2023 is well underway, and it is never to late to create a financial plan for your business! Today I want to share the six keys to building a financial plan. These six keys are the framework I follow with my clients to help them achieve a precise and measurable financial roadmap for their businesses. By focusing on these six areas of your business finances, you can create a plan to follow and financial goals you can measure throughout the year. 

Balance Sheet Validation

The first step is to perform a balance sheet validation. This means reconciling credit card transactions, accounts payable, accounts receivable, payroll, fixed assets, subscriptions, deferred accounts, and other areas from the general ledger or balance sheet to their source or supporting file. Think about a bank reconciliation as an example. You want to be able to match your bank balance back to your balance sheet and know what has or hasn’t cleared yet.

By verifying the accuracy of the balance sheet with other forms of documentation, we can ensure the profit and loss statement shows every transaction it should. 

Profit Assessment

A profit assessment uses several metrics to evaluate how the company is allocating profits compared to other companies of a similar size. Spend time looking at the percentages given to the owner’s compensation, operating expenses, investment, etc. In any buckets where profits are allocated, figure out percentages. Compare these percentages to benchmarks. I have a set of benchmarks I use with clients but they aren’t hard to find with a quick google search for your industry and size.

Once you have that information, you can look for ways to improve against the benchmarks. Is there anywhere you need to allocate more or less? If so, how will you make that happen? A profit analysis allows you to dive deeper than just knowing you are profitable; it will enable you to analyze where that profit is spent. 

Revenue Review

A revenue review is just as it sounds, a review of all revenue coming into the business. Revenue is the money brought in through business operations, measured over a specific time frame. It is the number before subtracting any expenses. Revenue is calculated by adding up all of a company’s earnings from sales over a particular period. 

Look closely at where the money comes from, what products or services bring cash into the business? Spend time listing how your company makes money and how that revenue compares with the cost of making the product or delivering the service. 

If you have a service-based business, remember that the time it takes to provide the service is costing you “money”. Often, service providers do not value their time as a finite resource and ultimately undercharge for their service. 

Pull a list of all clients and what they paid in 2022. What are your different revenue streams? Which were the most profitable after subtracting the expense of delivering your product or service? A revenue review gives you a clear picture of the money flowing into your business and how profitable your offerings are compared to the delivery cost. It also helps us think about what revenue we can expect to receive in the future.

Team Review

If you have a team of employees, contractors, and/or professional services, you will want to audit to determine how much you are paying versus the results you expect from their work. For example, if you are paying a salesperson $60K per year and the business they brought in is $40K, that might be something to consider. Another great example would be a paralegal that you thought could perform a certain task in 4 hours (and priced your service based on that) but it took them 8 hours to complete. Do you need to adjust your intake process to identify potential problems? Do they need more support? Fewer hours? Or is their skillset not a good fit any longer? 

Alternatively, you can look at what you might gain if you hire some support staff if you do not have a team. Some of the reasons you might be ready to hire: 

• You are turning down work
• You have a new revenue stream
• Things are falling through the cracks
• You don’t have time for maintenance tasks
• You need to hire for a specific skill
• You are never able to take time off 
• You can afford to hire

To learn more about hiring, check out this past blog post: When Is It Time to Hire?

Expense Review

Expenses are the costs accrued during the ordinary course of business operations. There are a variety of types of expenses that occur regularly in a business. We put most business expenses into three categories. 

Required Business Spending

Required business spending includes the expenses that keep the business running. These are the items required to operate legally in your county/city/state/country. They also include the costs of keeping the lights on and allowing you to do your work. 

• Business Insurance
• Legal Structure Fees (business license) 
• Continuing Education (if required for your industry)
• Professional Services (bookkeeper, legal counsel, etc.) 
• Utilities (internet, electricity, water/sewer)
• Rent/Mortgage (If you have a physical location)
• Insurance

Personal Perks

Personal perks are not unique to small businesses. All businesses offer benefits to their employees. However, those benefits generally have to be provided equally to all employees. This means small business owners can offer themselves “benefits” that they might not see in corporate America because they don’t have hundreds of employees receiving the same benefit. Is your business paying for things you would be paying for out-of-pocket even if you didn’t have a business? These could be things such as: 

• Cell Phone
• Internet
• Meal Delivery (prepared lunches every day while you work through lunch) 

Investments

Every other expense in your business is an investment. It could be a good investment. It might be a bad investment. The difference is defined by the return on investment. Expenses in this category should provide a return in time, money, or both. If they don’t they are not a good investment and should be considered when cutting costs.

Pull all 2022 expenses and categorize them by recurring/frequency to complete an expense review. Weekly, biweekly, monthly, quarterly, or as needed. Go through the list and determine the business purpose. Are they required? Personal perks? Or unnecessary? Go through the expenses and determine if there is a way to cut costs or eliminate the expense. 

An expense review allows you to cut costs or find a cheaper option. You can learn more about spending on our blog post Types of Spending.

Build a Budget

The next step in creating your financial plan is to create your actual budget. An annual business budget helps business owners determine what they have available for operations, payroll, cash flow, and any other activity that costs money. A budget also helps manage debt and serves as a guide for forecasting. Operating without a business budget can lead to spending money that is unavailable, running up debt, not having a proper emergency fund on hand, and ultimately not being able to pay yourself what you deserve. 

Your budget is the numerical representation of your company’s financial goals for the period (generally the fiscal or calendar year). It’s not just the goals but the plan to get there. A budget shows what you want to achieve and how you intend to accomplish those goals. An annual budget will help you: 

• Determine the availability of resources
• Set and track internal goals
• Determine project priority
• Create a financial roadmap
• Avoid wasteful spending

You can read more about how a business budget leads to success here.

Cashflow Forecast

Finally, you want to complete a cash flow forecast. Cash flow is the cash balance that moves in and out of the business at a specific time. Cash is constantly moving through your company. When you hire a contractor and pay them, money flows out of your business. When you collect payments from clients, cash flows into the business. 

Cash flow can be positive or negative. Positive cash flow means a company has more money moving in than moving out. Negative cash flow means a company has more money moving out of it than into it.

Many accountants will talk about operating cash flow, investing cash flow, and financing cash flow but let’s be honest…this doesn’t mean much to most business owners. We recommend building your cash flow just like you do a budget but with adjustments for when the money comes in. If you get paid 30 days after you invoice someone, the revenue shows up in one month, and the cash shows up in the next month. Your credit card payments are cash out the door for expenses you had the month before. The timing of when cash moves is the most important difference between a cash flow and a budget. 

Types of Cash Flow

• Operating cash flow is the net cash from a company’s regular business operations. 
• Investing cash flow is the net cash generated from a company’s investment-related activities. 
• Financing cash flow is how money moves from your business to your investors, owners, or creditors. 

The second most important difference between a cash forecast and a budget is that your budget does not show savings, profit, and debt. Debt is a critical area to analyze is in your business. Make a list of all of your debts, the interest rates, and payments, and ask the following questions: 

• How much outstanding debt do you have tied to your business?
• How much is it costing you to service this debt? 

You want to be aware of your debt and the cost of carrying that debt. If the interest is high, it may impact your profitability. For more information about business debt, check out these articles we compiled about using debt in your business and dealing with pandemic debt.

Once you have completed all six tasks (balance sheet, profit assessment, revenue review, expense review, budget, and cashflow forecast) and have your financial plan, I advise avoiding setting and forgetting. This financial plan should be revisited quarterly, if not monthly so that you can measure what is happening against your projections. To learn more about tasks that keep your business financially healthy, check out this post about maintenance tasks.

If you want help with your financial plan, get in touch! We are here to help you reach your financial goals!