estimate Your Sales Forecast
This can be frustrating for new businesses: how can you estimate a sales forecast when you have no history of sales to base it on? You’ll have to get creative if you’re starting from scratch. Look to industry resources to find an average for similar businesses. Seek help from small business organizations like SCORE and the SBDC for help as well. If you have contacts in the industry, talk to them and see if you can get some general numbers to help you as you plug in this data into your financial plan.
5. Create Scenarios to Achieve Your Goal
Remember that goal you started with? Now you’re going to play around with a few ways you can achieve it. Draft several scenarios for how $X in financing would help you do Y and Z, and the benefits of this. For example:
A $1 million small business loan would cover the costs to purchase the building at Oak and Staton Streets, as well as set it up with the equipment to produce 20,000 widgets per month. This additional capacity would increase revenues by 30% and enable us to pay back the loan within 25 years.
Receiving $1 million in financing from a venture capitalist would cover the costs to purchase the building at Oak and Staton Streets, as well as set it up with the equipment to produce 20,000 widgets per month. This additional capacity would increase revenues by 30% and increase the business value by 25%.
Using existing funds, we can purchase a new machine that will increase production by 15%. No loan needed.
You may find, by creating these various scenarios, that you’re not ready to take on a 25-year loan. Maybe you’d benefit from having the expertise of a VC in your industry, and you’d rather give up equity for his connections (not to mention cash flow). Or you have a hefty 401(k) and are considering a Rollover for Business Start-ups (ROBS) to fund it since you wouldn’t have any tax penalty for borrowing from your retirement account to fund your business.
6. Incorporate it Into Your Business Plan
Your financial plan should be part of your overall business plan because it needs other components (like marketing) to stand. Your business plan will cover how you will reach new customers, who they are, and what products or services you will deliver. In the event that you do plan to apply for a loan or seek funding, both banks and investors will want to see the total package for your business.
7. Review and Update as Needed
Your business will pivot. You may change focus, add new products, or tap into a new market. Your business expenses will change, as will your cash flow and sales forecast. Stay on top of these changes: review your financial plan (and business plan) quarterly or annually to make sure it is still aligned with where you’re currently taking the business. If it’s not, make changes to stay in tune with your ever-changing goals.
No matter what you want to achieve with your small business, having a financial plan can keep you focused on those objectives and help you break down how to achieve them. If you’re not comfortable managing the numbers in your plan, seek help from an accountant or small business advisor.
Christine Soeun Choi is a digital marketing associate at Fit Small Business. Currently based in NYC, she has a background in business studies and math with a passion for business development. Outside of work, Christine enjoys taking photos, exploring artwork, and traveling.