why is a financial plan important in business planning

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The Importance of Financial Planning for your Businesses 

When you’re starting out and putting in the hours to turn that business dream into a functioning reality, it can be difficult to think of next week – never mind next year. However, it always pays to plan ahead, especially when it comes to the financial future of your business.

Business Financial Planning:

Financial planning for your business helps you to forecast future financial results and decide how best to use your company’s current financial resources in order to realise both your short-term and long-term plans. Because planning involves looking well into the future, it is a highly creative thinking process as well as an analytical one, and you might need to call in the experts to help you juggle both these aspects of your financial roadmap.

How can financial planning help me achieve my company goals?

Having a strong financial plan for your business is probably the most important single thing that you can do to help yourself succeed.  It’s your roadmap, your guideline, a reminder of what your goals are–what you are trying to achieve in the short term and the long term. It is so important that possible investors, bankers, and creditors won’t even set up a meeting with you if you don’t have a financial plan in place. We cannot state this clearly enough – get your business’s financial function set up effectively from the start, and the rest will follow. 

Here are 5 benefits of financial planning for your business:

Financial planning can help you:

• Manage your cash flow properly: Good financial planning allows you to set clear expectations regarding your cash flow so that you know where you can spend and where you need to cut back. This is especially important after the initial startup expenditures.
• Allocate your budget: Financial planning for businesses makes for clever budget allocation and allows all players within your company to understand where and how money will be spent, ensuring less friction. 
• Set realistic goals: If you don’t know how much you have to work with, you can’t set realistic financial goals that work within your budget. Your vision might be lofty, but it pays to be realistic.
• Mitigate your risk: A good financial plan should prepare for unexpected expenses, as well as times of lower income. That way you can ride out the bad times, but keep your doors open.
• Plan a roadmap for the future: Financial planning helps you clarify your company goals and communicate them to your employees and other stakeholders. This makes it easier for the business owners and top management to make more good decisions when planning to scale.

Most people have some idea of what they would like to achieve financially, but they don’t always know how to go about setting realistic goals. Companies that put in the time and effort to work out an effective and strategic financial plan , will be able to allocate their time and resources effectively, allowing them to expand while ensuring good cash flow and healthy accounts.

Does my business need a financial plan?

In short – yes. If money is the lifeblood of your business, then you cannot afford NOT to have a sound financial plan in place. A good financial plan that you refer back to, will allow you to spot anomalies and positive or negative trends in your finances so that you can take the necessary corrective action. This means that you can make your money work for you – spending when and where it’s needed for growth, and cutting back on those outgoings that are becoming a financial black hole. 

We have found that business owners and entrepreneurs are often so involved in the day-to-day running of their businesses, that they don’t have the time and energy to think of long-term financial planning and strategy. This is where we recommend a financial consultant or CFO with the expertise to see what you might miss.  Many entrepreneurs are making use of the services of a virtual CFO instead of hiring full-time, as this allows them access to expertise without the cost of a permanent hire.

What should be included in a business financial plan?

All business financial plans , whether you’re just starting a business or building an expansion plan, should include at least the following:

• Revenue or income – what money is actually coming into your business.
• Your basic fixed operating costs such as rent and utilities.
• General monthly expenses such as marketing etc.
• Costing of your goods or services – take the time to note every cent and every minute that you put into producing your product or service.
• Total profit or loss – the formula for this is income minus cost of goods or services.
• Actual operating income (total profit minus expenses).

After you have these basics down and feel that you have at least an overview of the financial health of your business, it is important to remember that ‘big-picture’ higher-order financial planning and strategizing  are also necessary for the long-term viability of your business. Finance is complex and the finance function is often one of the last frontiers to get fortified by the leadership team. It is also one that becomes increasingly more important as you head towards further expansion, possible fundraises and potential acquisitions. Getting the numbers right is critical. So is developing the right strategy based on analysis, forecasts , and smart financial management . This is where you need the advice of an expert CFO or the assistance of a virtual ‘CFO-as service’ company like Outsourced CFO.

At Outsourced CFO we can assist with getting your financial planning off to a solid start,  in order to help you with building long-term profitability for your business. Reach out to us and let’s get your business ready for growth.

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6 Elements of a Successful Financial Plan for a Small Business

Improve your chances of growth by covering these bases in your plan.

Table of Contents

Many small businesses lack a full financial plan, even though evidence shows that it is essential to the long-term success and growth of any business. 

For example, a study in the New England Journal of Entrepreneurship found that entrepreneurs with a business plan are more successful than those without one. If you’re not sure how to get started, read on to learn the six key elements of a successful small business financial plan.

What is a business financial plan, and why is it important? 

A business financial plan is an overview of a business’s financial situation and a forward-looking projection for growth. A business financial plan typically has six parts: sales forecasting, expense outlay, a statement of financial position, a cash flow projection, a break-even analysis and an operations plan.

A good financial plan helps you manage cash flow and accounts for months when revenue might be lower than expected. It also helps you budget for daily and monthly expenses and plan for taxes each year.

Importantly, a financial plan helps you focus on the long-term growth of your business. That way, you don’t get so caught up in the day-to-day activities that you lose sight of your goals. Focusing on the long-term vision helps you prioritize your financial resources. 

The 6 components of a successful financial plan for business

1. sales forecasting.

You should have an estimate of your sales revenue for every month, quarter and year. Identifying any patterns in your sales cycles helps you better understand your business, and this knowledge is invaluable as you plan marketing initiatives and growth strategies . 

For instance, a seasonal business can aim to improve sales in the off-season to eventually become a year-round venture. Another business might become better prepared by understanding how upticks and downturns in business relate to factors such as the weather or the economy.

Sales forecasting is also the foundation for setting company growth goals. For instance, you could aim to improve your sales by 10 percent over each previous period.

2. Expense outlay

A full expense plan includes regular expenses, expected future expenses and associated expenses. Regular expenses are the current ongoing costs of your business, including operational costs such as rent, utilities and payroll. 

Regular expenses relate to standard business activities that occur each year, such as conference attendance, advertising and marketing, and the office holiday party. It’s a good idea to distinguish essential expenses from expenses that can be reduced or eliminated if needed.

Expected future expenses are known future costs, such as tax rate increases, minimum wage increases or maintenance needs. Generally, a part of the budget should also be allocated to unexpected future expenses, such as damage to your business caused by fire, flood or other unexpected disasters. Planning for future expenses ensures your business is financially prepared via budget reduction, increases in sales or financial assistance.

Associated expenses are the estimated costs of various initiatives, such as acquiring and training new hires, opening a new store or expanding delivery to a new territory. An accurate estimate of associated expenses helps you properly manage growth and prevents your business from exceeding your cost capabilities. 

As with expected future expenses, understanding how much capital is required to accomplish various growth goals helps you make the right decision about financing options.

3. Statement of financial position (assets and liabilities)

Assets and liabilities are the foundation of your business’s balance sheet and the primary determinants of your business’s net worth. Tracking both allows you to maximize your business’s potential value. 

Small businesses frequently undervalue their assets (such as machinery, property or inventory) and fail to properly account for outstanding bills. Your balance sheet offers a more complete view of your business’s health than a profit-and-loss statement or a cash flow report. 

A profit-and-loss statement shows how the business performed over a specific time period, while a balance sheet shows the financial position of the business on any given day.

4. Cash flow projection

You should be able to predict your cash flow on a monthly, quarterly and annual basis. Projecting cash flow for the full year allows you to get ahead of any financial struggles or challenges. 

It can also help you identify a cash flow problem before it hurts your business. You can set the most appropriate payment terms, such as how much you charge upfront or how many days after invoicing you expect payment .

A cash flow projection gives you a clear look at how much money is expected to be left at the end of each month so you can plan a possible expansion or other investments. It also helps you budget, such as by spending less one month for the anticipated cash needs of another month.

5. Break-even analysis

A break-even analysis evaluates fixed costs relative to the profit earned by each additional unit you produce and sell. This analysis is essential to understanding your business’s revenue and potential costs versus profits of expansion or growth of your output. 

Having your expenses fully fleshed out, as described above, makes your break-even analysis more accurate and useful. A break-even analysis is also the best way to determine your pricing.

In addition, a break-even analysis can tell you how many units you need to sell at various prices to cover your costs. You should aim to set a price that gives you a comfortable margin over your expenses while allowing your business to remain competitive.

6. Operations plan

To run your business as efficiently as possible, craft a detailed overview of your operational needs. Understanding what roles are required for you to operate your business at various volumes of output, how much output or work each employee can handle, and the costs of each stage of your supply chain will aid you in making informed decisions for your business’s growth and efficiency.

It’s important to tightly control expenses, such as payroll or supply chain costs, relative to growth. An operations plan can also make it easier to determine if there is room to optimize your operations or supply chain via automation, new technology or superior supply chain vendors.

For this reason, it is imperative for a business owner to conduct due diligence and become knowledgeable about merchant services before acquiring an account. Once the owner signs a contract, it cannot be changed, unless the business owner breaks the contract and acquires a new account with a new merchant services provider. 

Tips on writing a business financial plan

Business owners should create a financial plan annually to ensure they have a clear and accurate picture of their business’s finances and a realistic view for future growth or expansion. A financial plan helps the business’s leaders make informed decisions about purchases, debt, hiring, expense control and overall operations for the year ahead. 

A business financial plan is essential if a business owner is looking to sell their business, attract investors or enter a partnership with another business. Here are some tips for writing a business financial plan.

Review the previous year’s plan.

It’s a good idea to compare the previous year’s plan against actual performance and finances to see how accurate the previous plan and forecast were. That way, you can address any discrepancies or overlooked elements in next year’s plan.

Collaborate with other departments.

A business owner or other individual charged with creating the business financial plan should collaborate with the finance department, human resources department, sales team , operations leader, and those in charge of machinery, vehicles or other significant business tools. 

Each division should provide the necessary data about projections, value and expenses. All of these elements come together to create a comprehensive financial picture of the business.

Use available resources.

The Small Business Administration (SBA) and SCORE, the SBA’s nonprofit partner, are two excellent resources for learning about financial plans. Both can teach you the elements of a comprehensive plan and how best to work with the different departments in your business to collect the necessary information. Many websites, including business.com , and service providers, such as Intuit, offer advice on this matter. 

If you have questions or encounter challenges while creating your business financial plan, seek advice from your accountant or other small business owners in your network. Your city or state has a small business office that you can contact for help.

Business financial plan templates

Many business organizations offer free information that small business owners can use to create their financial plan. For example, the SBA’s Learning Platform offers a course on how to create a business plan. It also offers worksheets and templates to help you get started. You can seek additional help and more personalized service from your local office.

SCORE is the largest volunteer network of business mentors. It began as a group of retired executives (SCORE stands for “Service Corps of Retired Executives”) but has expanded to include business owners and executives from many industries. Advice is free and available online, and there are SBA district offices in every U.S. state. In addition to participating in group or at-home learning, you can be paired with a mentor for individualized help. 

SCORE offers templates and tips for creating a small business financial plan. SCORE is an excellent resource because it addresses different levels of experience and offers individualized help.

Other templates can be found in Microsoft Office’s template library, QuickBooks’ online resources, Shopify’s blog and other places. You can also ask your accountant for guidance, since many accountants provide financial planning services in addition to their usual tax services.

Diana Wertz contributed to the writing and research in this article.

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How to Write a Financial Plan for a Business Plan

Noah Parsons

4 min. read

Updated July 11, 2024

Creating a financial plan for a business plan is often the most intimidating part for small business owners.

It’s also one of the most vital. Businesses with well-structured and accurate financial statements are more prepared to pitch to investors, receive funding, and achieve long-term success.

Thankfully, you don’t need an accounting degree to successfully create your budget and forecasts.

Here is everything you need to include in your business plan’s financial plan, along with optional performance metrics, funding specifics, mistakes to avoid , and free templates.

• Key components of a financial plan in business plans

A sound financial plan for a business plan is made up of six key components that help you easily track and forecast your business financials. They include your:

Sales forecast

What do you expect to sell in a given period? Segment and organize your sales projections with a personalized sales forecast based on your business type.

Subscription sales forecast

While not too different from traditional sales forecasts—there are a few specific terms and calculations you’ll need to know when forecasting sales for a subscription-based business.

Expense budget

Create, review, and revise your expense budget to keep your business on track and more easily predict future expenses.

How to forecast personnel costs

How much do your current, and future, employees’ pay, taxes, and benefits cost your business? Find out by forecasting your personnel costs.

Profit and loss forecast

Track how you make money and how much you spend by listing all of your revenue streams and expenses in your profit and loss statement.

Cash flow forecast

Manage and create projections for the inflow and outflow of cash by building a cash flow statement and forecast.

Balance sheet

Need a snapshot of your business’s financial position? Keep an eye on your assets, liabilities, and equity within the balance sheet.

What to include if you plan to pursue funding

Do you plan to pursue any form of funding or financing? If the answer is yes, you’ll need to include a few additional pieces of information as part of your business plan’s financial plan example.

Highlight any risks and assumptions

Every entrepreneur takes risks with the biggest being assumptions and guesses about the future. Just be sure to track and address these unknowns in your plan early on.

Plan your exit strategy

Investors will want to know your long-term plans as a business owner. While you don’t need to have all the details, it’s worth taking the time to think through how you eventually plan to leave your business.

• Financial ratios and metrics

With your financial statements and forecasts in place, you have all the numbers needed to calculate insightful financial ratios.

While including these metrics in your financial plan for a business plan is entirely optional, having them easily accessible can be valuable for tracking your performance and overall financial situation.

Key financial terms you should know

It’s not hard. Anybody who can run a business can understand these key financial terms. And every business owner and entrepreneur should know them.

Common business ratios

Unsure of which business ratios you should be using? Check out this list of key financial ratios that bankers, financial analysts, and investors will want to see.

Break-even analysis

Do you want to know when you’ll become profitable? Find out how much you need to sell to offset your production costs by conducting a break-even analysis.

How to calculate ROI

How much could a business decision be worth? Evaluate the efficiency or profitability by calculating the potential return on investment (ROI).

• How to improve your financial plan

Your financial statements are the core part of your business plan’s financial plan that you’ll revisit most often. Instead of worrying about getting it perfect the first time, check out the following resources to learn how to improve your projections over time.

Common mistakes with business forecasts

I was glad to be asked about common mistakes with startup financial projections. I read about 100 business plans per year, and I have this list of mistakes.

How to improve your financial projections

Learn how to improve your business financial projections by following these five basic guidelines.

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Download and use these free financial templates and calculators to easily create your own financial plan.

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Noah is the COO at Palo Alto Software, makers of the online business plan app LivePlan. He started his career at Yahoo! and then helped start the user review site Epinions.com. From there he started a software distribution business in the UK before coming to Palo Alto Software to run the marketing and product teams.

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• What to include for funding

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The Importance of Financial Planning for Small Businesses

A financial plan is the most important thing a small business needs. It’s a road map, a guideline, a reminder of what your goals are–what you are trying to achieve in the short-term and the long-term. It lays out what your possible costs are, and it seeks out to address avenues for how to manage these costs. It is so important that investors, bankers, and creditors won’t even set up a meeting with you if you don’t have a financial plan for your small business.

Your financial plan helps you manage your cash flow. Most businesses have income that varies from season to season. A good financial plan takes these vicissitudes into account so that there aren’t shortages in the long term. Having a cash cushion helps ensure that your business can take a poor season and still come out on top. Planning your taxes, prudishly spending your cash flow, and budgeting carefully can result from careful financial planning. When someone is in the thick of running his/her business, he /she can lose sight of the long term goals that ensure proper growth of your small business. A solid financial plan can be a reminder of all the necessary expenditures to keep your small business growing so as to stay ahead of the competitors in your market. The decisions of the small business owner takes can have positive or negative consequences. A good financial plan can spot positive and negative trends where they may have become lost in a sea of numbers. This will help you better allocate funds to the areas that are making your business money, and avoid expenditures that didn’t yield enough results. Financial planning can also help you prioritize expenditures. In small businesses, conserving financial resources is a must. A well thought out financial plan can help you prioritize what areas need to be funded immediately, and where your expenses can wait until you have a better season. Even the world’s largest corporations go through a process of prioritization of expenditures resulting from careful cost/benefit analysis.

Overall, the financial plan is there to help you measure your progress. How did your season go? What steps have been made in achieving your goals? When a small business owner is knee-deep in the day-to-day operations of running their business, they can often lose sight of what strides they have made to grow their small business. The financial plan helps the small business owner see precisely what is occurring through reviewing and analyzing the hard data. In short, every small business owner must have a methodical business plan that is updated regularly if they want to operate successfully for years to come.

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• Creating a Small Business Financial Plan

Written by True Tamplin, BSc, CEPF®

Reviewed by subject matter experts.

Updated on September 02, 2023

Are You Retirement Ready?

Table of contents, financial plan overview.

A financial plan is a comprehensive document that charts a business's monetary objectives and the strategies to achieve them. It encapsulates everything from budgeting and forecasting to investments and resource allocation.

For small businesses, a solid financial plan provides direction, helping them navigate economic challenges, capitalize on opportunities, and ensure sustainable growth.

The strength of a financial plan lies in its ability to offer a clear roadmap for businesses.

Especially for small businesses that may not have a vast reserve of resources, prioritizing financial goals and understanding where every dollar goes can be the difference between growth and stagnation.

It lends clarity, ensures informed decision-making, and sets the stage for profitability and success.

Understanding the Basics of Financial Planning for Small Businesses

Role of financial planning in business success.

Financial planning is the backbone of any successful business endeavor. It serves as a compass, guiding businesses toward profitability, stability, and growth.

With proper financial planning, businesses can anticipate potential cash shortfalls, make informed investment decisions, and ensure they have the capital needed to seize new opportunities.

For small businesses, in particular, tight financial planning can mean the difference between thriving and shuttering. Given the limited resources, it's vital to maximize every dollar and anticipate financial challenges.

Through diligent planning, small businesses can position themselves competitively, adapt to market changes, and drive consistent growth.

Core Components of a Financial Plan for Small Businesses

Every financial plan comprises several core components that, together, provide a holistic view of a business's financial health and direction. These include setting clear objectives, estimating costs , preparing financial statements , and considering sources of financing.

Each component plays a pivotal role in ensuring a thorough and actionable financial strategy .

For small businesses, these components often need a more granular approach. Given the scale of operations, even minor financial missteps can have significant repercussions.

As such, it's essential to tailor each component, ensuring they address specific challenges and opportunities that small businesses face, from initial startup costs to revenue forecasting and budgetary constraints.

Setting Clear Small Business Financial Objectives

Identifying business's short-term and long-term financial goals.

Every business venture starts with a vision. Translating this vision into actionable financial goals is the essence of effective planning.

Short-term goals could range from securing initial funding and achieving a set monthly revenue to covering startup costs. These targets, usually spanning a year or less, set the immediate direction for the business.

On the other hand, long-term financial goals delve into the broader horizon. They might encompass aspirations like expanding to new locations, diversifying product lines, or achieving a specific market share within a decade.

By segmenting goals into short-term and long-term, businesses can craft a step-by-step strategy, making the larger vision more attainable and manageable.

Understanding the Difference Between Profitability and Cash Flow

Profitability and cash flow, while closely linked, are distinct concepts in the financial realm. Profitability pertains to the ability of a business to generate a surplus after deducting all expenses.

It's a metric of success and indicates the viability of a business model . Simply put, it answers whether a business is making more than it spends.

In contrast, cash flow represents the inflow and outflow of cash within a business. A company might be profitable on paper yet struggle with cash flow if, for instance, clients delay payments or unexpected expenses arise.

For small businesses, maintaining positive cash flow is paramount. It ensures that they can cover operational costs, pay employees, and reinvest in growth, even if they're awaiting payments or navigating financial hiccups.

Estimating Small Business Startup Costs (for New Businesses)

Fixed vs variable costs.

When embarking on a new business venture, understanding costs is paramount. Fixed costs remain consistent regardless of production levels. They include expenses like rent, salaries, and insurance . These are predictable outlays that don't fluctuate with business performance.

Variable costs , conversely, change in direct proportion to production or business activity. Think of costs associated with materials for manufacturing or commission for sales .

For a startup, delineating between fixed and variable costs aids in crafting a more dynamic budget, allowing for adaptability as the business scales and evolves.

One-Time Expenditures vs Ongoing Expenses

Startups often grapple with numerous upfront costs. From purchasing equipment and setting up a workspace to initial marketing campaigns, these one-time expenditures lay the foundation for business operations.

They differ from ongoing expenses like utility bills, raw materials, or employee wages that recur monthly or annually.

For a small business owner, distinguishing between these costs is critical. One-time expenditures often demand a larger chunk of initial capital, while ongoing expenses shape the monthly and annual budget.

By categorizing them separately, businesses can strategize funding needs more effectively, ensuring they're equipped to meet both immediate and recurrent financial obligations.

Funding Sources for Small Businesses

Personal savings.

This is often the most straightforward way to fund a startup. Entrepreneurs tap into their personal savings accounts to jumpstart their business.

While this method has the benefit of not incurring debt or diluting company ownership, it intertwines the individual's personal financial security with the business's fate.

The entrepreneur must be prepared for potential losses, and there's the evident psychological strain of putting one's hard-earned money on the line.

Loans can be sourced from various institutions, from traditional banks to credit unions . They offer a substantial sum of money that can be paid back over time, usually with interest .

The main advantage of taking a loan is that the entrepreneur retains full ownership and control of the business.

However, there's the obligation of monthly repayments, which can strain a business's cash flow, especially in its early days. Additionally, securing a loan often requires collateral and a sound credit history.

Investors, including angel investors and venture capitalists , offer capital in exchange for equity or a stake in the company.

Angel investors are typically high-net-worth individuals who provide funding in the initial stages, while venture capitalists come in when there's proven business potential, often injecting larger sums. The advantage is substantial funding without the immediate pressure of repayments.

However, in exchange for their investment, they often seek a say in business decisions, which might mean compromising on some aspects of the original business vision.

Grants are essentially 'free money' often provided by government programs, non-profit organizations, or corporations to promote innovation and support businesses in specific sectors.

The primary advantage of grants is that they don't need to be repaid, nor do they dilute company ownership. However, they can be highly competitive and might come with stipulations on how the funds should be used.

Moreover, the application process can be lengthy and requires showcasing the business's potential or alignment with the specific goals or missions of the granting institution.

Preparing Key Financial Statements for Small Businesses

Income statement (profit & loss).

An Income Statement , often termed as the Profit & Loss statement , showcases a business's financial performance over a specific time frame. It details revenues , expenses, and ultimately, profits or losses.

By analyzing this statement, business owners can pinpoint revenue drivers, identify exorbitant costs, and understand the net result of their operations.

For small businesses, this document is instrumental in making informed decisions. For instance, if a certain product line is consistently unprofitable, it might be prudent to discontinue it. Conversely, if another segment is thriving, it might warrant further investment.

The Income Statement, thus, serves as a financial mirror, reflecting the outcomes of business strategies and decisions.

Balance Sheet

The Balance Sheet offers a snapshot of a company's assets , liabilities , and equity at a specific point in time.

Assets include everything the business owns, from physical items like equipment to intangible assets like patents .

Liabilities, on the other hand, encompass what the company owes, be it bank loans or unpaid bills.

Equity represents the owner's stake in the business, calculated as assets minus liabilities.

This statement is crucial for small businesses as it offers insights into their financial health. A robust asset base, minimal liabilities, and growing equity signify a thriving enterprise.

In contrast, mounting liabilities or dwindling assets could be red flags, signaling the need for intervention and strategy recalibration.

Cash Flow Statement

While the Income Statement reveals profitability, the Cash Flow Statement tracks the actual movement of money.

It categorizes cash flows into operating (day-to-day business), investing (buying/selling assets), and financing (loans or equity transactions) activities. This statement unveils the liquidity of a business, indicating whether it has sufficient cash to meet immediate obligations.

For small businesses, maintaining positive cash flow is often more vital than showcasing profitability.

After all, a business might be profitable on paper yet struggle if clients delay payments or unforeseen expenses emerge.

By regularly reviewing the Cash Flow Statement, small business owners can anticipate cash crunches and strategize accordingly, ensuring seamless operations irrespective of revenue cycles.

Small Business Budgeting and Expense Management

Importance of budgeting for a small business.

Budgeting is the financial blueprint for any business, detailing anticipated revenues and expenses for a forthcoming period. It's a proactive approach, enabling businesses to allocate resources efficiently, plan for investments, and prepare for potential financial challenges.

For small businesses, a meticulous budget is often the linchpin of stability, ensuring they operate within their means and avoid financial pitfalls.

Having a well-defined budget also fosters discipline. It curtails frivolous spending, emphasizes cost-efficiency, and sets clear financial boundaries.

For small businesses, where every dollar counts, a stringent budget is the gateway to financial prudence, ensuring that funds are utilized judiciously, fostering growth, and minimizing wastage.

Strategies for Reducing Costs and Optimizing Expenses

Bulk purchasing.

When businesses buy supplies in large quantities, they often benefit from discounts due to economies of scale . This can significantly reduce per-unit costs.

However, while bulk purchasing leads to immediate savings, businesses must ensure they have adequate storage and that the products won't expire or become obsolete before they're used.

Renegotiating Vendor Contracts

Regularly reviewing and renegotiating contracts with suppliers or service providers can lead to better terms and lower costs. This might involve exploring volume discounts, longer payment terms, or even bartering services.

Building strong relationships with vendors often paves the way for such negotiations.

Adopting Energy-Saving Measures

Simple changes, like switching to LED lighting or investing in energy-efficient appliances, can lead to long-term savings in utility bills. Moreover, energy conservation not only reduces costs but also minimizes the environmental footprint, which can enhance the business's reputation.

Embracing Technology

Modern software and technology can streamline business processes. Automation tools can handle repetitive tasks, reducing labor costs.

Meanwhile, data analytics tools can provide insights into customer preferences and behavior, ensuring that marketing budgets are used effectively and target the right audience.

Streamlining Operations

Regularly reviewing and refining business processes can eliminate redundancies and improve efficiency. This might mean merging roles, cutting down on unnecessary meetings, or simplifying supply chains. A leaner operation often translates to reduced expenses.

Outsourcing Non-core Tasks

Instead of maintaining an in-house team for every function, businesses can outsource tasks that aren't central to their operations.

For instance, functions like accounting , IT support, or digital marketing can be outsourced to specialized agencies, often leading to cost savings and access to expert skills.

Cultivating a Culture of Frugality

Encouraging employees to adopt a cost-conscious mindset can lead to collective savings. This can be fostered through incentives, regular training, or even simple practices like recycling and reusing office supplies.

When everyone in the organization is attuned to the importance of cost savings, the cumulative effect can be substantial.

Forecasting Small Business Revenue and Cash Flow

Techniques for predicting future sales in a small business, past sales data analysis.

Historical sales data is a foundational element in any forecasting effort. By reviewing previous sales figures, businesses can identify patterns, understand seasonal fluctuations, and recognize the effects of past initiatives.

This information offers a baseline upon which to build future projections, accounting for known recurring variables in the business cycle .

Market Research

Understanding the larger market dynamics is crucial for accurate forecasting. This involves tracking industry trends, monitoring shifts in consumer behavior, and being aware of potential market disruptions.

For instance, a sudden technological advancement can change consumer preferences or regulatory changes might impact an industry.

Local Trend Analysis

For small businesses, localized insights can be especially impactful. Observing local competitors, understanding regional consumer preferences, or noting shifts in the local economy can offer precise data points.

These granular details, when integrated into a larger forecasting model, can enhance prediction accuracy.

Customer Feedback

Direct feedback from customers is an invaluable source of insights. Surveys, focus groups, or even informal chats can reveal customer sentiments, preferences, and potential future purchasing behavior.

For instance, if a majority of loyal customers express interest in a new product or service, it can be indicative of future sales potential.

Moving Averages

This technique involves analyzing a series of data points (like monthly sales) by creating averages from different subsets of the full data set.

For yearly forecasting, a 12-month moving average can be used to smooth out short-term fluctuations and highlight longer-term trends or cycles.

Regression Analysis

Regression analysis is a statistical tool used to identify relationships between variables. In sales forecasting, it can help understand how different factors (like marketing spend, seasonal variations, or competitor actions) relate to sales figures.

Once these relationships are understood, businesses can predict future sales based on planned actions or expected external events.

Understanding the Cash Cycle of Business

The cash cycle encompasses the time it takes for a business to convert resource investments, often in the form of inventory, back into cash.

This involves the processes of purchasing inventory, selling it, and subsequently collecting payment. A shorter cycle implies quicker cash turnarounds, which are vital for liquidity.

For small businesses, a firm grasp of the cash cycle can aid in managing cash flow more effectively.

By identifying bottlenecks or delays, businesses can strategize to expedite processes. This might involve renegotiating payment terms with suppliers, offering discounts for prompt customer payments, or optimizing inventory levels to prevent overstocking.

Ultimately, understanding and optimizing the cash cycle ensures that a business remains liquid and agile.

Preparing for Seasonality and Unexpected Changes

Seasonality affects many businesses, from the ice cream vendor witnessing summer surges to the retailer bracing for holiday shopping frenzies.

By analyzing historical data and market trends, businesses can prepare for these cyclical shifts, ensuring they stock up, staff appropriately, and market effectively.

Small businesses, often operating on tighter margins , need to be especially vigilant. Beyond seasonality, they must also brace for unexpected changes – a local construction project obstructing store access, a sudden competitor emergence, or unforeseen regulatory changes.

Building a financial buffer, diversifying product or service lines, and maintaining flexible operational strategies can equip small businesses to weather these unforeseen challenges with resilience.

Securing Small Business Financing and Capital

Role of debt and equity financing.

When businesses seek external funding, they often grapple with the debt vs. equity conundrum. Debt financing involves borrowing money, typically via loans. While it doesn't dilute ownership, it necessitates regular interest payments, potentially impacting cash flow.

Equity financing, on the other hand, entails selling a stake in the business to investors. It might not demand regular repayments, but it dilutes ownership and might influence business decisions.

Small businesses must weigh these options carefully. While loans offer a structured repayment plan and retained control, they might strain finances if the business hits a rough patch.

Equity financing, although relinquishing some control, might bring aboard strategic partners, offering expertise and networks in addition to funds.

The optimal choice hinges on the business's financial health, growth aspirations, and the founder's comfort with sharing control.

Choosing Between Different Types of Loans

A staple in the lending arena, term loans offer businesses a fixed amount of capital that is paid back over a specified period with interest. They're often used for significant one-time expenses, such as purchasing machinery, real estate , or even business expansion.

With predictable monthly payments, businesses can plan their budgets accordingly. However, they might require collateral and a robust credit history for approval.

Lines of Credit

Unlike term loans that provide funds in a lump sum, a line of credit grants businesses access to a pool of funds up to a certain limit.

Businesses can draw from this line as needed, only paying interest on the amount they use. This makes it a versatile tool, especially for managing cash flow fluctuations or unexpected expenses. It serves as a financial safety net, ready for use whenever required.

As the name suggests, microloans are smaller loans designed to cater to businesses that might not need substantial amounts of capital. They're particularly beneficial for startups, businesses with limited credit histories, or those in need of a quick, small financial boost.

Since they are of a smaller denomination, the approval process might be more lenient than traditional loans.

Peer-To-Peer Lending

A contemporary twist to the traditional lending model, peer-to-peer (P2P) platforms connect borrowers directly with individual lenders or investor groups.

This direct model often translates to quicker approvals and competitive interest rates as the overheads of traditional banking structures are removed. With technology at its core, P2P lending can offer a more user-friendly, streamlined process.

However, creditworthiness still plays a pivotal role in determining interest rates and loan amounts.

Crowdfunding and Alternative Financing Options

In an increasingly digital age, crowdfunding platforms like Kickstarter or Indiegogo have emerged as viable financing avenues.

These platforms enable businesses to raise small amounts from a large number of people, often in exchange for product discounts, early access, or other perks. This not only secures funds but also validates the business idea and fosters a community of supporters.

Other alternatives include invoice financing, where businesses get an advance on pending invoices, or merchant cash advances tailored for businesses with significant credit card sales.

Each financing mode offers unique advantages and constraints. Small businesses must meticulously evaluate their financial landscape, growth trajectories, and risk appetite to harness the most suitable option.

Small Business Tax Planning and Management

Basic tax obligations for small businesses.

Navigating the maze of taxation can be daunting, especially for small businesses. Yet, understanding and fulfilling tax obligations is crucial.

Depending on the business structure—whether sole proprietorship , partnership , LLC , or corporation—different tax rules apply. For instance, while corporations are taxed on their earnings, sole proprietors report business income and expenses on their personal tax returns.

In addition to income taxes, small businesses may also be responsible for employment taxes if they have employees. This covers Social Security , Medicare , federal unemployment, and sometimes state-specific taxes.

There might also be sales taxes, property taxes, or special state-specific levies to consider.

Consistently maintaining accurate financial records, being aware of filing deadlines, and setting aside funds for tax obligations are essential practices to avoid penalties and ensure compliance.

Advantages of Tax Planning and Potential Deductions

Tax planning is the strategic approach to minimizing tax liability through the best use of available allowances, deductions, exclusions, and breaks.

For small businesses, effective tax planning can lead to significant savings.

This might involve strategies like deferring income to a later tax year, choosing the optimal time to purchase equipment, or taking advantage of specific credits available to businesses in certain sectors or regions.

Several potential deductions can reduce taxable income for small businesses. These include expenses like rent, utilities, business travel, employee wages, and even certain meals.

By keeping abreast of tax law changes and actively seeking out eligible deductions, small businesses can optimize their financial landscape, ensuring they're not paying more in taxes than necessary.

Importance of Hiring a Tax Professional or Accountant

While it's feasible for small business owners to manage their taxes, the intricate nuances of tax laws make it beneficial to consult professionals.

An experienced accountant or tax consultant can not only ensure compliance but can proactively recommend strategies to reduce tax liability.

They can guide businesses on issues like whether to classify someone as an employee or a contractor, how to structure the business for optimal taxation, or when to make certain capital investments.

Beyond just annual tax filing, these professionals offer year-round counsel, helping businesses maintain clean financial records, stay updated on tax law changes, and plan for future financial moves.

The investment in professional advice often pays dividends , saving businesses from costly mistakes, penalties, or missed financial opportunities.

Regularly Reviewing and Adjusting the Small Business Financial Plan

Setting checkpoints and milestones.

Like any strategic blueprint, a financial plan isn't static. It serves as a guiding framework but should be flexible enough to adapt to evolving business realities.

Setting regular checkpoints— quarterly , half-yearly, or annually—can help businesses assess whether they're on track to meet their financial objectives.

Milestones, such as reaching a specific sales target, launching a new product, or expanding into a new market, offer tangible markers of progress. Celebrating these victories can bolster morale, while any shortfalls can serve as lessons, prompting strategy tweaks. F

or small businesses, where agility is an asset, regularly revisiting the financial plan ensures that the business remains aligned with its overarching financial goals while being responsive to the dynamic marketplace.

Using Financial Ratios to Monitor Business Health

Financial ratios offer a distilled snapshot of a business's health. Ratios like the current ratio ( current assets divided by current liabilities ) can shed light on liquidity, indicating whether a business can meet short-term obligations.

The debt-to-equity ratio , contrasting borrowed funds with owner's equity, offers insights into the business's leverage and potential financial risk.

Profit margin , depicting profitability relative to sales, can highlight operational efficiency. By consistently monitoring these and other pertinent ratios, small businesses can glean actionable insights, understanding their financial strengths and areas needing attention.

In a realm where early intervention can stave off major financial setbacks, these ratios serve as vital diagnostic tools, guiding informed decision-making.

Pivoting Strategies Based on Financial Performance

In the ever-evolving world of business, flexibility is paramount. If financial reviews indicate that certain strategies aren't yielding anticipated results, it might be time to pivot.

This could involve tweaking product offerings, revising pricing strategies, targeting a different customer segment, or even overhauling the business model.

For small businesses, the ability to pivot can be a lifeline. It allows them to respond swiftly to market changes, customer feedback, or internal challenges.

A robust financial plan, while offering direction, should also be pliable, accommodating shifts in strategy based on real-world performance. After all, in the business arena, adaptability often spells the difference between stagnation and growth.

Bottom Line

Financial foresight is integral for the stability and growth of small businesses. Effective revenue and cash flow forecasting, anchored by historical sales data and enhanced by market research, local trends, and customer feedback, ensures businesses are prepared for future demands.

With the unpredictability of the business environment, understanding the cash cycle and preparing for unforeseen challenges is essential.

As businesses contemplate external financing, the decision between debt and equity and the myriad of loan types, should be made judiciously, keeping in mind the business's health, growth aspirations, and risk appetite.

Furthermore, diligent tax planning, with professional guidance, can lead to significant financial benefits. Regular reviews using financial ratios allow businesses to gauge their performance, adapt strategies, and pivot when necessary.

Ultimately, the agility to adapt, guided by a well-structured financial plan, is pivotal for businesses to thrive in a dynamic marketplace.

Creating a Small Business Financial Plan FAQs

What is the importance of a financial plan for small businesses.

A financial plan offers a structured roadmap, guiding businesses in making informed decisions, ensuring growth, and navigating financial challenges.

How do forecasting revenue and understanding cash cycles aid in financial planning?

Forecasting provides insights into expected income, aiding in budget allocation, while understanding cash cycles ensures effective liquidity management.

What are the core components of a financial plan for small businesses?

Core components include setting objectives, estimating startup costs, preparing financial statements, budgeting, forecasting, securing financing, and tax management.

Why is tax planning vital for small businesses?

Tax planning ensures compliance, optimizes tax liabilities through available deductions, and helps businesses save money and avoid penalties.

How often should a small business review its financial plan?

Regular reviews, ideally quarterly or half-yearly, ensure alignment with business goals and allow for strategy adjustments based on real-world performance.

About the Author

True Tamplin, BSc, CEPF®

True Tamplin is a published author, public speaker, CEO of UpDigital, and founder of Finance Strategists.

True is a Certified Educator in Personal Finance (CEPF®), author of The Handy Financial Ratios Guide , a member of the Society for Advancing Business Editing and Writing, contributes to his financial education site, Finance Strategists, and has spoken to various financial communities such as the CFA Institute, as well as university students like his Alma mater, Biola University , where he received a bachelor of science in business and data analytics.

To learn more about True, visit his personal website or view his author profiles on Amazon , Nasdaq and Forbes .

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Financial Planning

Finance planning definition.

Financial planning enables a business to determine how it will afford to achieve its objectives and strategic goals. A business typically sets a vision and objectives, and then immediately creates a financial plan to support those goals. The financial plan describes all of the resources and activities that the company will require—and the expected timeframes—for achieving these objectives.

Financial planning is crucial to organizational success because it compliments the business plan as a whole, confirming that set objectives are financially achievable.

The financial planning process includes multiple tasks, including:

• Confirming the vision and objectives of the business
• Assessing the business environment and company priorities
• Identifying which resources the business needs to achieve its objectives
• Assigning costs business costs centers included in the plan
• Quantifying the amount of equipment, labor, materials, and other resources needed
• Creating and setting a budget
• Identifying any issues and risks with the budget
• Establishing the time period of the plan or planning horizon, either short-term (typically 12 months) or long-term (2 to 5 years)
• Preparing a full financial plan summarizing all key investments, budgets and departmental costs

Generally, the financial partner role includes three areas:

• Strategic financial management;
• Determining financial management objectives; and
• Managing the planning cycle itself.
• Connecting business partners and teams to financial plan

Finance Planning FAQs

What is financial planning, what is finance planning.

Financial planning is the process of assessing the current financial situation of a business to identify future financial goals and how to achieve them. The financial plan itself is a document that serves as a roadmap for a company’s financial growth. It reflects the current status of the business, what progress they intend to make, and how they intend to make it.

Financial plans include budgets, but the terms are not interchangeable. Budgets are just one piece of a financial business plan, which should also include other important information that contribute to a complete picture of a business’ financial health, such as detailed, itemized breakdowns of company assets; typical expenditures; and forecasts of income, cash flow, and revenue.

Typically, business financial plans also focus on specific growth goals and other long-term objectives, as well as potential obstacles to achieving those objectives. A detailed financial planning checklist can identify overlooked opportunities and highlight possible risks that will affect the growth plan.

The comprehensive financial planning process in business is designed to determine how to most effectively use the company’s financial resources to support the objectives of the organization, both short- and long-range, by accurately forecasting future financial results. Financial planning processes are both analytical and informative, balancing the use of data and metrics to predict the future as well as institutional knowledge in departments and teams.

What is Financial Planning and Analysis (FP&A)?

Financial planning and analysis (FP&A) is a group within a company’s finance organization that supports the health of the organization by engaging in several types of activities: budgeting, integrated financial planning, modeling, and forecasting; decision support via reporting on management and performance; and various special projects. FP&A solutions link corporate strategy and execution, enhancing the ability of the finance department to manage performance.

FP&A professionals provide senior management with forecasts of the company’s operating performance and profit and loss for each upcoming quarter and year. These forecasts allow leadership to assess investments and strategic plans for effectiveness and progress. They also enable improved communication between external stakeholders and management.

To map out future goals and plans and evaluate the company’s progress toward achieving its goals, corporate FP&A professionals analyze the company’s operational aspects both quantitatively and qualitatively. FP&A analysts review past company performance, consider business and economic trends, and identify risks and possible obstacles, all to more effectively forecast future financial results for a company.

In contrast to accountants, who are tasked with accurate recordkeeping, consolidations and reporting, financial analysts must analyze and evaluate the totality of a company’s financial activities and map out the financial future of the business. FP&A professionals manage a broad range of financial scenarios and plans, including capital expenditures, expenses, financial statements, income, investments, and taxes.

Budgeting, planning, modeling, and forecasting

The primary responsibility of FP&A is to anchor the company, unite the business and translate plans to actionable & informed results. . So, what is financial planning and analysis, and how does it look in practice?

Senior management creates and drives the strategic plan in a top-down way, setting net income and revenue goals, core strategic initiatives, and other high-level business targets for the company’s next 2 to 10 years. FP&A’s corporate performance management aim is to develop the financial plan needed to achieve the strategic plan created by management.

In the past, financial planning and analysis teams developed annual budgets that remained mostly static and updated annually. However, whether in tandem with a traditional budget or as a replacement altogether, modern FP&A teams are increasingly developing rolling forecasts to cope with stale static budgets. Other important tasks of FP&A teams that are related to the budgeting, planning, and forecasting process include:

• Creating, maintaining, and updating detailed forecasts and financial models of future business operations
• Comparing budgets and forecasts to historical results, and conducting variance analysis to illustrate to management how actual performance and the rolling forecast or budget compare, suggesting ways to improve future performance
• Assessing expansion and growth opportunities based on forecasts and other projections
• Mapping out capital expenditures and investments, and other growth plans
• Generating long-term financial forecasts in the three- to five-year range

Decision support and reporting

FP&A reports variances and forecasts, naturally. However, the team also advises management using that data, offering support on decisions concerning performance improvement, risk minimization, or risk benefit analysis of new opportunities from outside and within the company.

One primary piece of this the FP&A team typically generates is the monthly budget versus actual variance comparison. This report explanations of variances; analysis of historical financials; an updated version of the forecast with opportunities and risks related to the current stage of plan; and Key Performance Indicators (KPIs). Ideally, this report or analysis offers leadership information sufficient to identify ways to meet specific goals or optimize performance, and answer imminent questions of stakeholders. However, the true goal of the budget vs. actual report should be to inform the business around gaps or opportunities that inform the future.

Other ongoing pieces of the FP&A team’s reporting and decision support role include:

• Using key financial ratios such as the current ratio, debt to equity ratio, and interest coverage ratio to gauge the overall financial health of the business
• Identifying which company products, product lines, or services generate the most net profit
• Determining which products, product lines, or services have the highest and lowest profit margins—separate from total profit
• Assessing and evaluating each department’s cost-efficiency in light of the percentage of total company financial resources it consumes
• Collaborating with departments to prepare and consolidate budgets into a single corporate budget
• Preparing other internal reports in support of decision making for executive leadership

Special projects

Inevitably, the FP&A team works on special projects, depending on the size and needs of the business. For example:

Capital allocation. How much of the organization’s capital should be spent, and on what? Based on factors such as return on investment (ROI) and comparisons with increased stock dividends, different possible investments, and other ways the business could utilize its cash flow, are the company’s current investments and assets the best use of excess working capital?

Market research. What are the sizes and contours of a given market in which the organization may have a competitive advantage? Who are its laggards and leaders, and what potential opportunities does it hold for the company?

M&A. Which potential buy-side support, acquisition targets, integration, and divestiture opportunities exist for the company?

Process optimization. How can the company improve problems of process and workflow inefficiency? How can tools and technology in use by the business speak to and work with each other more effectively?

Ultimately, the FP&A team provides upper management with advice and analysis concerning how to best deploy the organization’s financial resources for optimal growth and increased profitability, while avoiding serious financial risk.

What is Corporate Financial Planning and Analysis?

Corporate financial planning is the process of determining what a company’s financial needs and goals for the future are, and how best to achieve them. Corporate financial planning considers the individual circumstances of the company as well as its broader economic context to determine which activities and investments would be most advantageous and appropriate. Generally, because short-term market trends are more predictable, short-term corporate financial planning involves less uncertainty and more readily adaptable financial plans.

Balanced corporate financial planning should elucidate how the company can achieve its goals and priorities while upholding its values. A financial plan for a corporation achieves at least two aims.

First, it forces management to think about the company’s prospects for business success objectively by basing their analysis on company finances. It also gives lenders and investors a good reason to invest into the business performance, by showing the growth and profit projections. Unrealistic or unbalanced financial plans or plans that understate profits tell investors to reconsider their investment or evaluation.

As a basic matter, three financial statements form the core of a corporate financial plan: income statement, statement of cash flow, and balance sheet. These statements clarify how much profit the business earns, and how much cash actually comes in, compared to the income reflected in accounts receivables. They also detail the relationships between corporate liabilities, corporate assets, and owner equity.

What is the Financial Planning Process?

The financial planning process results in the development of a financial plan, a financial forecast, or both. There are several well-understood steps in this process, and they often come out of sequence, depending on the deliverable or project at hand. However, it’s often simplest to think about these as steps in financial planning as financial planning tips, all of which are parts of a larger, flexible financial planning process.

With that in mind, these key components of financial planning for businesses are, in a sense, a set of best practices for your financial planning checklist.

Forecast revenue

Project revenue or sales for the next three years in a spreadsheet, or even better, in Planful. You’ll track numbers at least monthly in year one, and quarterly in years two and three.

Ideally you want to include sections that track unit sales, pricing, units times price to calculate sales, unit costs, and units times unit cost to calculate COGS or cost of goods sold, also called direct costs. Calculate gross margin, which is sales less cost of sales, and it’s a useful number for considering a new line of business or a new product expansion.

Budget expenses

Here you want to determine the actual cost of making the revenue you have forecasted. Differentiate between fixed costs such as payroll and rent and variable costs such as most promotional and advertising expenses. Lower fixed costs mean less risk; higher fixed costs may signal a need for reduced risk tolerance.

Remember, this is not accountancy, but a forecast, so you will have to estimate things such as taxes and interest. Use run rates or average assumptions whenever possible, and estimate taxes by multiplying estimated profits by estimated tax percentage rate. Then estimate interest by multiplying estimated debts balance by estimated interest rate.

Project cash flow

Project cash flow, or dollars moving in and out of the business, in this statement is based partly on balance sheet items, sales forecasts, and reasonable assumptions.

An existing company should have historical documents to base these forecasts on, such as balance sheets and profit and loss statements from years past. A new business which lacks these historical financial statements can project a cash-flow statement broken down month by month.

Remember to choose a realistic ratio for how many of your invoices will be paid in cash, 30 days, 60 days, 90 days and so on when compiling a cash-flow projection so you are not reliant on collecting 100 percent to pay your expenses. Some financial planning platforms build these formulas to make these projections simpler.

Project income

The income projection is the company’s pro forma profit and loss statement or P&L, which offers detailed business forecasts for the coming three years. To project income, use expense projections, sales forecasts, and cash flow statement numbers. Sales minus cost of sales equals gross margin. Gross margin minus expenses, interest, and taxes equals net profit.

Compile assets and liabilities

To deal with assets and liabilities that project the net worth of your business at the end of the fiscal year but are not in the profit and loss statement you need a projected balance sheet. Some of these, such as startup assets, are obvious and affect just one part of the process. However, others are less apparent.

For example, although the profit and loss reflects interest, it does not reflect repayment of principle. This means that loans and inventory register only as assets, but only up until you pay for them.

Cope with this by compiling a complete list of assets, equipment, real estate, and an estimate month by month of inventory if the business has it, accounts receivable (money owed to the company), and cash the business will have on hand. Then compile a complete list of liabilities and debts, including outstanding loans.

Conduct breakeven analysis

The breakeven point is when the expenses of the business match volumes or revenue. Undertake this analysis using the three-year income projection. Overall revenue will exceed overall expenses, including interest, within this period of time if the business is viable. Potential investors must engage in this critical analysis to ensure they are investing in a healthy business that is fast-growing and maintains reasonable profit.

Put the plan to work

Many companies work hard to create a financial plan for small business, only to ignore it as soon as it has been created. Placing all of the focus on creating the plan is a major error, because it is a powerful management tool. It is a better practice to compare actual numbers in the profit and loss statement with projections in the financial plan once a month, and use that data to revise future projections.

Compare statements over time

Undertake a financial statement analysis to compare specific items and entire financial statements over time—even the statements of the business to those of other companies. Conduct a ratio analysis to determine the prevailing industry ratios for profitability analysis, liquidity analysis, and debt. Measure the business both against its past performance and other similar businesses by comparing these standard ratios. You can also use the business plans from similar companies as financial plan examples.

Pitch with past plans

Include past financial plans as supplementary documentation of the business’s financial history as the organization applies for a loan or works to attract investment.

Use financial planning software

Obviously, this is a tremendous amount of dynamic information and calculation, making financial planning software a good option for many teams assembling a business plan’s financial section. These digital financial planning tools also enable visual financial projections such as bar graphs and pie charts.

What Should Financial Planning Include?

All business financial plans should include: a profit and loss statement; a cash flow statement; a balance sheet; a sales forecast; a personnel plan; business ratios; and a break-even analysis.

Profit and loss statement

The profit and loss statement is a financial statement that goes by several names, including P&L, income statement, and pro forma income statement. By any name, the profit and loss statement is essentially an explanation of how the business either made a profit or incurred a loss over a specific time period—typically three-months. The table lists all revenue streams and expenses, along with the total net profit or loss.

Depending on the type and structure of the business, there are different formats for profit and loss statements. However, in general, include in the profit and loss statement:

• Revenue or sales
• Cost of sale or cost of goods sold (COGS), although services companies may not have COGS
• Gross margin, which is revenue less COGS

Revenue, COGS, and gross margin are at the heart of how most businesses make money.

The P&L should also include operating expenses, those expenses that are not directly associated with making a sale but that are associated with running the business. These are the fixed costs that fluctuations in business really don’t affect, such as utilities, rent, and insurance.

The P&L statement should also include operating income:

• Gross Margin – Operating Expenses = Operating Income

Typically, operating income is equivalent to EBITDA: earnings before interest, taxes, depreciation, and amortization—although this depends on how the organization classifies expenses. Another way to think about operating income is the amount in profit before tax and interest but after operational costs.

The net income is the bottom line of the business, found at the end of the profit and loss statement. It represents going back to EBITDA and going a few steps further, subtracting expenses for interest, taxes, depreciation, and amortization to find net income:

• Operating Income – Interest, Taxes, Depreciation, and Amortization Expenses = Net Income

Cash flow statement

Just as critical as the P&L, the cash flow statement is typically a per-month explanation of how much cash the business brings in, pays out, and the ending cash balance. This detailed map of how much cash is in play, where it originates and goes to, and the cash flow schedule itself, is essential to any healthy, functional business.

The cash flow statement assists management in understanding the difference between the company’s actual cash position and the reported income on the profit and loss statement. It is just as important to clearly lay this information out for investors and lenders in the cash flow statement to raise funds.

Some businesses might be profitable but still lack the cash to pay expenses and continue to operate. Others might have the cash on hand to stay open even if they are unprofitable—cash flow break-even is vital to future company scale.. Therefore, the cash flow statement is important to understand.

There are two methods of accounting in the cash flow statement—the indirect method and the direct method. Which you select can affect how the cash flow statement and profit and loss statement compare, and accrual accounting might better reflect actual cash flow than cash accounting for many businesses.

Balance sheet

The balance sheet is a picture of the financial position of the business at a specific point in time. It reflects how much cash and equity is on hand, how much is in receivables, and how the business owes vendors and other debtors.

A balance sheet should include:

• Assets: Cash, inventory, accounts receivable, etc.
• Liabilities: Debt, loan repayments, accounts payable, etc.
• Equity: Owners’ equity, investors’ shares, stock proceeds, retained earnings, etc.

Ideally, as the name suggests, the balance sheet items should balance out. Total assets on one side should always equal total liabilities plus total equity.

• Assets = Liabilities + Equity

Sales forecast

The sales forecast is the FP&A team’s forecast or projections for a set period of what they think will generate revenue. Particularly if a business is seeking investment from investors or lenders, the sales forecast is among the fundamentals of financial planning, and should be part of a dynamic, ongoing process.

The sales or revenue number in the profit and loss statement and the sales forecast should be consistent. In fact, many types of financial planning software automatically connect these projects. Develop, organize, and segment an individualized sales forecast to meet the needs of a specific business.

Personnel plan

The personnel plan identifies the resourced structure and positions needed to run the company operations. How important the personnel plan is depends in large part on the company.

A sole proprietor doesn’t need much of a personnel plan. A large company with high labor costs requires a detailed personnel plan and should invest the necessary time in determining how personnel impacts the business.

A complete personnel plan should describe the expertise, training, and market or product knowledge of each member of the management team. Some businesses might find listing entire departments as a better tactic for the personnel plan.

Business ratios and break-even analysis

To calculate standard business ratios, all that is required are the profit and loss statement, cash flow statement, and balance sheet. Common profitability ratios and liquidity ratios include the gross margin, return on investment (ROI), and debt-to-equity ratios.

The break-even analysis determines how much revenue a business needs to cover all of its expenses, or break even. To assess the break-even point for the business, find the contribution margin—those are the costs necessary to generate revenue.

For management to get an accurate sense of how high revenue must be for the company to stay profitable, they must subtract those contribution margin costs as well as fixed costs from the profit to find that break-even point. For example, most businesses have some labor costs as well as things like insurance and rent—those are fixed costs. Then there might be contribution costs per sale, such as costs per meal prepared in a restaurant or costs per package shipped or outfit sold in a store. A functional business has to cover them all and generate additional profit to break-even.

What are the Steps in Financial Planning?

There are many routes toward creating a solid financial plan. A well-designed financial business plan thoroughly clarifies business goals in financial context and helps a company plan for the future. Although there is no one correct way to engage in financial planning, understanding some basic steps in financial planning can make the process easier.

Review your strategic plan

The strategic plan of the business is usually where comprehensive financial planning services start. If the business lacks such a plan, it’s time to develop one.

As management reviews the plan, they should consider several questions for the coming year:

• Will we want or need to expand?
• Will we need to hire talent/staff?
• Will we need more equipment?
• What about additional new resources?
• Are there any other plans that we have in mind this year that will require resources?
• How will these plans impact cash flow?
• Will we need financing? If so, how much? Can we revise our plans? Should we?

Fully assess the financial impact of all spending on major projects over the next 12 months.

Develop financial projections

Develop financial projections based on anticipated income and anticipated expenses. Sales forecasts are the basis for anticipated income, while things like costs for supplies, labor, and other overhead form the basis for anticipated expenses. Typically these financial projections will be monthly, but weekly projections may be better for businesses focused on cash optimization.

To make a financial projection, the business will compare project costs from the strategic plan to these anticipated costs and expenses. In other words, the team will look at the costs of doing business as normal plus the costs of adding in the projects, keeping in mind that sales will not always convert to cash immediately.

To create a financial projection, management often also must refer to a projected profit and loss or income statement and a projected balance sheet which it may need to develop in tandem with the financial projection. To assist the team in evaluating the impact of each possible scenario, it can be useful to include various outcomes—optimistic, most likely, and pessimistic—for the projections.

Finance’s advice may be essential to developing financial projections. However, ensure that leadership and anyone who will be seeking financing and explaining the plan to investors and lenders understands the projections and how they fit into the plan.

Arrange financing, plan for growth and contingencies

Determine the financing needs of the business using the financial projections. Well-prepared projections presented to financial stakeholders in advance of deadlines are always more reassuring.

How will the business grow in the coming year? Turn to the FP&A team to make smart investment and growth decisions.

Keep emergency sources of money on hand in case business finances suddenly pivot.. Maintaining credit or a cash reserve are possibilities. Keep laser focus on cash management and optimization.

Financial planning is a dynamic process. Compare projections to actual results throughout the year to see if they are accurate or require adjustments. Monitoring assists businesses in spotting financial problems before they are out of control, and ultimately in identifying smarter growth opportunities.

Consult and use tools

For some businesses, expert help in the form of financial planning services may be necessary to create a financial plan. For many others, the right financial planning software and other financial planning tools are critical to the job.

Why is Financial Planning Important?

A financial business plan has two main purposes. A business needs a financial plan that proves the business will grow, scale, and provide shareholder value over the long term.. Ensuring growth, scale and consistent shareholder value is vital to all stakeholders in the business. . Similarly, the financial plan proves to lenders and banks that the business will be able to repay any loans.

Just as critically, though, a financial forecast benefits leadership. A realistic projection of how the business is likely to perform prepares management and staff. A financial plan is a guide to running a healthy business and should be considered a living document.

There are several other reasons why financial planning is important to a business:

Credibility

Be realistic when developing a financial business plan, make sure your forecast or plan mirrors business reality. However, if you can demonstrate that your financial plan is realistic in a step-by-step way, your financial forecast will be credible. For example, if you break down your figures into components or channels to provide more detailed estimates, you may be able to reassure lenders, investors, and leadership more.

Balancing the balance sheet

Balance sheet optimization is one of the powerful benefits of financial planning. Identifying and assessing all business assets and liabilities and planning in advance how and when to pay all taxes, salaries, expenses, overheads, and miscellaneous costs is part of this process. Another strategy is to divide the business into functions or departments and prioritize them to better identify which important and urgent investment areas.

Long-term visibility

Efficient, comprehensive financial planning gives businesses improved long-term visibility into fund allocation. Analysis of how funds are deployed within a business can positively affect productivity and revenue and offer deeper insight into the health of the business. This kind of visibility also empowers more insightful decision making.

Strategic marketing

No business has endless money to burn on marketing, and a well-designed financial plan helps identify which marketing strategies are most productive for that particular business. Business marketing strategies frame tasks for a company, from planning to execution and implementation.

The marketing team may well be experts across the board when it comes to marketing channels and strategies. However, only actions that generate more business in measurable ways should be planned for the company. Ultimately, finance partnership with the business assesses whether the metrics in the reports justify ongoing marketing campaigns, so for every strategy the team formulates for business, they should highlight the ratio of expense and profits.

Monitoring assets (In’s) and liabilities(Out’s)

The financial team protects the stability of the business by routinely monitoring its assets and liabilities and the ratio of liabilities and assets. This ongoing activity provides insight into needed improvements and actionable ways to decrease liabilities and increase assets.

Measuring profit and loss

The finance team compiles financial planning reports to support evaluation of organizational profits and loss. These reports also showcase the net profits and their main causes, assisting management in evaluating which strategies worked best for the business.

What are Financial Planning Benefits?

It is easier for businesses that focus on financial planning to grow their revenues at a quicker pace than it is for companies that lack an efficient financial planning process. Corporate financial planning offers decision making support in the form of forecasts or budgets. It assists businesses in managing costs and building revenues by highlighting where they should focus resources for optimal effectiveness. Impactful financial management nurtures more growth by freeing up more funds for expanding operations, marketing, and product development.

As a broader matter, strategic business planning develops tasks and determines who will be responsible for delivering those tasks in a timely way, thus determining the company’s direction. Financial planning aligns to the strategic plan which then translates to actionable outcomes and measurable results.

The financial plan projects the revenues the team thinks will result from implementing the strategies and the expenses taking those actions will require. Senior management, operations, and marketing personnel are all deeply involved in strategic financial planning, and finance is focused on developing deep business partnerships, connecting the business and tracking the results. Here are some of the specific benefits of financial planning:

The starting point for the financial plan as a whole is what the company aims to achieve in the coming quarter, year, three years, five years, and longer. This is because it is essential to establish that a real need for the business exists, and this company in particular fills the need—a product/market fit.

Many startups devote several years to establishing that product/market fit as they build out and refine their product. In fact, achieving that kind of fit, with smaller checkpoints along the way, is a good one-to-two year goal. In these early stages, the financial plan can reveal to the team that it doesn’t yet make sense to set massive marketing KPIs or sales targets as the refinement process continues.

Business alignment

The financial plan sets forth clear cash flow expectations. For new businesses, the amount of cash going out is often more than is coming in, but it remains important to determine an acceptable level of expense, and ensure the business stays on track, and the statement helps achieve this. Cash flow management is also an important part of a financial plan, so that even team members who are not seasoned finance experts can efficiently and accurately track cash flow as needed. For all of these reasons, a solid financial plan assists with sensible cash flow management.

Agility, collaborative and actionable budgeting

Closely related to both cost reductions and cash flow management, it is essential to know the best way to spend the funding that is actually available to the business, whether through investments, revenue, or some other source. The business should break down the overall budget for the quarter or year into separate budgets for specific teams such as customer support, marketing, product development, and sales. This way management can ensure each budget accurately reflects the team’s productivity and relative importance.

Budgets also allow each team to build within a known set of limits. Team members can effectively plan campaigns and other tasks because they know what resources are available. Furthermore, it is always simpler to track team or project budgets than to monitor overspending at the company level.

Identify spend reductions

A financial plan enables the FP&A team to identify ways to reduce spend in advance. Building a financial plan includes a careful look back over the speed of current growth and what has already been spent. The goal with this kind of spend control is to detect over-inflated costs and unnecessary spending in the past to eliminate it in future budgets. The result from this kind of periodic review is keeping spending in line with expectations and making better use of resources.

Mitigated risks

The finance team assists the business in avoiding risk and navigating pitfalls when they occur. Many risks, from fraud and other forms of economic crises, are predictable and avoidable.

A strong financial plan should account for some uncertainty, business insurance expenses, and other unexpected expenses, and set aside resources to cope with them. Some teams create several financial forecasts with various business outcomes: one that shows results under conditions with more revenue, and others under conditions with less.

Especially during economically volatile times, prepare for many contingencies in the financial plan, which should clarify how the roadmap for the business will change as growth fluctuates.

Crisis management

During a crisis in any business, the first move is typically to review and re-build strategic plans. Without strategic plans in place, a crisis response is merely improvisational.

As the coronavirus crisis and surrounding financial crisis in 2020 and beyond have revealed, finance teams and leaders must constantly reforecast to deal with adversity. Businesses are developing new financial plans quarterly or even monthly to cope, and nobody truly knows when the crises will end.

The financial-planning team should help get through this particular challenge and other crises by focusing on several steps, all using their ongoing financial planning process. The first step in crisis management is to reassess new business operational baselines. Next, the team should use the plans and feedback to build a reality-based plan they will review many different business scenarios.

The team will next determine the business’s general direction and align on a financial plan that fits with this possibly new direction, in context. Then they will identify the best actions for the company to take, as well as any trigger points that could require further changes. A strong financial planning process, FP&A team, and store of financial statements can all make these crisis management steps much simpler.

Be opportunistic around fundraising

Any prospective bank, lender, or investor needs to see financial planning in the form of a business plan. A financial plan must tell a story to investors, while communicating the trustworthiness of the projections.

Roadmap for growth

A financial plan clarifies both the current financial situation of a business, and helps it project where it intends to be in the future. This may be reflected in various specifics, such as number of employees to hire; markets to penetrate; or new services or products to sell. The financial plan itself augments these goals with specific data, such as a budget for a particular number of new employees, including talent and recruitment costs and other resourcing needs.

Transparency

Of course transparency in the financial plan is critical for lenders and investors. But it’s just as important for the team and staff. To ensure your team that the business is healthy, following a solid plan towards growth and scale, and in good leadership hands, a transparent financial plan is key.

Does Planful Help With Financial Planning?

Yes. Planful delivers a continuous planning platform elevating the financial conversation, aligning finance’s need for structured planning with the business’ need for dynamic planning, and enabling your organization to make better decisions more confidently, quickly, and strategically by uniting the business together.

Comprehensive budgeting, planning, and forecasting features offer the financial planning and analysis team the control, structure, and partnership with the business they want. Meanwhile, dynamic planning features empower business leaders and finance with individualized, agile models and plans to manage for multiple business outcomes

Planful also delivers complete financial consolidation, including inter-company eliminations, partial ownership rules, and statutory reporting. The platform also ensures your business meets every management, financial, regulatory, and ad hoc reporting need with a robust library of delivery options and reporting formats.

Planful can help your business:

• Reduce reporting time up to 90% by automating manual processes
• Replace annual planning cycles with rolling forecasts to better respond to changing business conditions with increased agility, more accurate financial plans, and optimized financial results in real-time
• Leverage data from across the business to drive strategic planning, long-term value, and growth
• Free up time for collaboration and analysis by automating tedious, manual tasks in the planning process
• Simplify complex ad-hoc financial analysis and explore financial insights with greater confidence and speed
• Reduce time to close by up to 75% by automating data collection, aggregation, and validation across the organization with low risk and high security thanks to robust, searchable audit logs and strong internal controls
• Create impressive, professional financial and management reports that share insights with clarity
• Improve collaboration and workflow with accurate, current data

Find out more about Planful’s Financial Planning solution here.

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13 March 2024

The importance of financial planning

Financial planning isn’t just a nice-to-have - it's essential to your business’s long-term success and sustainability. But what exactly is it, and how does it impact the bottom line? Let’s find out.

What is financial planning.

Financial planning might sound like corporate jargon, but it's simpler than you think. At its core, financial planning is about making sure your business has a roadmap for its finances. It involves looking at your current financial situation, setting goals, and then working out how to get there. 

Planning your finances starts with taking stock of what you've got - your income, expenses, assets, and debts. Then, you think about where you want to be in the future. Perhaps you want to boost revenue, reduce expenses, or save for a big investment. Or perhaps, like many businesses, you want to do all of these things and more at the same time. 

Once you've got your goals in mind, it's all about making them happen. This could mean everything from better budgeting to more ambitious marketing, and it could even involve making changes to your business operations. 

The goal of financial planning

Ultimately, the goal of financial planning is to ensure your business is successful and sustainable in the long term. With clear financial objectives and a plan to achieve them, you can keep your business on the right track and prepare for the challenges and opportunities that arise along the way. 

Why financial planning is crucial

Now we understand what financial planning is, let's explore why it's so important for your business. 

Staying focused on what you want to achieve

Sometimes, competing motivations among stakeholders make it easy to stray from your initial objectives. A robust financial plan helps you make confident decisions that support your goals rather than distract from them. 

Managing cash flow

Financial planning helps you strike the right balance between the money coming into and out of your business. By creating a budget and tracking your expenses, you can ensure you always have enough cash on hand to cover obligations such as paying employees and suppliers on time. 

Growing your business

 A detailed financial plan identifies growth opportunities you might not have noticed otherwise. By analysing your sales data and seeking out new revenue streams or ways of enhancing existing ones, you can develop strategies to boost profits. For example, you could decide to launch a new product or service, expand into unfamiliar markets, or take a fresh approach to your marketing. 

Investing wisely

Financial planning lets you develop investment strategies that align with your business’s goals and risk tolerance. This might include investing in stocks, bonds, real estate, or other assets that have the potential to generate returns over time. 

You could lower your risk by spreading investments across different types of assets and industries, protecting your money from sudden changes in the market. At the same time, smart investment strategies can maximise your profits by minimising what you owe in taxes. 

Managing risk

Finally, financial planning helps businesses anticipate and defend themselves against problems before they arise. Assessing your business's vulnerabilities and putting risk management strategies in place makes you more resilient in the face of things like economic downturns, natural disasters, and legal liabilities. 

Insurance plays a crucial role in risk management, and financial planning can help you identify the types and levels of insurance coverage that will help your business most. This might include property, liability, or business interruption insurance, or even key person insurance to protect against losing your most valuable employees. 

How does financial planning help businesses achieve their goals?

Financial planning ensures you’re not simply winging it when it comes to forming and meeting your goals. While other business plans might include high-level actions and vague measures, financial plans provide a tangible path to success. They use financial data rather than gut feel to underpin decisions, while giving you measurable performance indicators so you can easily keep track of progress. 

With a financial plan in place, you’ll be able to set relevant goals, develop effective strategies to achieve them, make informed decisions, and evaluate success in a meaningful way. At the same time, you can swiftly adapt to changes and seize opportunities for growth before it’s too late. 

Want to learn more about financial planning, including what to include in a financial plan? Take a look at our complete guide to financial planning . You can also take a look at our financial planning software , designed to grow your business by boosting its financial health. 

Jannike Ohsten

During a decade in writing-based marketing roles, Jannike has helped businesses define their brands, build powerful online presences, and convert prospects into loyal customers. Today, she supports organisations large and small to achieve their goals with better writing, whether it’s through copywriting or coaching.

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9 key benefits of business financial planning

Published on January 31, 2024

Building a business financial plan is never easy. It requires effort, good data, and a fair amount of imagination. And if you’ve never done this before, you’ll likely hit a few roadblocks along the way.

But this post will show you why it’s so valuable, nonetheless.

A good financial plan keeps you focused and on track as the company grows , when new challenges arise, and when unexpected crises hit. It helps you communicate clearly with staff and investors, and build a modern, transparent business.

And there are plenty of other advantages .

We’ll explore nine of our favorites shortly. But first, let’s define exactly what we’re talking about.

What is business financial planning?

Your company’s financial plan is essentially just the financial section of your overall business plan . It applies real financial data and projections to put the rest of your business plan in context.

And crucially, it is forward-looking. While you use existing accounting figures (if you have them already) and experience to create your plan, it’s not simply a copy/paste of your accounting data. Instead, you look at your business goals and define the level of investment you’re willing to make to achieve each of these.

But this doesn’t mean that financial plans are just “made up.” If anything, this section of your business plan is the most grounded in reality.

As Elizabeth Wasserman writes for Inc :

“A business plan is all conceptual until you start filling in the numbers and terms. The sections about your marketing plan and strategy are interesting to read, but they don't mean a thing if you can't justify your business with good figures on the bottom line.

The financial section of a business plan is one of the most essential components of the plan, as you will need it if you have any hope of winning over investors or obtaining a bank loan. Even if you don't need financing, you should compile a financial forecast in order to simply be successful in steering your business.”

The importance of financial planning in business

This probably won’t come as a surprise to most readers, but financial planning is essential to building a successful business. Your business plan dictates how you plan to do business over the next month, quarter, year, or longer - depending on how far out you plan.

It includes an assessment of the business environment, your goals, resources needed to reach these goals, team and resource budgets, and highlights any risks you might face. While you can’t guarantee that everything will play out exactly as planned, this exercise prepares you for what’s to come.

We’ll look at the precise individual benefits next, but suffice it to say that, without a clear financial plan, you’re basically just hoping for the best .

9 benefits of financial planning for business

So what exactly can you hope to gain from business financial planning? The benefits of business planning are probably endless, but here are nine clear advantages.

1. Clear company goals

This is really the starting point for your whole financial plan. What is the company supposed to achieve in the next quarter, year, three years, and so on?

Early on, you’ll want to establish that there is a real need for your business , and that your business fills this need. This is also known as “product/market fit.” For many startups, the first several years may be devoted to building a product and establishing that product/market fit. So this would be your chief one-to-two year goal, with smaller checkpoints along the way.

Crucially, if this is your key goal, you won’t set lofty sales targets or huge marketing KPIs. What’s the point of investing in sales and marketing for new customers, if the product isn’t ready to sell?

We’ll refer back to your company goals throughout this post, so it’s worth getting a handle on them from the start.

2. Sensible cash flow management

Your financial plan should also set clear expectations for cash flow - the amount coming in and out of the company. In the beginning, you’ll of course spend more than you make. But what is an acceptable level of expense, and how will you stay on track?

As part of this plan, you also need to figure out how you’ll measure cash flow easily. You may not have seasoned finance experts in the team, so can you accurately and efficiently keep track of where your money’s going?

By making your plan now, you can anticipate challenges both in receiving money and spending it , and identify ways to do both more effectively.

3. Smart budget allocation

This is obviously closely related to cash flow management (above) and cost reductions (below). Once you have a clear understanding of the amount of funding you have to spend - whether through sales income or investments - you need to figure out how you’ll actually spend it.

The company has its overall budget - essentially its “burn rate” for each quarter or year. Break this down into specific team budgets (product development, marketing, customer support, etc), and ensure that the amounts dedicated to each reflect their importance.

Budgets give each team their own constraints from within which to build . They know what resources are available to them, and can plan out campaigns and personal or product development accordingly.

At the company level, tracking project or team budgets is always going to be easier than monitoring spending as a whole . Once you break each budget down, it’s relatively straightforward to keep an eye on who’s spending what.

Get our free marketing budget template to help.

4. Necessary cost reductions

Aside from setting out how much you can afford to spend (and on what), a financial plan also lets you spot savings ahead of time. If you’ve already been in business for some time, building your financial plan involves first looking back at what you’ve already spent and how fast you’re currently growing.

As you set out your budget(s) for next year, you’ll refer back to past spending and identify unnecessary or over-inflated costs along the way. And then for next year’s budget , you simply adjust accordingly.

This conscious effort is all part of spend control , the practice of keeping company spending in line with your expectations. Even better, a quarterly or annual review almost always unearths areas where you can save money and put your resources to better use.

Learn more about effective spend control .

5. Risk mitigation

A crucial aspect of the finance team’s role is to help companies avoid and navigate risk - from financial fraud to economic crisis . And while plenty of risks are hard to predict or even avoid, there are plenty that you can see coming.

Your financial plan should make room for certain business insurance expenses, losses through risky inefficiencies, and perhaps set aside resources for unexpected expenses . Particularly during turbulent times, you may in fact create several financial forecasts which show different outcomes for the business: one where revenue is easy to come by, and one or two others where times are tougher.

Again, the point is to have contingency plans in place, and to attempt to determine how your roadmap changes if you grow only 20% next quarter instead of 30% (or 50%) . There’s no reason to go overboard, but you can find risky areas within the business, and also consider your best responses if things go wrong.

6. Crisis management

The first thing that tends to happen in any company crisis is you review and re-build your plans. Which of course means that you must have a clear business plan in the first place . Otherwise, your crisis response is simply to improvise.

As the 2020 financial crisis unfolded, the key refrain we heard from finance leaders was the need to reforecast constantly. Nobody truly knew how long the crisis would last, or how it would impact their business. So companies created new financial plans on a monthly or quarterly basis, at least.

And those with robust and well thought-out financial plans found this process easier. They weren't starting from scratch over and over, and they’d already identified obvious risks and the key levers to pull in response.

7. Smooth fundraising

Let’s shift away from risk entirely now. Whether you’re a brand new startup, a sustainable company that needs a small cash injection, or looking for a significant series-level investment, at some point you’ll likely need funds.

And the first thing any prospective investor or bank will ask you for is your business plan . They want to see how you intend to grow the business, what risks and uncertainties are involved, and how you’ll put their money to good use.

A financial plan that speaks to investors is critical, and the better your history of planning is, the more likely they’ll trust your projections. So whether or not you’re looking for funds today , a business financial plan is an important tool in your chest.

8. A growth roadmap

Finally, your financial plan helps you analyze your current situation, and project where you want the business to be in the future . Again, your wider business plan will do this on a broad level: the markets you’d like to be present in; the number of employees you’ll have; the products or services you hope to sell.

The financial section adds data to these goals, and plugs in your level of investment along the way . For example, if you wish to hire 100 new employees this year, your financial plan will likely need to include recruiters, and a specific budget to find new talent.

Take the time to set out how large you expect the company to be, your expenses with a larger company, and the amount of revenue coming in to compensate. If you’ve raised venture capital to help grow financially , you can probably expect to burn cash faster than you make it - this is normal.

But if you burn through money and can’t reach your growth targets, then you’ll need to re-evaluate your position. So set those growth targets out now, and you’ll be able to assess as you go.

9. Transparency with staff and investors

We already mentioned how necessary your financial plan is for investors. So we won’t dive into them more here.

But the same is true for staff. It is now expected that company executives will be open and honest with staff . Some startups go so far as to publicize their salaries for the world to see.

At the very least, modern employees want to see that the company is in good hands and on the road to success. And when executives can share the financial plan in all-hands meetings, they bring real data to what would otherwise be a business plan lacking in details.

Employees love to see key figures like revenue coming in, costs, and where you are on the road to profitability .

What to include in a business financial plan

We won’t go into too much detail here, but it’s worth giving an idea of what belongs in the typical financial plan.

A three-year financial plan is most common. But whatever the period in question is, your plan should include:

Sales projections : Project your expected sales growth for the near future, as well as the cost of sales . You can break these down in different pricing groups, products, and other important factors.

Expenses & budgets : Most important here are costs - separated into fixed and variable expenses. (Lower fixed costs usually mean lower risk for the business).

Profit & loss statement : Alternatively, you can create a cash flow statement, which achieves a similar outcome. You essentially want to project money in and money out over the next three years.

Assets & liabilities : These will usually be separated from your P&L statement, and will certainly include startup costs and assets for new businesses.

Break-even analysis : Ideally, you’ll be able to identify your break-even point within the coming three years.

Hiring & team structure : This one is not essential, but it makes sense to add as part of your business plan. Who will you need - and when will you acquire them - in order to reach your goals?

For more information - especially on forecasting in uncertain times - read our expert’s guide to startup financial planning .

There’s no time like the present to create your business financial plan

We’ve seen nine excellent reasons to get to work on your company financial plan as soon as possible. As we explored, the financials form a critical part of your overall business plan , without which you’ll have a hard time assessing your performance as a company.

Of course, this exercise requires projection - you can’t just rely on the numbers you have today. But that’s not the same thing as guesswork . Follow best practices and consider all potential outcomes, and you’ll walk away with a clear roadmap to get you to business success in the foreseeable future.

From there, it’s a matter of putting in the work, measuring success, and regularly updating your financial plan.

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Financial Planning: What It Is and How to Make a Plan

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What Is a Financial Plan?

How to create a financial plan, financial planning 101, benefits of making a financial plan, when to create a financial plan, the bottom line.

Liz Manning has researched, written, and edited trading, investing, and personal finance content for years, following her time working in institutional sales, commercial banking, retail investing, hedging strategies, futures, and day trading. 

Gordon Scott has been an active investor and technical analyst or 20+ years. He is a Chartered Market Technician (CMT).

Ariel Courage is an experienced editor, researcher, and former fact-checker. She has performed editing and fact-checking work for several leading finance publications, including The Motley Fool and Passport to Wall Street.

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A financial plan is a document that details a person’s current financial circumstances, their short- and long-term monetary goals, and the strategies to achieve those goals.

A financial plan can help you to establish and plan for fundamental needs, such as managing life's risks (e.g., those involving health or disability), income and spending, and debt reduction.

It can provide financial guidance so that you're prepared to meet your obligations and objectives. It can also help you track your progress throughout the years toward financial well-being.

Financial planning involves a thorough evaluation of one’s money situation (income, spending, debt, and saving) and expectations for the future. It can be created independently or with the help of a certified financial planner.

Key Takeaways

• A financial plan documents an individual’s short- and long-term financial goals and includes a strategy to achieve them.
• The plan should be comprehensive and highly customized.
• It should reflect an individual’s personal and family financial needs, investment risk tolerance, and plan for saving and investing.
• Planning in finance starts with a calculation of one’s current net worth and cash flow.
• A solid financial plan provides guidance over time and serves as a way to track progress toward your goals.

The Fundamentals of Financial Plans

Certain steps are needed to create a financial plan . In addition to calculating your net worth, determining your cash flow, and establishing financial goals, here are the primary plan elements/steps to take.

1. Do It Yourself or Get Professional Help

Decide whether you'll create your financial plan on your own or with the help of a licensed financial planner . While you can certainly build a financial plan, a financial pro can help ensure that your plan covers all the essentials.

2. Build an Emergency Cash Fund

Based on what your cash flow allows, start setting aside enough money in a liquid account to cover all your expenses for at least six months (preferably, for 12) if you find yourself without income due to unexpected events.

3. Plan to Reduce Debt and Manage Expenses

If you have debt, the faster and more effectively that you can eliminate it, the better for the growth of your savings, your standard of living, and the achievement of specific financial objectives.

Make it a habit to cut expenses whenever possible so that you can add to your savings. In addition, stay on top of expenses that you know you'll have, such as taxes, so you always meet those obligations on time.

4. Manage Potential Risks

Your financial well-being can be affected when accidents, health problems, or the death of loved ones strike. Plan to put into place the appropriate insurance coverage that will protect your financial security at such times. This coverage can include home, property , health, auto, disability , personal liability , and life insurance.

5. Plan to Invest

Take part in a retirement plan at work that automatically deducts contributions from your paycheck. And plan to maximize your tax-advantaged investing with a personal IRA if and when your income allows.

Also, consider how you might allocate any other available income to a taxable investment account that can add to your net worth over time. Your plan for investing should take into account your investment risk tolerance and future income needs.

6. Include a Tax Strategy

Address the goal of reducing your income taxes with tax deductions, tax credits, tax loss harvesting, and any other opportunities that are legally available to taxpayers.

7. Consider an Estate Plan

It's important to make arrangements for the benefit and protection of your heirs with an estate plan . The details will depend on your stage in life and whether you're married, have children, or have other legacy goals.

8. Monitor and Adjust Your Financial Plan

Revisit your plan at least yearly (on your own or with a financial professional) and more often if a change in circumstances affects your financial situation. Keep it working efficiently and effectively by adjusting it as needed.

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Whether you’re going it alone or with a financial planner, it's necessary to understand how important a financial plan can be to your financial future. It can provide the guidance that assures your financial success.

Start your planning effort by gathering information from your various financial accounts into a document or spreadsheet. Then make some basic calculations that establish where you stand financially.

You may complete the following steps as an individual or a couple:

Calculate Net Worth

To calculate your current net worth , subtract the total of your liabilities from the total of your assets. Begin by listing and adding up all of the following:

• Your assets : An asset is property of value that you own. Assets may include a home, a car, cash in the bank, money invested in a 401(k) plan , and other investment accounts.
• Your liabilities : A liability is something you owe. Liabilities may include outstanding bills, credit card debt, student debt, a mortgage, and a car loan.

Determine Cash Flow

Cash flow is the money you take in measured against the money you spend. To create a financial plan, you must know your income as well as how and when your money is spent.

Documenting your personal cash flow will help you determine how much you need every month for necessities, how much is available for saving and investing, and where you can cut back on spending.

One way to get this done is to review your checking account and credit card statements. Collectively, they should provide a fairly complete history of your income and spending in a wide range of spending categories.

For example, document how much you’ve paid during the year for housing expenses like rent or mortgage payments, utilities, and credit card interest.

Other categories include food, household (including clothing), transportation, medical insurance, and non-covered medical expenses. Still others can include your spending on miscellaneous entertainment, dining out, and vacation travel.

Once you add up all these numbers for a year and divide by 12, you’ll know what your monthly cash flow has been (and where you can improve it).

When establishing your cash flow history, don’t overlook cash withdrawals that may have been used on sundries, from take-out to shampoo, to sodas. ATM withdrawals can also highlight where you might cut unnecessary spending.

Establish Your Goals

A major part of a financial plan is a person’s clearly defined goals . These may include funding a college education for the children, buying a larger home, starting a business, retiring on time, or leaving a legacy.

No one can tell you how to prioritize these goals. However, a professional financial planner should be able to help finalize a detailed savings plan and specific investing that can help you reach them one by one.

The main elements of a financial plan include a retirement strategy, a risk management plan, a long-term investment plan, a tax reduction strategy, and an estate plan.

• A financial plan involves a thorough examination of your income and spending.
• It can improve your understanding of your financial circumstances at all times.
• It establishes important short- and long-term financial goals.
• It clarifies the actions required of you to achieve your various financial goals.
• A financial plan can focus your attention on important immediate steps, such as reducing debt and building your savings for emergencies.
• It enhances the probability that you'll achieve financial milestones and overall financial success (however you define it).
• It can guide your efforts over time and provide a means to monitor your progress.
• It can keep you out of financial trouble and reduce the stress and worry you may have experienced in the past.

Reasons for a Financial Plan

Financial planning is a smart way to keep your financial house in order. It's a money tool for everyone, regardless of age, earnings, net worth, or financial dreams. It offers individuals a way to document their personal goals and corresponding financial goals. It can keep people on track to meet ongoing financial needs and major financial goals.

A financial plan is always an advantage for those who want to make sure that they manage their finances in ways that are best suited for them. You can create one at any time, whether you've just joined the workforce or have been working for years.

Beyond that, here are some particular instances that call for the creation and use of a financial plan. They can also serve as signals to adjust existing plans.

• A new job that results in added income, new expenses, or new opportunities
• An income change that can affect your ability to pay expenses, pay off debt, or save
• Major life events such as marriage, children, or divorce that can change financial objectives and spending needs
• Health adversities that result in re-directing income and spending away from existing goals
• An income windfall, such as an inheritance or insurance payment, which can affect efforts to reach your financial goals (such as providing more money for investing and debt reduction)

What Is the Purpose of a Financial Plan?

A financial plan should help you make the best use of your money and achieve long-term financial goals, such as sending your children to college, buying a bigger home, leaving a legacy, or enjoying a comfortable retirement.

How Do I Write a Financial Plan?

You can write a financial plan yourself or enlist the help of a professional financial planner. The first step is to calculate your net worth and identify your spending habits. Once this has been documented, you need to consider longer-term objectives and decide on the ways to achieve them.

What Are the Key Components of a Financial Plan?

Financial plans aren't one-size-fits-all, although the good ones tend to focus on the same things. After calculating your net worth and spending habits, you’ll explore your financial goals and ways to achieve them. Usually, this involves some form of budgeting , saving, and investing each month. To ensure that you live comfortably and financially stress-free for the rest of your life, the areas to focus on include an emergency savings plan, a retirement plan, risk management, a long-term investment strategy, and a tax minimization plan.

What Are the 5 Key Areas of Financial Planning?

The five key areas of financial planning are (1) estate planning, (2) retirement planning, (3) self-protection/risk management, such as insurance, (4) investment planning, and (5) tax planning.

A financial plan is an essential planning tool for your financial well-being, now and into the future. It involves setting down the current state of your finances, your various financial goals, and methods that can help you achieve them.

It's never too early or too late to create a financial plan. And no matter the amount of money that you have, a financial plan can help you to determine the best way to put it to work so that you can meet your financial needs through all of your life stages.

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How to Write the Financial Section of a Business Plan

An outline of your company's growth strategy is essential to a business plan, but it just isn't complete without the numbers to back it up. here's some advice on how to include things like a sales forecast, expense budget, and cash-flow statement..

A business plan is all conceptual until you start filling in the numbers and terms. The sections about your marketing plan and strategy are interesting to read, but they don't mean a thing if you can't justify your business with good figures on the bottom line. You do this in a distinct section of your business plan for financial forecasts and statements. The financial section of a business plan is one of the most essential components of the plan, as you will need it if you have any hope of winning over investors or obtaining a bank loan. Even if you don't need financing, you should compile a financial forecast in order to simply be successful in steering your business. "This is what will tell you whether the business will be viable or whether you are wasting your time and/or money," says Linda Pinson, author of Automate Your Business Plan for Windows  (Out of Your Mind 2008) and Anatomy of a Business Plan (Out of Your Mind 2008), who runs a publishing and software business Out of Your Mind and Into the Marketplace . "In many instances, it will tell you that you should not be going into this business." The following will cover what the financial section of a business plan is, what it should include, and how you should use it to not only win financing but to better manage your business.

Dig Deeper: Generating an Accurate Sales Forecast

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How to Write the Financial Section of a Business Plan: The Purpose of the Financial Section Let's start by explaining what the financial section of a business plan is not. Realize that the financial section is not the same as accounting. Many people get confused about this because the financial projections that you include--profit and loss, balance sheet, and cash flow--look similar to accounting statements your business generates. But accounting looks back in time, starting today and taking a historical view. Business planning or forecasting is a forward-looking view, starting today and going into the future. "You don't do financials in a business plan the same way you calculate the details in your accounting reports," says Tim Berry, president and founder of Palo Alto Software, who blogs at Bplans.com and is writing a book, The Plan-As-You-Go Business Plan. "It's not tax reporting. It's an elaborate educated guess." What this means, says Berry, is that you summarize and aggregate more than you might with accounting, which deals more in detail. "You don't have to imagine all future asset purchases with hypothetical dates and hypothetical depreciation schedules to estimate future depreciation," he says. "You can just guess based on past results. And you don't spend a lot of time on minute details in a financial forecast that depends on an educated guess for sales." The purpose of the financial section of a business plan is two-fold. You're going to need it if you are seeking investment from venture capitalists, angel investors, or even smart family members. They are going to want to see numbers that say your business will grow--and quickly--and that there is an exit strategy for them on the horizon, during which they can make a profit. Any bank or lender will also ask to see these numbers as well to make sure you can repay your loan. But the most important reason to compile this financial forecast is for your own benefit, so you understand how you project your business will do. "This is an ongoing, living document. It should be a guide to running your business," Pinson says. "And at any particular time you feel you need funding or financing, then you are prepared to go with your documents." If there is a rule of thumb when filling in the numbers in the financial section of your business plan, it's this: Be realistic. "There is a tremendous problem with the hockey-stick forecast" that projects growth as steady until it shoots up like the end of a hockey stick, Berry says. "They really aren't credible." Berry, who acts as an angel investor with the Willamette Angel Conference, says that while a startling growth trajectory is something that would-be investors would love to see, it's most often not a believable growth forecast. "Everyone wants to get involved in the next Google or Twitter, but every plan seems to have this hockey stick forecast," he says. "Sales are going along flat, but six months from now there is a huge turn and everything gets amazing, assuming they get the investors' money."  The way you come up a credible financial section for your business plan is to demonstrate that it's realistic. One way, Berry says, is to break the figures into components, by sales channel or target market segment, and provide realistic estimates for sales and revenue. "It's not exactly data, because you're still guessing the future. But if you break the guess into component guesses and look at each one individually, it somehow feels better," Berry says. "Nobody wins by overly optimistic or overly pessimistic forecasts."

Dig Deeper: What Angel Investors Look For

How to Write the Financial Section of a Business Plan: The Components of a Financial Section

A financial forecast isn't necessarily compiled in sequence. And you most likely won't present it in the final document in the same sequence you compile the figures and documents. Berry says that it's typical to start in one place and jump back and forth. For example, what you see in the cash-flow plan might mean going back to change estimates for sales and expenses.  Still, he says that it's easier to explain in sequence, as long as you understand that you don't start at step one and go to step six without looking back--a lot--in between.

• Start with a sales forecast. Set up a spreadsheet projecting your sales over the course of three years. Set up different sections for different lines of sales and columns for every month for the first year and either on a monthly or quarterly basis for the second and third years. "Ideally you want to project in spreadsheet blocks that include one block for unit sales, one block for pricing, a third block that multiplies units times price to calculate sales, a fourth block that has unit costs, and a fifth that multiplies units times unit cost to calculate cost of sales (also called COGS or direct costs)," Berry says. "Why do you want cost of sales in a sales forecast? Because you want to calculate gross margin. Gross margin is sales less cost of sales, and it's a useful number for comparing with different standard industry ratios." If it's a new product or a new line of business, you have to make an educated guess. The best way to do that, Berry says, is to look at past results.
• Create an expenses budget. You're going to need to understand how much it's going to cost you to actually make the sales you have forecast. Berry likes to differentiate between fixed costs (i.e., rent and payroll) and variable costs (i.e., most advertising and promotional expenses), because it's a good thing for a business to know. "Lower fixed costs mean less risk, which might be theoretical in business schools but are very concrete when you have rent and payroll checks to sign," Berry says. "Most of your variable costs are in those direct costs that belong in your sales forecast, but there are also some variable expenses, like ads and rebates and such." Once again, this is a forecast, not accounting, and you're going to have to estimate things like interest and taxes. Berry recommends you go with simple math. He says multiply estimated profits times your best-guess tax percentage rate to estimate taxes. And then multiply your estimated debts balance times an estimated interest rate to estimate interest.
• Develop a cash-flow statement. This is the statement that shows physical dollars moving in and out of the business. "Cash flow is king," Pinson says. You base this partly on your sales forecasts, balance sheet items, and other assumptions. If you are operating an existing business, you should have historical documents, such as profit and loss statements and balance sheets from years past to base these forecasts on. If you are starting a new business and do not have these historical financial statements, you start by projecting a cash-flow statement broken down into 12 months. Pinson says that it's important to understand when compiling this cash-flow projection that you need to choose a realistic ratio for how many of your invoices will be paid in cash, 30 days, 60 days, 90 days and so on. You don't want to be surprised that you only collect 80 percent of your invoices in the first 30 days when you are counting on 100 percent to pay your expenses, she says. Some business planning software programs will have these formulas built in to help you make these projections.
• Income projections. This is your pro forma profit and loss statement, detailing forecasts for your business for the coming three years. Use the numbers that you put in your sales forecast, expense projections, and cash flow statement. "Sales, lest cost of sales, is gross margin," Berry says. "Gross margin, less expenses, interest, and taxes, is net profit."
• Deal with assets and liabilities. You also need a projected balance sheet. You have to deal with assets and liabilities that aren't in the profits and loss statement and project the net worth of your business at the end of the fiscal year. Some of those are obvious and affect you at only the beginning, like startup assets. A lot are not obvious. "Interest is in the profit and loss, but repayment of principle isn't," Berry says. "Taking out a loan, giving out a loan, and inventory show up only in assets--until you pay for them." So the way to compile this is to start with assets, and estimate what you'll have on hand, month by month for cash, accounts receivable (money owed to you), inventory if you have it, and substantial assets like land, buildings, and equipment. Then figure out what you have as liabilities--meaning debts. That's money you owe because you haven't paid bills (which is called accounts payable) and the debts you have because of outstanding loans.
• Breakeven analysis. The breakeven point, Pinson says, is when your business's expenses match your sales or service volume. The three-year income projection will enable you to undertake this analysis. "If your business is viable, at a certain period of time your overall revenue will exceed your overall expenses, including interest." This is an important analysis for potential investors, who want to know that they are investing in a fast-growing business with an exit strategy.

Dig Deeper: How to Price Business Services

How to Write the Financial Section of a Business Plan: How to Use the Financial Section One of the biggest mistakes business people make is to look at their business plan, and particularly the financial section, only once a year. "I like to quote former President Dwight D. Eisenhower," says Berry. "'The plan is useless, but planning is essential.' What people do wrong is focus on the plan, and once the plan is done, it's forgotten. It's really a shame, because they could have used it as a tool for managing the company." In fact, Berry recommends that business executives sit down with the business plan once a month and fill in the actual numbers in the profit and loss statement and compare those numbers with projections. And then use those comparisons to revise projections in the future. Pinson also recommends that you undertake a financial statement analysis to develop a study of relationships and compare items in your financial statements, compare financial statements over time, and even compare your statements to those of other businesses. Part of this is a ratio analysis. She recommends you do some homework and find out some of the prevailing ratios used in your industry for liquidity analysis, profitability analysis, and debt and compare those standard ratios with your own. "This is all for your benefit," she says. "That's what financial statements are for. You should be utilizing your financial statements to measure your business against what you did in prior years or to measure your business against another business like yours."  If you are using your business plan to attract investment or get a loan, you may also include a business financial history as part of the financial section. This is a summary of your business from its start to the present. Sometimes a bank might have a section like this on a loan application. If you are seeking a loan, you may need to add supplementary documents to the financial section, such as the owner's financial statements, listing assets and liabilities. All of the various calculations you need to assemble the financial section of a business plan are a good reason to look for business planning software, so you can have this on your computer and make sure you get this right. Software programs also let you use some of your projections in the financial section to create pie charts or bar graphs that you can use elsewhere in your business plan to highlight your financials, your sales history, or your projected income over three years. "It's a pretty well-known fact that if you are going to seek equity investment from venture capitalists or angel investors," Pinson says, "they do like visuals."

Dig Deeper: How to Protect Your Margins in a Downturn

Related Links: Making It All Add Up: The Financial Section of a Business Plan One of the major benefits of creating a business plan is that it forces entrepreneurs to confront their company's finances squarely. Persuasive Projections You can avoid some of the most common mistakes by following this list of dos and don'ts. Making Your Financials Add Up No business plan is complete until it contains a set of financial projections that are not only inspiring but also logical and defensible. How many years should my financial projections cover for a new business? Some guidelines on what to include. Recommended Resources: Bplans.com More than 100 free sample business plans, plus articles, tips, and tools for developing your plan. Planning, Startups, Stories: Basic Business Numbers An online video in author Tim Berry's blog, outlining what you really need to know about basic business numbers. Out of Your Mind and Into the Marketplace Linda Pinson's business selling books and software for business planning. Palo Alto Software Business-planning tools and information from the maker of the Business Plan Pro software. U.S. Small Business Administration Government-sponsored website aiding small and midsize businesses. Financial Statement Section of a Business Plan for Start-Ups A guide to writing the financial section of a business plan developed by SCORE of northeastern Massachusetts.

Editorial Disclosure: Inc. writes about products and services in this and other articles. These articles are editorially independent - that means editors and reporters research and write on these products free of any influence of any marketing or sales departments. In other words, no one is telling our reporters or editors what to write or to include any particular positive or negative information about these products or services in the article. The article's content is entirely at the discretion of the reporter and editor. You will notice, however, that sometimes we include links to these products and services in the articles. When readers click on these links, and buy these products or services, Inc may be compensated. This e-commerce based advertising model - like every other ad on our article pages - has no impact on our editorial coverage. Reporters and editors don't add those links, nor will they manage them. This advertising model, like others you see on Inc, supports the independent journalism you find on this site.

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Why Is It Important for Entrepreneurs to Develop Financial Plans for Their Companies?

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Preparing a Three-Year Business Plan

Objectives of a feasibility study, about business financial planning.

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• The Importance of Funding for Business

Completing a financial plan is the last step in writing a business plan. The plan includes a projected profit-and-loss statement for the next three to five years and a cash flow statement. A balance sheet is sometimes included as well as a break-even analysis. The financial plan in entrepreneurship is important, because it establishes the financial goals of the company. That is not the only reason it's important.

Determine Feasibility

When you begin to contemplate starting a business, you assume it will be successful, but many entrepreneurs find out after launching the company that success can be elusive. Creating a business plan with the accompanying financial plan is really a feasibility study of what it takes to be successful.

If the resources are out of your reach, you don't have the experience or the market is too unstable at the moment, the financial plan will make that clear. You may find that the price you plan on charging for your products or services is materially higher than what your competitors are charging. Or perhaps the price is fine, but your manufacturing costs are too high and it will be difficult to earn a profit.

Variance Analysis

One of the biggest points of importance for entrepreneurial finance is monitoring the actual results against the line-item budget in the financial plan to give you the opportunity to take whatever steps are necessary to get back on track. For example, if you're not reaching the projected revenue, either the projections are wrong or the marketing program is not as effective as you thought. Knowing the assumptions behind the projections is important to find out why the projections have been missed. In other words, you need to know what you did right and what went wrong.

Forecast Financing Requirements

Starting a business requires money. The forecast financial plan demonstrates how much money is required and when, according to the Small Business Administration . If you don't have the required amount of funding to start the business, you may have to begin on the smaller scale your funding allows. The financial plan also shows you where a shortfall will occur. Adjust the revenue and expense projections to avoid the shortfall or make sure you have other funds available, such as your own savings or a loan to cover any cash deficit.

Obtain Funding

Investors and lenders request to see the entrepreneur's business plan, including the financial plan with projections and assumptions behind the forecast. If the financial plan is unrealistic, a common mistake with entrepreneurs, the loan or investment will not be forthcoming. Make sure you learn the ins and out of making and reading balance sheets, income statements and cash flow projections, says Shopify .

Another reason the financial plan is important is because it lets you know what type of financing would be more appropriate. For example, if you need less than $1 million to get started, then venture capital firms won't be interested. Venture capitalists (VCs) invest larger amounts of money.

• Small Business Administration: Financial Projections
• Shopify: How Financial Planning Can Help You Achieve Your Business Growth Goals

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Why Business Budget Planning Is So Important

What is a business budget, business budget planning steps, benefits of business budget planning.

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Successful small businesses depend on the effectiveness of a business owner's planning process. One of the most critical elements of the planning process is business budget planning, which is also one of the final stages of the planning process. To begin, you have to gather company financial data, forecasts, and industry analysis to help you build your business budget.

Along with the valuable financial information and analytics, however, you also need to keep the company's general business and strategic plans in mind in order to build your budget.

A business budget is a dynamic, financial plan used to estimate a company's anticipated revenue and expenses for an upcoming time period. It is essentially a financial plan a business makes for a month, quarter, or year. It should be dynamic and flexible so it can be adjusted as business plans and the market environment change.

Business budgets should include every source of revenue, or income, anticipated by a firm along with all possible expenditures the firm might make during a specified time period.

A detailed and realistic budget is one of the most important tools for guiding your business. A budget provides essential information for operating within your means, managing unexpected challenges, and turning a profit. A proper budget will identify available capital, estimate expenditures, and anticipate revenues. Business owners must continually refer to their budget as a way of measuring forecasted budget figures against actual budgetary results in order to know where to make adjustments.

Planning should account for long-term needs as well. For example, if you anticipate a large expenditure one or two years down the road for computer upgrades or equipment maintenance, it's a good idea to start budgeting in advance.

A budget is a foundational  framework for your business finances, detailing past performance and providing a tool for forecasting the fiscal year, or another time period, with a view of assets, revenue, and expenses. Here is an overview of the budgetary process:

Budget Preparation

Budgets enable a business to accurately set goals, priorities, and spending caps, and detail where funding originates and where new strategies might bring revenue into the company coffers. The line items that command the most funding are high-priority items like the sources of revenue and the different types of expenses. These items demand precise bookkeeping and serve as performance indicators of the overall business strategy.

An effective budget should break down revenue and anticipated expenses by month, by quarter, or fiscal year. Depending on the size of your business, it should include separate budgets for each department. These departmental budgets should also be broken down by month or by quarter, and collectively, they will come together to form your  master budget .

The master budget is a comprehensive financial plan based on the strategic plan of the business firm. It is composed of two sub-budgets—the operating budget and the financial budget . Each of these includes a number of more specific budgets.

Businesses that rely heavily on seasonal sales revenue serve as a good example of why a budget is so important. If the months of June, July, August, and December typically generate 75% of your business's revenue, your budget will allow you to plan ahead. Having a strategy for distributing your revenue most effectively over the course of a full fiscal year will help maximize profits.

Budget to Evaluate Company Performance

In addition to being an important part of the planning process, budgets are necessary for evaluating the performance of your company over the course of each fiscal year. Common types of budgeting in business are:

• Static budgets : Static budgets are a type of operating budget that uses historical financial data to budget for revenue and expenses expected in the next time period. Typically used by very small businesses, these budgets require taking each line item and adding a percentage increase or decrease to it to reflect the next budget.
• Performance-based budgeting : This type of budget takes into account the inputs and outputs per unit of product or service in order to achieve maximum efficiency.
• Zero-based budgeting : A zero-based budget starts from scratch every time period and builds a new budget based on the conditions at that time. In other words, it starts from zero for each line item and uses internal and industry financial data to build the budget.
• Variance analysis : A variance-based budget is one where actual and expected values for every revenue and expense item are calculated. The results are used to try to bring the budget items back within a certain range and achieve improved efficiency

The use of one of these types of company budgets can be another tool for the financial analysis of the firm.

For example, if sales in the first quarter are lower than what you budgeted, you'll know to find expenses to cut later in the fiscal year in order to stay profitable. A more positive example might be sales of a new product that exceeds expectations. By tracking this trend and comparing it to what was budgeted, you will see that you have the additional revenue to perhaps revise the budget with plans to increase production or hire additional staff to handle the extra business.

Budget to Obtain Financing

A history of writing sound, detailed budgets and sticking to them can help show lenders or potential investors that you can develop a business plan and make it work.

Lenders and investors want to dig deeply into your finances and history. If they don't see evidence of strong budgeting practices, it might be a red flag that would turn them away.

If you're opening a new business and have little or no history, you need to make up for that lack of a track record with detailed support for your budget. This means doing research on the marketplace and showing how past trends or, perhaps a void in the industry, supports the numbers you present. This kind of attention to detail can help you gain serious consideration from lenders or investors.

Staffing for Budgeting

Even small businesses with only a few employees need to make sure they're staffed properly for writing and maintaining a budget. If, for example, you own and operate a small cafe, you might have a unique menu and a reputation for quality customer service, but that doesn't mean you're a financial professional.

If hiring a full-time person to handle your budget and other financial affairs is not realistic, consider part-time help or working with an outside consulting firm, especially early on and annually when it comes time to write a new budget for the next fiscal year. SCORE , a business mentorship organization affiliated with the U.S. Small Business Administration (SBA), is made up largely of volunteers with backgrounds in business and finance who provide guidance and advice to small businesses. This can be a valuable resource when you're just getting started or when you're confronted with a significant challenge. In addition to helping with budgeting or other problems, organizations like SCORE can put you in touch with other resources in your community.

Budgeting Software

Some of the best tools for writing a detailed budget and sticking to it are software programs, and they go beyond just Microsoft Excel or other spreadsheet programs. Some of the most useful budget software programs are:

• QuickBooks : One of the most user-friendly and inexpensive software programs that include budgeting.
• Budgyt : A user-friendly budget software program allowing for more than one profit and loss statement.
• PlanningMaestro by Centage : A cloud-based budgeting software program, including forecasting, for small and medium-sized businesses.

In addition, you already might be utilizing PayPal, Square, or other similar online services with your point-of-sale (POS) system . And like the software programs above, they offer tools for writing a budget and tracking revenue and expenses.

When looking for a budgeting software program, you usually want to look for these features:

• Departmentalized budgeting : Gives you the ability to create budgets by department, division, or profit center and merge them all into the master budget.
• Collaboration : Gives more than one person in your organization the ability to work on the budgetary planning process.
• Variance comparison : Gives you the ability to see actual vs. budgeted amounts on a line-by-line basis.

If a business does not develop a budget, it will face a host of problems. It is, effectively, flying blind if it is not aware how much revenue to expect or expenses to plan to during a given time period. Such a business will likely fail within the first two years after it opens.

The benefits of business budget planning are many. Here are some of the most important:

• Financial health : Without a business budget, it is impossible for you to know the financial health of your company. You will have no idea if you met or exceeded your goals.
• Strategic planning : A business budget allows you to develop a strategic plan since you will know the answer to issues like whether you can expand.
• Obtain debt financing : If a small business tries to obtain debt financing from a bank or other financial institution, it must produce a budget to show potential lenders.
• Attract investors : If a business wants to attract investors in the business, those investors will not put their money into the business unless they can see a budget.
• Tax preparation : A business budget assists in the preparation of income, sales, and payroll taxes.
• Decision making : In order to make decisions about any facet of the business, you have to know how much money is allocated to that item.

Corporate Finance Institute. " Types of Budgets ." Accessed March 9, 2021.

eFinance Management. " Variance Analysis ." Accessed March 9, 2021.

CompareCamp. " Best Budgeting Software - 2021 List of Top 10 Budgeting Software Tools ." Accessed March 9, 2021.

Business and Finance Experts Column. " The Benefits of Budgeting in a Business ." Accessed March 9, 2021.

Financial Plan

A document that covers an individual’s current financial situation, short-term and long-term economic goals, and an in-depth strategy to achieve them

What is a Financial Plan?

A financial plan is a document that covers an individual’s current financial situation, short-term and long-term economic goals, and an in-depth strategy to achieve the goals.

A financial plan should incorporate every aspect of an individual’s finances, which include savings, investing, debt, insurance , taxes, retirement, and an assortment of other factors that will be discussed in more depth below. The plan can be created independently or with the help of a financial planner.

Benefits of Financial Planning

Creating a financial plan is an extremely beneficial way for an individual to evaluate their current financial situation and plan ahead for future objectives and expenses. Listed below are the advantages of creating a financial plan.

• Better management of personal income
• Increased preparation for future expenses
• Clarity in retirement objectives
• Reduced risk of debt
• Increased likelihood of achieving personal and financial goals
• Decrease in stress levels, anxiety, and worry
• Increased probability of financial success

Producing a financial plan brings forth an assortment of benefits that would not be present previously. Other than time loss, there are no disadvantages to creating a financial plan.

Reasons to Create a Financial Plan

If you are not quite sure if you are ready to allocate personal time to create a financial plan, the following factors should convince you why it is an advantageous idea.

1. Prioritize financial goals

If an individual is saving up for a down payment on a house, mortgage , or car, a financial plan helps organize associated expenses, allowing the individual to plan ahead for a large future purchase.

2. Prioritize personal goals

Personal goals such as a specific savings account balance, portfolio value, or luxury vehicle can be achieved by constructing a financial plan that assigns income effectively to achieve preset goals.

3. Standard of living

The ongoing collection and distribution of finances is a stressful topic for most individuals but can be minimized by the creation of a financial plan. This is because a financial plan is organized, laid out, and provides information on how to reduce debt.

When to Create or Adjust Your Financial Plan

On average, an individual should review and adjust their financial plan every year. However, if you’ve not yet created a financial plan, here are some of the factors that should influence and motivate the idea to begin the process.

1. Change in income

When an individual is granted a change in income, their purchasing power will either increase or decrease. The change will significantly lead to a change in the ability to spend money, invest, and pay off debt.

2. Job change

When an individual lands a new occupation, an assortment of new expenses and costs must be accounted for. For example, a new job may result in an increase in transportation or communication expenses.

3. Change in family dynamics

The creation or adjustment of a financial plan should occur when a change in family dynamics occurs, such as the birth of a child, marriage, or divorce. It is necessary because a number of new expenses will be added, which will affect personal income .

4. Inheritance

Receiving some sort of inheritance could significantly impact the allocation of income towards expenses and investment, which would warrant an individual to either create or adjust their financial plan.

Beyond the criteria above, it is recommended that every individual who is earning should eventually create a financial plan to ensure comfortability, relief, and success.

Steps to Build a Financial Plan

When it comes to actually constructing a financial plan, several elements should be considered and eventually included in the individual’s design. Numbered below are the steps needed to be taken when creating such a plan.

1. Calculate net worth : Before diving into finances, it is recommended that an individual is to calculate their net worth by summing their assets and comparing them to their liabilities.

2. Determine cash flow : Inflows and outflows of an individual’s income must be determined in order to organize funds and locate current and potential debt.

3. Set financial goals : Setting financial goals will create the baseline for the entire plan and will motivate the individual. For example, a financial goal would be to save $10,000 by 2021.

4. Start an emergency fund : Prepare for unexpected events by allocating a certain amount of money to the fund and set it aside.

5. Debt strategy : Start looking at all of the debt that contributes to the reduction of your income and determine the best way to pay off that debt. In such a case, it is most beneficial to design a strategy that pays off the most demanding debt first.

6. Investment strategy : Create an investment strategy that does not rely heavily on risky investments and will bring forth a close to “guaranteed” return.

7. Insurance : Start allocating a portion of income towards health, auto, disability, life, and home insurance to establish security.

8. Retirement plan : To ensure that there is a sufficient amount of money left over once an individual decides to retire, there must be some sort of plan in effect that allocates a portion of income into RRSPs, 401(k)s, IRAs, or other forms of retirement plans.

9. Tax strategy : Not planning for taxes can result in a negative financial impact during tax season . To reduce the impact, allocate a fixed amount of income towards it.

10. Stay on track : It is easy to deviate from the original financial plan that is created. However, if the plan is constructed prudently and effectively, it is unlikely that an individual’s goals are not reached if they decide to stay on track with the plan.

Creating a financial plan is one of the most instrumental things that an individual can do with their income. Once a plan is implemented, the achievement of personal goals and financial freedom now become one step closer.

Additional Resources

CFI is the official provider of the global Certified Banking & Credit Analyst (CBCA)® certification program, designed to help anyone become a world-class financial analyst. To keep advancing your career, the additional CFI resources below will be useful:

• Financial Analyst vs. Financial Advisor
• Personal Finance
• Checking Accounts vs. Savings Accounts
• Private Wealth Management
• See all wealth management resources
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Importance of Financial Planning

Financial planning helps consumers determine whether they are on track to meet their goals and outlines their path to overall financial success. Today financial advisors face the challenge of providing services to address consumers’ complicated financial lives and meeting their demands for fee transparency and value.

• How much should I save for retirement?
• What is the amount of life insurance that I need?
• What type of investments should I own?
• Can we afford a new house?
• Is there a way we can save on taxes?

Most consumers do not have the time to answer these questions and manage their financial needs without a financial advisor that can take the time to understand their total financial picture. If financial advisors are going to sustain the value they want to deliver and earn the fees they need to run their businesses, they will have to offer more than just investment management.

Studies have shown that on average, clients with a financial plan hold 60% more advisory assets than clients without a plan. 1  Despite evolving consumer behaviors and expectations and the competitive dynamics of the investment industry, many advisors see no reason to change the services they offer. They built successful firms and will keep running them the same way until they retire. However, for those focused on retaining clients and growing their business, they will have to embrace financial planning to demonstrate their value in this changing landscape of financial advice.

A holistic approach to each client’s wealth objectives is the key to a successful financial advisory practice. Advisor platforms can provide financial advisors with a solution with multiple modules to facilitate the delivery of financial planning services in addition to CRM, Portfolio Accounting, Client Reporting, and Aggregation which can help an advisor efficiently provide their clients with expert advice on retirement planning, education funding, and estate planning and more.

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What is Financial Planning (FP&A)?

The solutions you need to tell the whole financial story.

What is Financial Planning and Analysis (FP&A)?

FP&A is a specialized function in financial planning, forecasting, maintaining financial models, decision-making, and analysis. It provides strategic insights that drive business performance and strengthen the overall financial health of an organization. Who uses FP&A, and how can you leverage its capabilities to increase efficiency across your business?

The Director of Finance, in collaboration with the Chief Financial Officer (CFO), typically uses FP&A to help determine, review, and update the company’s business goals as part of their corporate financial planning process. FP&A teams commonly comprise the Director of Finance, CFO, controller(s), accountants, financial analysts, business analysts, data analysts, and other analysis professionals. These teams work closely with other departments including, accounting, sales, marketing, and operations, to develop and execute financial plans that align with the company's goals. These plans use financial models, data analytics, and forecasting tools to unlock insights into the company's performance, trends, and future opportunities for growth.

Corporate financial analysts have several key responsibilities that can benefit from FP&A:

• Budgeting and forecasting: Develop and maintain the company's annual budget and forecast to help meet financial targets.
• Financial reporting: Prepare and analyze financial reports to provide insights into the company's financial performance.
• Performance analysis: Conduct financial analysis to identify areas of improvement and opportunities for cost savings or revenue growth.
• Strategic planning: Help provide financial insights and analysis to support the development of the company's strategic plan.
• Risk management: Identify and manage financial risks that could impact the company's performance or financial position.

FP&A empowers you to make informed business decisions while achieving your big-picture goals.

The Evolution of FP&A

FP&A emerged from the early days of late-1970s spreadsheet software and progressed through the development of more sophisticated analytical capabilities in the 1990s, to emerge in today’s cloud-based solutions offering greater scalability, advanced analytics, machine learning, and artificial intelligence (AI). From the beginning, the goal of FP&A has always been to help provide finance teams like yours with real-time insights and enhanced decision-making capabilities.

The Tech That’s Making it Happen

The FP&A process uses several key tools to streamline processes, analyze data, and deliver clear, informative results:

Business Intelligence

Business intelligence and analytics tools can process vast amounts of information more efficiently than humans—enabling deeper business performance insights, more informed forecasting, and better decision-making.

Advanced analytics help you identify everything from patterns and trends to data anomalies, allowing you to mitigate risk proactively and protect your company’s bottom line.

Cloud Solutions

Cloud-based platforms offer flexible, scalable solutions that support collaborative planning and analysis across your organization. Powerful integrations help you consolidate data from multiple applications, revealing relevant processes and workflows.

With the right tools and tech, your finance teams can operate efficiently and access important data, regardless of their physical location. Moving to the cloud will allow you to better support both remote workers as well as other teams across your organization.

Artificial intelligence (AI) and machine learning (ML) enable you to automate routine tasks like data collection and processing, helping ensure more accurate forecasts while preparing for any unexpected risks.

How Can FP&A Help You Work Smarter?

Knowing the basics of financial planning is only the beginning. The next step is using that knowledge to go through the actual planning process, starting with these key steps:

Gathering Information

The first step in financial planning is collecting clean, accurate data. This means gathering everything from accounting documents to operational information, along with other external data like customer demographics and market trends.

Remember, too, that high-quality in equals high-quality out—if you input top-level data, your analytics reports will be useful and complete. You’ll be able to make decisions based on sound intelligence, which can help your business hit financial targets and meet its goals.

Building a Plan

Next, decision-makers need to identify the organization’s long-term goals and how to achieve them. You can’t set realistic goals unless you understand the market, the competition you’re facing, and the internal capabilities of your workforce.

It’s vital to identify important milestones, which help determine whether the company is on pace to reach its goals or whether you need to pivot. Plans shouldn’t be rigid, but they should be clear enough for you and your team to execute.

Making a Budget

Now, it’s time to create a budget, which involves setting concrete targets for various business units, departments, or projects. Allocate these resources in alignment with the strategic priorities of your business, helping ensure that you direct funds toward those areas with the highest potential to create value.

The finance team and key department heads should collaborate throughout the budgeting phase, enabling the final budget to reflect both strategic goals and operational realities.

Forecasting

Forecasting involves predicting future outcomes based on current trends, historical information, and external factors. It allows the organization to anticipate changes in revenue, expenses, and other key financial metrics, helping drive proactive decision-making and allowing your business to capitalize on potentially fleeting opportunities.

However, creating effective forecasts requires an abundance of quality data, as you’ll have to account for potential market shifts, economic conditions, and internal factors that might impact performance.

Analyzing Variances

A variance is anything that doesn’t align with your predictions. The greater the deviation, the bigger its impact on your company’s performance—that’s why it’s critical to analyze all figures that don’t match your initial predictions. Identifying what went wrong allows you to determine what happened and why, so you can quickly adjust and get your business back on track.

Running Reports

Your final step involves generating the reports and insights that can inform decision-making. Your team will summarize this financial data, analyze performance metrics, and report their findings—transforming complex information into digestible content.

Through reporting, you can obtain a holistic view of the company’s fiscal health. These reports deliver value as you prepare for the next revenue cycle, allowing your company to make strategic adjustments that keep you moving forward toward your long-term growth goals.

Overall Benefits of FP&A

Current user-friendly solutions, like Epicor FP&A, offer several advantages over manual or outdated financial planning and analysis tools:

• Centralized Data: Merge information from various sources across your organization, creating a single source of truth and eliminating data silos.
• Automation : Eliminate many of the manual processes involved in financial planning and analysis, saving you time and minimizing errors.
• Accuracy: Gain accurate and reliable financial data, empowering your finance teams to make more informed decisions.
• Collaboration: Facilitate collaboration among different departments and stakeholders within your company, building greater cooperation, transparency, and awareness.
• Reporting: Access customizable reports and dashboards, streamlining communication about the company’s financial performance to your stakeholders.
• Forecasting: Leverage advanced forecasting capabilities, allowing finance teams to create accurate and reliable forecasts of future financial performance.
• Scenario planning: Easily create different scenarios and test the impact of various assumptions on your company’s financial performance.

Industry-Specific Benefits of FP&A

For manufacturers.

FP&A software offers manufacturers a way to make their businesses more profitable through accurate data collection, budgeting, forecasting, real-time tracking of metrics, risk modeling, and a range of other analytical tools.

This software helps you target where to make better use of your resources, reduce cost outlay, improve cash flow, cut waste, and make better decisions.

For Distributors

Distributors use FP&A solutions to help them stay ahead of the competition by tracking sales data, analyzing customer behavior, and forecasting future sales and revenue. Detailed reports offer real-time insights into business performance, allowing them to identify areas of improvement and make strategic decisions.

By automating routine tasks like data entry or report generation with FP&A software, distributors can streamline financial processes and reduce the risk of potential errors.

For Retailers

Using data visualization tools and enhanced reporting, FP&A solutions help retailers make better decisions  through accurate financial projections, cost control, cashflow management, and performance tracking.   These critical insights will help you identify trends and unlock opportunities to add product lines or expand into new markets.

Leveraging the power of FP&A software , retailers can improve their financial performance and maintain a competitive edge in today's dynamic retail landscape.

What’s Next for FP&A

Many exciting new technologies are reshaping how businesses will engage with FP&A in the future:

• Prescriptive Analytics: Tells you what is likely to happen and how to respond.
• New Integrations: Allows you to connect even more applications.
• Real-Time Analytics Tools: Provides up-to-the-minute insights.

These innovative tools have the potential to change your financial planning strategies while guiding your business forward.

FP&A Glossary

Understanding a shared set of common FP&A terms is important for both internal and external collaboration, communications, and planning:

Budget : A financial plan that outlines a company's expected revenues, expenses, and profits over a period of time.

Capital expenditure (Capex) : The funds a company invests in fixed assets such as property, plant, and equipment.

Cash flow : The amount of cash coming in and going out of a company over a period of time.

Cost of goods sold (COGS) : The direct costs incurred in producing and delivering a company's products or services.

EBITDA : An acronym meaning Earnings Before Interest, Taxes, Depreciation, and Amortization—a measure of a company's operating profitability.

Forecast : A prediction of a company's future financial performance based on past performance, market trends, and other factors.

Gross margin : The difference between revenue and COGS, which represents the amount of money left to cover operating expenses and generate profit.

Operating expenses : Expenses that a company incurs in day-to-day operations including salaries, rent, utilities, and marketing—commonly called "overhead."

Revenue : The income a company generates through the sale of products or services.

ROI : An acronym meaning “return on investment,” measuring how much profit a company generates from its investments.

Variance analysis : The process of comparing actual financial results to budgeted or forecasted results, in order to identify and explain any differences.

Working capital : The amount of cash and other liquid assets a company has available to cover its day-to-day operating expenses.

Here to Help: How Epicor Simplifies FP&A for Your Business

Epicor Financial Planning & Analysis (FP&A) is our licensed FP&A software that allows you to streamline financial processes and make faster, smarter decisions. FP&A is built specifically for businesses that make, move, and sell the things we all need every day: manufacturers, distributors, and retailers.

As a solution that sits on top of your ERP system, Epicor FP&A gives your business a financial storybook by leveraging the combined power of advanced reporting and consolidation, dashboarding, machine learning-powered budgeting, rolling forecasting, what-if analysis, and more. Using FP&A, you can enjoy reporting, budgeting, and forecasting on the Web or in Excel—you can also integrate data from various sources, perform detailed analyses, and collaborate with your team in real-time. It also offers templated financial statements and budget sheets, or you can create custom reports from scratch quickly and easily.

Epicor is all about ease, efficiency, and visibility. If you’re ready to move from spreadsheets to streamlined forecasting and quick decision-making, contact an Epicor sales rep today to see how we can cut through the complexities and make FP&A a whole lot simpler to manage.

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Table of Contents

What is a financial plan?

How to make a financial plan in 9 steps, how to get financial planning help, why is financial planning important.

A financial plan is a document that catalogs your current finances, your financial goals and any strategies you've set to achieve those goals. Ongoing financial planning allows you to make the most of your assets and gives you the confidence to weather any bumps along the way.

Key takeaways:

A comprehensive financial plan should include details about cash flow, savings, debt, investments, insurance and other financial life elements.

A financial plan isn’t a static document — it's a tool to track your progress and one you should adjust as your life evolves. It's helpful to reevaluate your financial plan after major life milestones, such as getting married, starting a new job, having a child or losing a loved one.

You can make a financial plan yourself or get help from a financial planning professional. Online services like robo-advisors have also made financial planning assistance more affordable and accessible than ever.

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1. Set financial goals

A good financial plan is guided by your financial goals. If you approach your financial planning from the standpoint of what your money can do for you — whether that's buying a house or helping you retire early — you'll make saving feel more intentional.

Make your financial goals inspirational. Ask yourself: What do I want my life to look like in five years? What about in 10 and 20 years? Do I want to own a car or a house? Do I want to be debt-free? Pay off my student loans? Are kids in the picture? How do I imagine my life in retirement?

Having concrete goals can help you identify and complete the next steps and provide a guiding light as you work to make those aims a reality.

» Need help with this step? Learn more about setting financial goals

2. Track your money

Get a sense of your monthly cash flow — what’s coming in and what’s going out. An accurate picture is key to creating a financial plan and can reveal ways to direct more to savings or debt pay-down. Seeing where your money goes can help you develop immediate, medium-term and long-term plans.

For example, developing a budget is a typical immediate plan. NerdWallet recommends the 50/30/20 budget principles: 50% of your take-home pay goes toward needs (housing, utilities, transportation and other recurring payments), 30% goes toward wants (dining out, clothing, entertainment) and 20% goes toward savings and debt repayment.

Reducing credit card or other high-interest debt is a common medium-term plan, and planning for retirement is a typical long-term plan.

» Need help with this step? A step-by-step guide to budgeting

3. Budget for emergencies

The bedrock of any financial plan is putting cash away for emergency expenses. You can start small — $500 is enough to cover small emergencies and repairs so that an unexpected bill doesn’t run up credit card debt. Your next goal could be $1,000, then one month’s basic living expenses, and so on.

Building credit is another way to shockproof your budget. Good credit gives you options when you need them, like the ability to get a decent rate on a car loan. It can also boost your budget by getting you cheaper rates on insurance and letting you skip utility deposits.

» Need help with this step? Use our emergency fund calculator

4. Tackle high-interest debt

A crucial step in any financial plan: Pay down high-interest debt, such as credit card balances, payday loans, title loans and rent-to-own payments. Interest rates on some of these may be so high that you end up repaying two or three times what you borrowed.

If you’re struggling with revolving debt, a debt consolidation loan or debt management plan may help you wrap several expenses into one monthly bill at a lower interest rate.

» Need help with this step? Learn tools and tips for paying off debt

5. Plan for retirement

If you visit a financial advisor, they will be sure to ask: Do you have an employer-sponsored retirement plan such as a 401(k) , and does your employer match any part of your contribution? True, 401(k) contributions decrease your take-home pay now, but it’s worth it to consider putting in enough to get the full matching amount. That match is free money.

If you have a 401(k), 403(b) or similar plan, financial advisors also generally suggest that you gradually expand your contributions toward the IRS limit: $23,000 in 2024 ($30,500 for those age 50 or older) .

Another savings vehicle for retirement planning is an IRA , or individual retirement arrangement. These tax-advantaged investment accounts can further build retirement savings. The contribution limit is $7,000 in 2024 ($8,000 if age 50 or older) .

» Need help with this step? Use our free retirement calculator

6. Optimize your finances with tax planning

For many of us, taxes take center stage during filing season, but careful tax planning means looking beyond the Form 1040 you submit to the IRS each year.

For example, if you're routinely getting a sizable refund, that may be a sign that you're needlessly living on less throughout the year. Learning how and when to review your W-4 , the form you fill out for your employer, can help you to take control of your future. Adjust your withholdings on your W-4, and you either can keep more of your paycheck, or pay a smaller tax bill.

Getting cozy with the tax law also means looking into tax credits and deductions ahead of time to understand which tax breaks could make a difference when it comes time to file. The government offers many incentives for taxpayers who have children, invest in green home improvements or technologies, or are even pursuing higher education.

» Need help with this step? See tax planning tips for beginners and learn about the federal brackets and income tax rates

7. Invest to build your future goals

Investing might sound like something for rich people or for when you’re established in your career and family life. It’s not. Investing can be as simple as putting money in a 401(k) and as easy as opening a brokerage account (many have no minimum to get started). Financial plans use a variety of tools to invest for retirement, a house or college.

» Need help with this step? Learn how to start investing

8. Grow your financial well-being

With each of these steps, you're protecting yourself from financial setbacks. If you can afford it, decide whether you'd like to do more, such as:

Increasing contributions to your retirement accounts.

Padding your emergency fund until you have three to six months of essential living expenses.

Using insurance to protect your financial stability, so a car crash or illness doesn’t derail you. Life insurance protects loved ones who depend on your income. Term life insurance, covering 10-year to 30-year periods, is a good fit for most people’s needs.

» Need help with this step? Understand life insurance and how it works

9. Estate planning: Protect your financial well-being

Financial planning also means looking out for your future needs, as well as mapping things out for your loved ones. Creating a will can help ensure your assets are distributed according to your wishes. Other types of estate-planning documents can also provide your relatives with clarity on how you would like to be cared for, and who should manage your affairs.

» Need help with this step? View our estate planning checklist

If you're not the DIY type or simply want professional help managing some tasks and not others, you don't have to go it alone. Consider what kind of help you need:

I want complete financial planning and investment advice .

I want specialized, face-to-face guidance.

I want help managing my portfolio.

Complete financial plan and investment advice

Online financial planning services offer virtual access to human advisors. A basic service would include automated investment management (like you’d get from a robo-advisor), plus the ability to consult with a team of financial advisors when you have other financial questions.

More comprehensive providers basically mirror the level of service offered by traditional financial planners : You're matched with a dedicated human financial advisor who will manage your investments, create a comprehensive financial plan for you, and do regular check-ins to see if you're on track or need to adjust your financial plan.

» Want to work with a local advisor ? Learn how to find a financial advisor near you

Specialized guidance and/or want to meet with an advisor face-to-face

If you have a complicated financial situation or need a specialist in estate planning, tax planning or insurance, a traditional financial advisor in your area may fit the bill. To avoid conflicts of interest, consider fee-only financial advisors who are fiduciaries (meaning they've signed an oath to act in the client's best interest).

Note that some traditional financial advisors decline clients who don’t have enough to invest; the definition of “enough” varies, but many advisors require $250,000 or more. If you want to know more about how much seeing an advisor will cost, read our guide to financial advisor fees .

» Need some help? Check out our roundup of the best wealth advisors

Portfolio management only

Robo-advisors offer simplified, low-cost online investment management. Computer algorithms build an investment portfolio based on goals you set, and your answers to questions about your risk tolerance. After that, the service monitors and regularly rebalances your investment mix to ensure you stay on track. Because it's all digital, it comes at a much lower cost than hiring a human portfolio manager.

» Need help investing? See our list of the best robo-advisors

Financial planning can help you feel more confident about navigating bumps in the road — like, say, a recession or historic inflation . According to Charles Schwab's 2024 Modern Wealth Survey, Americans who have a written financial plan feel more in control of their finances compared with those without a plan [0] Charles Schwab . Charles Schwab Modern Wealth Survey 2023 . Accessed Jul 12, 2024. View all sources .

Once your basic needs and short-term goals have been addressed, a financial plan can also help you tackle big-picture goals. Thoughtful investing, for example, can help build generational wealth , and careful estate planning can ensure that wealth gets passed down to your loved ones.

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Ten Reasons Why Financial Planning is Important

Financial planning helps you determine your short and long-term financial goals and create a balanced plan to meet those goals. Here are ten powerful reasons why financial planning – with the help of a professional financial advisor – can help you pursue your goals.

It's possible to manage income more effectively through planning. Managing income helps you understand how much money you'll need for tax payments, other monthly expenditures and savings.

2. Cash Flow

Increase cash flows by carefully monitoring your spending patterns and expenses. Tax planning, prudent spending and careful budgeting will help you keep more of your hard earned cash.

An increase in cash flow can lead to an increase in capital, allowing you to consider investments to work toward improving your overall financial well-being.

4. Family Security

Providing for your family's financial security is an important part of the financial planning process. Having the proper insurance coverage and policies in place can provide peace of mind for you and your loved ones.

5. Investment

A proper financial plan considers your personal circumstances, objectives and risk tolerance. It acts as a guide in helping choose the right types of investments to fit your needs, personality, and goals.

6. Standard of Living

The savings created from good planning can prove beneficial in difficult times. For example, you can make sure there is enough insurance coverage to replace any lost income should a family bread winner become unable to work.

7. Financial Understanding

Better financial understanding can be achieved when measurable financial goals are set, the effects of decisions understood, and results reviewed. Giving you a whole new approach to your budget and improving control over your financial lifestyle.

A nice 'cushion' in the form of assets is desirable. But many assets come with liabilities attached. So, it becomes important to determine the real value of an asset. The knowledge of settling or canceling the liabilities comes with the understanding of your finances. The overall process helps build assets that don't become a burden in the future.

It used to be called saving for a rainy day. But sudden financial changes can still throw you off track. It is good to have some investments with high liquidity. These investments can be utilized in times of emergency or for educational purposes.

10. Ongoing Advice 

Establishing a relationship with a financial advisor you can trust is important to pursuing your goals. Your financial advisor will meet with you to assess your current financial circumstances and develop a comprehensive plan customized for you.

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Mastering Your Clothing Company Startup: Essential Financial Planning for Success

Starting a clothing company requires not only a keen sense for fashion but also a robust financial strategy. Aspiring fashion entrepreneurs must understand the intricate balance between creativity and commerce to thrive in the competitive apparel industry. Effective financial planning serves as the backbone of this balance, ensuring that resources are wisely allocated and potential risks are mitigated. By mastering budgeting , cost control, and cash flow management, startup founders can avoid common pitfalls that often derail promising fashion ventures.

Key to this mastery is a deep dive into the specifics of financial forecasting and strategic pricing. Developing detailed financial projections helps in securing funding, whether from investors or banks, and supports informed decision-making throughout the lifecycle of the business. Pricing strategies, on the other hand, need to reflect both the brand’s market positioning and the target audience’s spending behavior. A well-thought-out financial plan not only boosts profitability but also enhances the brand’s resilience, enabling it to adapt swiftly to market trends and consumer demands.

Importance of Financial Planning in the Clothing Industry

Financial planning is a cornerstone of success in the clothing and fashion industry , a sector rife with unique challenges and dynamic market trends. Without a structured financial plan, businesses in this niche can falter amidst competition, fluctuating consumer preferences, and unpredictable economic climates. Effective financial planning helps entrepreneurs and stakeholders make informed decisions, optimize resource allocation, and achieve long-term sustainability.

In this article, we will delve into various aspects critical to financial planning within the clothing industry. To provide a comprehensive understanding, we will cover the following key sections:

Understanding Market Trends and Consumer Behavior

Budgeting and cost management, revenue forecasting and growth projections, investment and fundraising strategies, financial performance metrics and analysis, profitability and break-even analysis, risk management and contingency planning.

By understanding these vital areas, businesses can better navigate the complexities of the clothing industry and position themselves for financial success. Let’s begin by exploring how market trends and consumer behavior influence financial planning in this sector.

Keeping a pulse on market trends and consumer behavior is essential for any clothing business. This involves staying updated on fashion trends, recognizing seasonal shifts in demand, and understanding the demographic preferences of your target market. Here’s what you need to consider:

• Analyzing fashion trends and seasonal changes
• Understanding consumer purchasing behavior
• Evaluating competitors’ strategies

Analyzing these factors helps businesses adapt their offerings and marketing strategies to meet customer expectations. Ignoring market trends can lead to unsold inventory and financial losses, while a keen understanding can drive sales and brand loyalty.

In the clothing industry, meticulous budgeting is vital to maintain financial health. This includes planning for raw materials, production costs, marketing expenses, and overheads. Effective cost management ensures that businesses remain profitable without compromising on quality. Key points in this section are:

• Allocating budgets for different departments
• Monitoring production and operational costs
• Implementing cost-saving measures

By keeping a close watch on expenses and finding areas to cut costs, businesses can enhance their profit margins. Successful cost management allows for better pricing strategies and competitive positioning in the market.

Forecasting revenue accurately is essential for planning future growth and investment. This process involves predicting sales based on historical data, market conditions, and business strategies. Important focus areas include:

• Using historical sales data for predictions
• Setting realistic growth targets
• Evaluating the impact of marketing campaigns

Revenue forecasts provide a roadmap for business expansion and help in securing investments. They also allow businesses to strategize effectively and allocate resources where they can offer the highest returns.

Securing funding is a critical component for growth and expansion. Whether seeking investors or loans, having solid financial statements and a compelling business plan is essential. Consider the following:

• Preparing detailed financial projections
• Highlighting business potential to attract investors
• Exploring various financing options like loans or equity

Effective fundraising fuels innovation, supports expansion, and helps navigate financial challenges. It is the lifeblood that propels a business from concept to reality, ensuring resources are available for growth.

Monitoring financial performance through various metrics is crucial for understanding the business’s health. Key financial metrics provide insight into profitability, efficiency, and sustainability. Focus on:

• Tracking key performance indicators (KPIs)
• Analyzing profit margins and cost structures
• Assessing liquidity and solvency ratios

Regular analysis of these metrics helps identify areas for improvement and guides strategic decision-making. It ensures that the business remains on track towards achieving its financial goals.

Determining the break-even point and focusing on profitability is imperative for business survival and growth. This involves calculating fixed and variable costs and setting pricing strategies accordingly. Important considerations are:

• Calculating break-even volume
• Setting profitable pricing strategies
• Monitoring profit margins continuously

Understanding these financial aspects enables businesses to make informed decisions about pricing, production scales, and market strategies. It also helps in identifying the optimal path to profitability.

Every business faces uncertainties, and the clothing industry is no exception. Effective risk management and contingency planning ensure businesses can withstand market disruptions and unforeseen challenges. Key areas include:

• Identifying potential risks
• Developing risk mitigation strategies
• Creating contingency plans for emergencies

Having a robust risk management framework helps safeguard against losses and ensures operational continuity during crises. Preparedness can make a significant difference between thriving and merely surviving in a competitive market.

In conclusion, successful financial planning in the clothing industry involves a blend of understanding market dynamics, meticulous budgeting, strategic forecasting, and robust risk management. By addressing these key areas, businesses can navigate financial complexities, enhance their profitability, and ensure sustainable growth in an ever-evolving market.

Initial Budgeting: A Foundational Step

A solid initial budget is a fundamental aspect of any business venture, as it lays the groundwork for financial stability and informed decision-making. It allows entrepreneurs, investors, and finance professionals to forecast expenses, revenues, and cash flows accurately. Let us delve into the key budget items that should be included in your initial budget and understand their importance.

Key Budget Items

Below is a detailed breakdown of the essential components of an initial budget. Each item plays a pivotal role in shaping the financial framework of a business. Here’s a closer look:

• Revenue Projections: Estimations of future sales based on market research and historical data.
• Operating Expenses: Recurring costs required for the day-to-day functioning of the business, such as rent, utilities, and salaries.
• Cost of Goods Sold (COGS): Direct costs attributable to the production of the goods sold by the company, including raw materials and labor.
• Capital Expenditures: Funds used to acquire or upgrade physical assets like buildings, technology, and equipment.
• Marketing and Advertising: Budget allocated for promoting products and services to increase sales.
• Administrative Expenses: Overhead costs such as office supplies, legal fees, and insurance.
• Research and Development ( R&D ): Investments made in developing new products or improving existing ones.
• Contingency Fund: Reserve funds set aside for unforeseen expenses or financial emergencies.

Each of these components needs careful consideration to ensure the business operates efficiently and has the necessary resources to manage unforeseen challenges. Proper budgeting can help mitigate financial risks and support strategic long-term planning.

Sample Initial Budget

To illustrate how these key items come together in an initial budget, we present a sample table that outlines potential categories and estimates. This example can be used as a reference when creating your own budget.

This sample table provides a concise overview of how to allocate resources across various budget items. By examining and adjusting these figures periodically, businesses can maintain financial health and adapt to changing market conditions. Furthermore, establishing a clear initial budget allows for more precise financial tracking and assessment, which is crucial for sustaining growth and achieving long-term objectives.

Strategies for Effective Production Cost Management

In the world of manufacturing and production, managing production costs effectively is crucial for maintaining profitability and ensuring long-term success. This involves continuous monitoring and strategic planning to minimize unnecessary expenses without compromising the quality of the product. Let’s explore key strategies to achieve effective cost management in production.

1. Optimize Resource Utilization

One of the primary strategies for managing production costs is optimizing resource utilization. This involves assessing the efficiency of labor, materials, and machinery used in the production process. By doing so, businesses can identify waste areas, underutilized resources, and opportunities for improvement. Implementing strategies such as lean manufacturing can significantly enhance resource usage, reducing downtime and minimizing waste.

2. Implement Automation

Automation plays a vital role in streamlining production processes and eliminating human errors. By integrating automated systems and machinery, businesses can increase production speed and improve product consistency. Additionally, automation reduces labor costs and lessens the dependency on skilled workers, leading to significant cost savings in the long run.

3. Negotiate with Suppliers

Negotiating favorable terms with suppliers can substantially impact production costs. It is essential to build strong relationships with suppliers and explore opportunities for discounts, bulk purchasing, or long-term contracts. Effective negotiation can result in lower material costs and better payment terms, thus improving overall cost efficiency.

4. Regular Maintenance of Equipment

Regular maintenance of production equipment is critical for preventing breakdowns and costly repairs. Implementing a proactive maintenance plan ensures that machinery operates at optimal levels, reducing downtime and extending the lifespan of equipment. Routine check-ups and timely repairs can prevent small issues from escalating into major problems, which can be expensive to fix.

5. Adopt Energy-Efficient Practices

Energy consumption constitutes a significant portion of production costs. By adopting energy-efficient practices and technologies, businesses can reduce their energy bills and minimize their environmental footprint. Implementing measures such as using energy-efficient lighting, optimizing HVAC systems, and utilizing renewable energy sources can lead to substantial cost savings over time.

Comparison of Cost Factors: Suppliers vs. Production Methods

When evaluating production cost management, it’s essential to compare different cost factors associated with various suppliers and production methods. The table below highlights key cost factors to consider:

The table provides a clear comparison of different cost factors associated with local suppliers, overseas suppliers, in-house production, and outsourced production. Local suppliers might offer higher quality control and lower shipping costs but may come with higher labor costs. On the other hand, overseas suppliers might provide lower material costs but at the expense of higher logistics expenses. In-house production offers high flexibility and quality control, but at a higher cost. Outsourced production offers fixed contract rates and lower labor costs but typically provides less flexibility.

Effective production cost management requires a comprehensive understanding of these variables. By evaluating and selecting the most cost-effective options tailored to your business needs, you can achieve optimal production efficiency and maintain profitability.

Revenue Projection and Its Impact on Business Strategy

Revenue projection is a fundamental aspect of business strategy that drives decision-making and helps set realistic goals. Accurate revenue projections allow entrepreneurs, investors, and finance professionals to anticipate financial needs, allocate resources effectively, and identify growth opportunities. By having a clear view of potential future revenue, businesses can make informed decisions that align with their long-term vision and objectives.

Steps to Projecting Revenue

Projecting revenue involves several key steps. Each step requires careful analysis and relevant data to produce meaningful projections. Below, we outline the essential steps for estimating future revenue accurately and discuss their significance.

1. Market Research and Analysis

Conducting thorough market research is crucial for understanding the market landscape, customer needs, and competitive dynamics.

• Identify Target Market: Define your target audience and segment the market based on demographics, behaviors, and preferences.
• Analyze Competitors: Study your competitors to understand their strengths, weaknesses, market position, and pricing strategies.
• Assess Market Trends: Evaluate current market trends, technological advancements, and economic conditions that may impact demand.

A comprehensive market analysis enables businesses to gauge potential demand and set realistic sales targets. It also helps identify opportunities for growth and potential threats to be addressed.

2. Historical Data Analysis

Examining past performance provides valuable insights into trends and patterns that can inform future revenue projections.

• Analyze Sales Data: Look at previous sales data to identify seasonal trends, peak periods, and recurring patterns.
• Evaluate Marketing Campaigns: Assess the effectiveness of past marketing efforts and their impact on sales figures.
• Track Customer Behavior: Study customer purchasing behavior, repeat purchase rates, and average transaction values.

By understanding historical data, businesses can make educated guesses about future revenue, considering factors such as seasonality and market stability.

3. Setting Assumptions

Projecting revenue involves making assumptions about future circumstances. These assumptions should be well-informed and justified.

• Economic Outlook: Consider the broader economic environment and its potential influence on consumer spending power.
• Market Growth Rate: Estimate the growth rate of your market based on historical trends and future forecasts.
• Company Growth Rate: Project your company’s growth based on past performance and strategic initiatives.

Accurate assumptions are crucial for credible revenue projections. Regularly revisiting and adjusting these assumptions ensures your projections remain realistic.

4. Selecting a Revenue Projection Method

There are various methods to project revenue, each suited to different types of businesses and scenarios.

Choosing the right method depends on your business context, available data, and specific needs. Often, combining multiple methods can offer a more comprehensive projection.

5. Utilizing Financial Modeling Tools

Leverage financial modeling tools and software to enhance accuracy and efficiency in revenue projection.

• Microsoft Excel: Widely used for financial modeling due to its flexibility and powerful analytical capabilities.
• Forecasting Software: Tools like Tableau, SAP Analytics Cloud, and IBM Planning Analytics offer advanced forecasting features.
• Online Templates: Access ready-made financial model templates tailored to various industries and business scenarios on eFinancialModels.com.

Using the right tools can streamline the projection process, making it easier to update and refine your projections as new data becomes available.

In conclusion, revenue projection is a critical component of strategic business planning that guides decision-making and helps set realistic financial goals. By following a structured approach that includes thorough market research, historical data analysis, informed assumptions, choosing the appropriate projection method, and leveraging financial modeling tools, businesses can develop accurate and actionable revenue forecasts. This, in turn, supports sustainable growth and long-term success.

Feasibility Analysis with Break-Even Analysis

Conducting a feasibility analysis is a critical step for any new project or investment. This analysis helps determine whether a project is viable and worth pursuing. It involves evaluating various factors like market demand, financial viability, technical requirements, and operational challenges. Each element plays a pivotal role in providing a complete picture of the project’s potential success or failure.

Key Elements of Feasibility Analysis

Understanding the components of feasibility analysis can help you make informed decisions. Here are the key elements:

• Market Feasibility: This involves assessing the demand for a product or service. Market research, target audience analysis, and competitive landscape are typically examined.
• Technical Feasibility: Focuses on the technical resources and skills required to complete a project. This includes software, hardware, and technical expertise.
• Financial Feasibility: Considers the financial aspects such as projected revenues, costs, profitability, and funding requirements. Key financial metrics should be analyzed.
• Operational Feasibility: Evaluates the operational processes required for the project. This includes staffing, workflows, and day-to-day operations.
• Legal and Regulatory Feasibility: Entails analyzing any legal or regulatory requirements relevant to the project. Compliance with laws and regulations is crucial.

By thoroughly examining these elements, organizations can assess the practicality and potential success of a project or investment. A well-rounded feasibility analysis provides a holistic understanding, allowing for more strategic planning and risk mitigation.

Step-by-Step Guide to Conducting a Break-Even Analysis

A break-even analysis helps identify the point at which total revenues and total costs are equal, meaning there’s no net loss or gain. This is pivotal for understanding financial feasibility. Below is a step-by-step guide to conducting a break-even analysis:

Conducting a break-even analysis is crucial for understanding when a project or business will start to generate profit. By following these steps, organizations can make informed decisions about pricing, cost management, and sales strategies. This analysis also aids in forecasting and setting realistic financial goals.

Importance of Financial Spreadsheets and Templates

Financial spreadsheets and templates are indispensable tools for those involved in financial planning, fundraising, valuation, budgeting, investment analysis, and feasibility analysis. They provide a structured and organized way to manage data, facilitate calculations, and generate useful insights. Utilizing these tools effectively can significantly improve the accuracy and efficiency of your financial processes. Below, we delve into the key benefits of using financial spreadsheets and templates and provide practical examples and resources to illustrate their value.

Benefits of Using Financial Spreadsheets and Templates

Employing financial spreadsheets and templates can streamline numerous aspects of financial management. Here are some of the primary benefits, each with a brief explanation or example to highlight its utility:

• Accuracy and Consistency: Financial templates help maintain accuracy and consistency by standardizing calculations and formats. For instance, using a pre-built budget template ensures that all necessary expenses and income streams are accounted for, reducing the likelihood of errors.
• Time Efficiency: Pre-designed templates save time by providing a ready-made structure, which can be quickly adapted to meet specific needs. This allows finance professionals to focus on analysis rather than building models from scratch.
• Data Visualization: Many templates include built-in charts and graphs that transform raw data into visual insights, making it easier to understand trends and identify areas for improvement.
• Scenario Analysis: Templates often come equipped with features for scenario analysis, allowing users to test different assumptions and see how changes in variables impact outcomes. This is particularly useful for investment and feasibility analysis.
• Enhanced Collaboration: Shared templates facilitate collaboration among team members by providing a common framework for inputting and reviewing data, leading to more cohesive and informed decision-making.
• Professional Presentation: Using well-designed templates enhances the professionalism of reports and presentations, which can be critical when communicating with investors or stakeholders.

Using financial spreadsheets and templates ensures that key elements such as accuracy, efficiency, and professionalism are consistently upheld throughout your financial work. Whether you are building a budget, conducting a valuation, or preparing a financial presentation, these tools provide a solid foundation to achieve reliable results.

Recommended Templates and Tools

To maximize the benefits described above, it is important to select the right financial spreadsheets and templates. Here are some of the recommended templates and tools available on eFinancialModels.com that can help streamline your financial processes:

Each of these templates has been crafted to cater to specific financial modeling needs, making them highly effective for their intended purposes. By leveraging these tools, you can ensure that your financial analyses are accurate, efficient, and professionally presented, ultimately supporting better financial decision-making and planning.

Why Securing Funding is Critical for Your Business

Securing funding is an essential step for entrepreneurs and businesses alike, as it provides the necessary resources to transform ideas into tangible products or services. Funding enables businesses to scale operations, invest in marketing, hire talented teams, and ultimately drive growth. Without sufficient capital, even the most promising ventures may struggle to achieve their full potential.

Effective Fundraising Strategies

Successfully raising capital requires a well-thought-out strategy that aligns with your business goals. Here are some key strategies to consider:

1. Venture Capital

Venture capital involves securing investments from venture capital firms or individual investors. These investors provide significant funding in exchange for equity in the business, expecting substantial returns in the future.

• Identify potential venture capital firms that specialize in your industry.
• Prepare a compelling business plan and pitch deck that highlights your value proposition, market opportunity, and growth strategy.
• Network with industry professionals and attend investor conferences to create opportunities for introductions.
• Ensure your financial projections and valuation are realistic and well-supported by data.

Securing venture capital can be transformative for a business, but it also means relinquishing some control to investors. It is crucial to align with investors who share your vision and can add strategic value beyond just capital.

2. Crowdfunding

Crowdfunding leverages online platforms to raise small amounts of money from a large number of people. This approach not only generates funds but also builds a community of supporters and advocates for your product or service.

• Choose the right crowdfunding platform that suits your business type and goals.
• Create a captivating campaign with clear descriptions, engaging visuals, and a compelling story.
• Offer attractive rewards or incentives to encourage contributions.
• Promote your campaign through social media, email marketing, and PR efforts to reach a wider audience.

An example of a successful crowdfunding campaign is the Pebble smartwatch. By effectively leveraging Kickstarter, Pebble raised over $10 million from backers, far exceeding their initial goal. This success story demonstrates how crowdfunding can validate a product and generate excitement.

3. Pitching to Angel Investors

Angel investors are typically wealthy individuals who provide capital for startups in exchange for ownership equity or convertible debt. They often invest during the early stages and can provide valuable mentorship and networks.

• Research potential angel investors who have a track record of investing in your industry.
• Craft a compelling and concise pitch that clearly communicates your business model, market potential, and financial needs.
• Build a strong relationship by demonstrating your dedication, transparency, and willingness to accept feedback.
• Highlight the unique aspects of your business and its growth prospects to stand out.

Working with angel investors can provide not just initial funding but also critical guidance and insights, helping to navigate the challenges of early-stage growth.

Securing funding is a pivotal milestone in the entrepreneurial journey. Understanding and effectively implementing these fundraising strategies can provide the necessary resources for your business to thrive. Whether through venture capital, crowdfunding, or angel investors, each method offers unique advantages and challenges. Careful preparation, strategic networking, and effective communication of your business value can significantly enhance your chances of success. By leveraging these fundraising strategies thoughtfully, you can propel your business toward sustained growth and innovation.

Tracking these metrics periodically enables a company to assess its financial health comprehensively. It provides a roadmap for where adjustments are necessary, where performance is strong, and where opportunities for growth may be pursued. Regular evaluation ensures that financial strategies are meeting the company’s objectives and facilitates proactive decision-making for sustained financial success.

Summary of Key Points

Starting a clothing startup involves meticulous financial planning to ensure long-term success. This section summarizes the significant steps discussed in the article and highlights their importance in your business journey.

Importance of Financial Planning

Implementing each step of financial planning can significantly increase the chances of success for your clothing startup. Here are the key actions you should consider:

• Developing a comprehensive business plan with clear objectives
• Conducting thorough market research to understand your target audience
• Creating detailed financial projections, including income statements, balance sheets, and cash flow statements
• Securing adequate funding through investors, loans, or personal savings
• Monitoring financial performance regularly and adjusting plans as needed

Each of these actions plays a crucial role in developing and maintaining a viable business. Ensuring that you have a clear and efficient financial plan will help you navigate the challenges of the clothing industry and enhance your startup’s chances of thriving.

Detailed Financial Projections

Financial projections form the backbone of your financial planning. They offer a roadmap of your business’s expected financial performance. These projections should include several key elements:

• Income Statements: Projections of your revenues, expenses, and profitability over time
• Balance Sheets: A snapshot of your startup’s assets, liabilities, and equity
• Cash Flow Statements: Forecasts of inflows and outflows of cash to ensure liquidity

These financial documents are essential tools for tracking progress, identifying potential financial shortfalls, and making informed business decisions. Keeping these projections up-to-date and reviewing them regularly allows for proactive financial management.

Steps to Secure Funding

Funding is critical to launching and scaling your startup. Consider the following steps to secure the necessary resources:

• Identifying and approaching potential investors with a compelling pitch deck
• Exploring various loan options from financial institutions
• Utilizing personal savings or bootstrapping to maintain control and equity

Each funding method has its own set of benefits and drawbacks, so it is important to evaluate which option suits your business needs best. Building strong relationships with investors and financial institutions can provide ongoing support and investment as your business grows.

In conclusion, successful financial planning requires a well-rounded approach, focusing on comprehensive business plans, detailed financial projections, and adequate funding. Implementing these strategies will establish a solid foundation for your clothing startup and increase its likelihood of success in the competitive market. Now, it is time to take these insights and apply them to your business endeavors.

Frequently Asked Questions

Our Frequently Asked Questions (FAQ) section aims to address the most common queries from our users. To enhance readability, we have organized the questions and answers into a bulleted list format. Each question is presented in bold, followed by concise, yet comprehensive answers. For further reading on specific topics, you will find direct links to relevant sections of our articles.

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Estate Planning Guide and Checklist for 2024

Key takeaways.

• Common estate planning documents are wills, trusts, powers of attorney, and living wills.
• Everyone can benefit from having a will, no matter how small their estate or simple their wishes.
• Online estate planning services offer basic packages for less than $200.
• Estate planning attorneys can cost several hundred dollars per hour.
• Estate plans must be updated after significant life events.

Why you can trust us

Our Reviews Team consists of trained lawyers who have spent hundreds of hours researching estate planning and using the services we recommend. We only recommend services we find to be helpful and accurate. To develop our reviews and guidance, we:

• Spent 300 hours researching and using online estate planning services
• Consulted with legal experts, probate attorneys, and financial planners to learn the best practices in estate planning
• Went behind the paywall to gain firsthand experience with five of the top online will creation services to review and compare them with each other
• Read hundreds of customer reviews on trusted third-party websites, such as Better Business Bureau (BBB) and Trustpilot

What is estate planning?

Organizing your affairs in preparation for the end of your life is an important task, and estate planning is an ongoing process that includes much more than writing a will. This type of planning helps determine who can make decisions on your behalf, who takes care of your dependents, and how to avoid unnecessary taxes and waiting periods.

Estate planning covers any decisions regarding money, property, medical care, dependent care, and other matters that can arise when a person dies.

The biggest benefit of estate planning is peace of mind—you’ll know your wishes will be fulfilled for the benefit of your loved ones. At the very least, everyone should have a simple estate plan in place.

Elements of estate planning

Most of this process consists of creating and finalizing estate planning documents, such as wills, trusts, powers of attorney, and living wills. You can be as detailed as you want. Some people even include a letter of instruction with their estate to walk their family members through the documents.

A will, formally called a “ last will and testament ,” is a legal document stating how you want your executor (the person legally obligated to administer your estate) to distribute your assets when you die.

Dying without a will is known as dying “intestate,” which means state law will dictate what happens with your estate.

Probate refers to the process of distributing your estate after you’ve died. Your estate will go through the probate process whether you die with or without a will, but having a will ensures your executor honors your wishes. Going through probate court without a will is more time consuming and expensive, with the money coming out of your estate first.

If you already know where you want your assets to go, it’s easy to make a will without a lawyer . Online will services offer interactive questionnaires to help you create a legally binding will specific to your state.

A trust is a legal contract that allows another person (the “trustee”) to hold property for you (the “grantor”). This is typically so the beneficiaries (individuals or institutions who stand to inherit something) can use the property at some point in the future. You can place money, physical assets, or anything else of value in a trust.

Trusts are also helpful to hold property when beneficiaries are minor children who are not yet fit to handle their full inheritance. In that situation, the property will stay in the trust until the beneficiaries reach a certain age.

Property is also distributed faster in a trust because you avoid a lengthy probate court process, so it’s sometimes preferred for that reason.

Living trust vs. testamentary trust

You can create a living trust , also called an inter vivos trust, to hold property both before and after your death.

A testamentary trust is a type of trust that a will creates, so it only becomes effective after the grantor’s death.

The difference between these two kinds of trusts is that a living trust is effective while the grantor is alive, and a testamentary trust only becomes effective after the grantor’s death.

Revocable vs. irrevocable living trusts

A revocable living trust is one where the grantor retains the right to modify, amend, revoke, or terminate the trust. In an irrevocable living trust, the grantor is not allowed to make changes to the trust, but some states may allow the trustee to transfer property in and out of an irrevocable trust with permission from the trust’s beneficiaries.

A revocable trust becomes irrevocable when the grantor dies, since they can no longer make changes to it. Some people choose to place their assets in a revocable trust rather than only using a will. Upon the grantor’s death, the executor distributes assets in a trust faster because they don’t have to go through probate.

Helpful hint: Trusts are not just for wealthy people. Anyone who wants their property to go to their relatives in a quick and easy manner can create a trust. For example, parents of young children may put property in a trust specifically designated to fund a child’s education.

Power of attorney

Power of attorney (POA) refers to the authority you give someone else to make legal, financial, or medical decisions on your behalf. These documents are commonly included in online estate planning service packages.

The person to whom you grant power of attorney is called your “agent.” You identify this person in a document that only takes effect when you are considered unable to act on your own behalf, or you can grant someone POA for a specific purpose, such as purchasing a vehicle for you.

If you become unable to manage your own legal or financial affairs and you have not designated an agent to act on your behalf, a court may appoint one for you. Each state has its own laws on POAs, but the general types to be aware of include (but are not limited to) durable, limited, and financial.

A durable power of attorney means your agent can continue to act on your behalf even when your situation changes, such as if you become ill and are unable to make decisions. It can grant broad authority or be restricted to a specific purpose.

Helpful hint: Some states allow “springing” durable POAs, which means the POA only takes effect when you are deemed incapacitated. This is useful if you don’t want to give someone else decision-making authority right away, but want protection if you ever need someone to advocate on your behalf.

A limited power of attorney gives the agent authority to make decisions for a specific purpose, or for a limited period of time. In contrast, a general POA gives the agent broad authority to act.

A financial power of attorney gives the agent authority to manage your financial affairs. You can make this effective immediately or at the time of an event, like a sudden incapacitating illness or death.

Health care decisions

Health care is one of the most common aspects of estate planning. You want someone you trust to help ensure your wishes are respected if you become unable to advocate for yourself. Living wills, health care proxies, and advance health care directives are tools you can use to protect yourself in the future.

Living wills

A living will states your preferences regarding health care planning, such as whether you want life-extending treatment, how you want to manage long-term care, what procedures you do or do not want, and other end-of-life matters.

Health care proxies

A health care proxy is a durable POA specifically for medical treatment—you appoint someone to make decisions on your behalf when you are deemed unable to do so by a medical professional.

Advance health care directives

Advance directives is an umbrella term that can refer to any document regarding future medical decision-making. It can refer to a living will, health care proxy, or other legal document.

One document to include with your advance directive is a HIPAA authorization. HIPAA stands for Health Insurance Portability and Accountability Act (1996). 1 This federal law protects your medical records by requiring a signed authorization form before you grant access to someone other than yourself. Having a signed authorization for your agent ensures they can access your medical records when the directive takes effect.

Tax planning documents

Taxes can take an alarming percentage of what you leave to your beneficiaries, but you can limit what taxes your estate pays in a few ways. Each state has its own tax laws, so your obligation will depend on where you live. While financial and tax planners are best equipped to advise you on these matters, you should consider a few types of taxes when organizing your affairs: estate, inheritance, and gift taxes.

According to the IRS, an estate tax applies to estates valued more than a certain threshold at the time of death. 2 You calculate the tax by:

• Adding the fair market value of everything a person owns
• Taking out deductions
• Adding the value of gifts made during the person’s lifetime
• Taking out any credits

If the estate value is above $13.61 million (as of 2024), the estate pays a tax to the federal government.

Inheritance tax

Only six states impose inheritance taxes:

• Pennsylvania

While estate taxes are owed to the federal government, inheritance taxes are owed to the state government. Additionally, while estate taxes are paid directly from the estate itself, inheritance taxes are paid by the heir or beneficiaries based on what they received in probate.

These taxes do not apply to surviving spouses or to payouts from life insurance policies. Instead, inheritance taxes usually only apply to more distant relatives and heirs. It’s unlikely this tax affects you, but it’s good to be aware of it if you live in one of the six states that apply it.

Many people choose to make gifts during their lifetime to reduce the value of their estate when they die. According to the IRS, gifting can take different forms : selling something for less than its full value, transferring the right to use income from property, or transferring money or property without expecting to receive the full value in return. 3 Usually, the person giving the gift owes the tax, but other arrangements are possible with the advice of a tax professional.

Estate planning checklist 2024

The best way to approach estate planning for the first time is to make a checklist for yourself. Everyone has unique needs, and an estate planning attorney may be helpful if your needs are complex. Before making the choice whether to hire an attorney or do it yourself, these are general steps you can take to get started.

☐ Take an inventory

Write down everything you own of value that you can think of. This may seem overwhelming, but keeping a running list of assets is worth the time to make sure nothing important is left out. Make sure to consider both tangible and intangible assets. Tangible assets are:

• Other physical items of value

Intangible assets are:

• Bank accounts
• Retirement accounts, like 401(k)s or IRAs
• Life insurance plans
• Financial elements, like bonds or annuities
• Other nonphysical items

Listing liabilities, like mortgages, lines of credit, and other debt, is a good idea as well. That’s because certain debts must be paid—even after death. In that case, it will come out of your estate.

☐ List your family members

The purpose of listing your family members is to account for the needs of immediate family and dependents. Your will and life insurance policies are the primary ways to plan for the needs of your surviving spouse and make guardianship designations for children and other dependents. Many people also make arrangements for pets.

☐ Choose which directives you want in place

The more you plan ahead, the fewer decisions you’ll have to make during an already stressful time. The tools discussed in this article (such as living wills, powers of attorney, and trusts) make navigating illness and other end-of-life matters easier because you’ll have a plan for most scenarios. Decide which tools you want in place and how to set them up.

Once you know which directives you want to include in your life plan, talk to anyone you are considering naming as an agent. You’ll want to be sure they are willing to act if needed. You should also consider naming secondary agents if the first person is unavailable when the directive takes effect.

☐ Designate your beneficiaries

A beneficiary is a person or institution inheriting a piece of your estate, such as money, physical property, or control of or interest in a business.

You should name your beneficiaries on your bank accounts, retirement accounts, and life insurance policies. If you name beneficiaries to those accounts in your will, make sure the names match to avoid any confusion.

Choose backup beneficiaries for your assets if a person is unavailable or dies before your estate distribution. You can also name a beneficiary in a “residuary” clause in your will. This person will inherit anything left over after your estate distribution.

Helpful hint: This is a good time to check the named beneficiaries on all of your accounts to make sure they are updated. For example, if you are married for the second time, and your first spouse is still named as a beneficiary of a bank account, you can change it to your current spouse to avoid conflict in the future.

☐ Look up your state’s laws

States have different laws regarding what happens when a person dies. To ensure you have optimal asset protection, check your state’s probate and estate or inheritance tax laws . If you believe an estate or inheritance tax may apply in your state, contact a professional to help you reduce your tax burden as much as possible.

☐ Choose a law firm or online service

Now that you have a clear picture of your estate and who should receive it, you can decide whether an online estate planning service is right for you.

If you aren’t leaving behind any dependents and you have a good idea of how you want to distribute your estate, you can easily find an online legal service to get you started with estate planning documents and help you create a will online. Many services include living wills and POAs, as well as the option for attorney advice.

If you have dependents who will need care after you’ve died, you want to disinherit a family member, or you’re generally having trouble deciding how to divide your estate, you have two options. The first is to use an online estate planning service and opt for the package that includes attorney assistance. Services will typically charge an annual fee to have access to an attorney. Still, this fee is likely to be less than paying for a private attorney.

Our top choices for estate planning services offer basic will packages starting at $39.99. But you can get a package that includes attorney assistance, as well as additional estate planning documents, for around $249. Estate planning attorneys will either offer services for a flat fee or charge several hundred dollars per hour to work with you.

If you have more complex needs, you may want to contact a law firm specializing in estate administration and planning. Many attorneys offer free consultations to help you find the best fit.

After estate planning

Once you’ve finalized all the necessary documents and the originals are in one safe space, remember to keep them updated.

We spoke with Tim Hurban , Esq., an estate planning attorney licensed in Georgia and Michigan with more than 12 years of experience, about how often and when you should update your estate planning documents. He advised “updating your will and other estate planning documents . . . based on individual circumstances and life events.” Specifically, Hurban told us you should review and update these documents in situations such as changes in:

• Family structure (marriage, divorce, children, grandchildren)
• Assets and liabilities (property, business, financial circumstances)
• Laws (tax, inheritance)
• Personal wishes
• Health care preferences

Typically you should revisit your estate plans every three to five years—even without major life changes. If you create your documents using an online will maker service, many services offer free, unlimited changes for at least the first 30 days after purchase. With services that offer a membership, you’ll generally be able to make unlimited updates to your estate documents, so long as you pay the monthly or annual subscription. The Reviews Team chose Trust & Will as the “Editor’s Pick” in our roundup of the best online will makers of 2024 because of their helpful guidance and ongoing updates, a service that costs $199.99.

You can supplement the benefits of estate planning by using other tools to plan for your future. NCOA’s Age Well Planner gives personalized guidance on financial, health, and other decisions.

Frequently asked questions

Estate planning is not only about your peace of mind—it gives your loved ones guidance on how to move forward after you’re gone. It also plans for the care of individuals or animals who depend on you. Effective estate planning can also minimize the tax burden and probate costs that would typically deplete your estate.

The biggest mistake you can make in estate planning is failing to have a plan at all. A simple will is better than no plan—even if your situation is complicated. Other common mistakes are not properly executing estate planning documents, not providing for future care of dependents, and not expressing wishes for end-of-life care.

Not necessarily. Many small or straightforward estates can be managed using a low-cost online service. These services sometimes provide the option of consulting with an attorney for an additional fee. For very large or complex estates, consulting a specialized attorney or tax professional is a good idea.

Absolutely not! Everyone benefits from estate planning. In fact, failing to plan can lead to lengthy court processes and high probate fees, which affect small estates to a greater degree than large ones. Planning ahead allows your loved ones to keep as much of your estate as possible by avoiding unnecessary costs or taxes.

Have questions about this review? Email us at [email protected] .

• Centers for Disease Control and Prevention. Health Insurance Portability and Accountability Act of 1996 (HIPAA). Found on the internet at https://www.cdc.gov/phlp/publications/topic/hipaa.html
• IRS.gov. Estate Tax. Found on the internet at https://www.irs.gov/businesses/small-businesses-self-employed/estate-tax
• IRS.gov. Frequently Asked Questions on Gift Taxes. Found on the internet at https://www.irs.gov/businesses/small-businesses-self-employed/frequently-asked-questions-on-gift-taxes

Why ESG investing is key to securing your financial future

• By Digital Financier
• Aug 28, 2024

In a world where change is the only constant, how we invest is also evolving . Once a niche strategy, environmental, social and governance (ESG) investing is now a driving force in finance, reshaping how individuals and institutions approach their portfolios. With global issues like climate change, social inequality and corporate responsibility taking center stage, ESG investing offers a powerful way to align your financial goals with your values. If you want to build wealth while making a positive impact, understanding the rise of ESG investing is essential.

What is ESG investing?

Before diving into the importance of ESG investing, it’s essential to understand what it entails. ESG investing involves selecting investments based on environmental, social and governance factors in addition to traditional financial metrics. This approach considers how companies manage their impact on the environment, how they treat their employees and communities and how they are governed in terms of transparency, ethics and accountability.

In other words, “ESG investing primarily aims to integrate green and socially responsible factors into a portfolio to generate long-term positive impact,” Andrew Pickett, attorney at Andrew Pickett Law based in Melbourne, Florida, told Forbes .

For example, an ESG investor might choose to invest in a company that prioritizes renewable energy, supports fair labor practices and maintains a diverse and independent board of directors. Conversely, they might avoid companies involved in fossil fuels, poor labor conditions or questionable governance practices. The goal is to invest in companies that are not only profitable but also responsible and sustainable.

The financial case for ESG investing

One of the most compelling reasons for the growing importance of ESG investing is the financial performance of ESG-focused investments. Studies have shown that companies with strong ESG practices tend to perform better in the long run. They are often more resilient to economic downturns, less likely to be involved in scandals and more capable of adapting to regulatory changes.

Investors are increasingly recognizing that ESG factors can be material to a company’s financial performance. For instance, companies that reduce their carbon footprint may face lower regulatory risks and operational costs. Those that promote diversity and inclusion may benefit from a more innovative and engaged workforce. Companies with strong governance practices are less likely to face costly legal issues or reputational damage.

Moreover, as consumer preferences shift towards sustainability and ethical practices, companies that align with these values are likely to capture a larger market share. This alignment can drive long-term growth and profitability, making ESG investing not just a moral choice but a financially sound one.

How ESG investing aligns with your personal values

Another reason for the growing importance of ESG investing is the alignment it offers with personal values. More than ever, investors are seeking to put their money where their values are. Whether it’s protecting the environment, promoting social justice or advocating for corporate transparency, ESG investing allows individuals to support causes they care about while growing their wealth.

This alignment can be particularly powerful for younger generations, who are often more conscious of the social and environmental impact of their decisions. Millennials and Gen Z investors are driving the demand for sustainable investments; as their wealth grows, so does the influence of ESG factors in the investment landscape.

For many, the idea of investing in a company that contributes to climate change or exploits workers is unacceptable, regardless of the potential financial return. ESG investing offers a way to avoid such conflicts and invest in a future that aligns with their vision of a better world.

The role of ESG in risk management

Risk management is a critical aspect of investing, and ESG factors play a significant role in identifying and mitigating risks. Companies that ignore environmental, social and governance issues may face a range of risks, from regulatory fines to reputational damage and even operational disruptions.

For example, a company with poor environmental practices may be more likely to face lawsuits or regulatory penalties, while a company with poor governance may be more prone to scandals or fraud. By incorporating ESG factors into their investment decisions, investors can identify potential risks early and avoid companies that may be vulnerable to these issues.

Moreover, ESG investing can help investors build more resilient portfolios. In times of crisis, companies with strong ESG practices are often better equipped to navigate challenges and maintain stability. This resilience can be particularly important in today’s volatile and uncertain global environment.

The impact of ESG investing on the broader market

As the importance of ESG investing continues to grow, its impact on the broader market is becoming increasingly evident. Investors are not only influencing the behavior of individual companies but also shaping the direction of entire industries.

For example, the rise of ESG investing has led to increased pressure on companies to reduce their carbon emissions, improve labor practices and enhance corporate transparency. This pressure is driving significant changes in how businesses operate, from the adoption of renewable energy sources to the implementation of more robust governance frameworks.

Moreover, ESG investing is encouraging innovation and the development of new industries, such as clean energy and sustainable agriculture. By directing capital towards companies and projects that are addressing global challenges, ESG investors are helping to accelerate the transition to a more sustainable and equitable economy.

Challenges and criticisms of ESG investing

While the benefits of ESG investing are clear, it’s important to acknowledge the challenges and criticisms associated with this approach. One of the primary challenges is the lack of standardization in ESG metrics and reporting. With no universally accepted criteria for what constitutes good ESG performance, it can be difficult for investors to compare companies and make informed decisions.

Additionally, there is ongoing debate about the effectiveness of ESG investing in driving real change. Critics argue that some companies may engage in “greenwashing,” or making misleading claims about their ESG practices to attract investors. This highlights the need for greater transparency and accountability in the ESG space.

Despite these challenges, the growing importance of ESG investing is undeniable. As the field continues to evolve, it is likely that we will see more standardized metrics, improved reporting and greater scrutiny of companies’ ESG practices.

Making ESG investing a part of your financial future

The growing importance of ESG investing reflects a broader shift in how we think about finance and the role of businesses in society. ESG investing offers a way to align your financial goals with your personal values, manage risks more effectively and contribute to a more sustainable and equitable world.

As you consider your financial future, incorporating ESG factors into your investment strategy can help you achieve both your financial and ethical goals. Whether you’re just starting your investment journey or looking to refine your portfolio, ESG investing is a powerful tool for building a better future for yourself and the world around you.

Investing is not just about growing wealth; it’s about shaping the world we live in. By choosing ESG investing, you can play a part in creating a more sustainable and just future while also securing your financial success .

This story was edited by Andrea Plaid and created using AI technology.

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This Is How Much You Should Have Saved for Retirement by Age 50

Many people dream of a relaxing retirement with travel, hobbies, and spending time with family. But turning that dream into a reality requires careful financial planning. It isn’t odd for those planning for retirement to look for specific benchmarks, such as how much they should have saved at 50.

While reaching a specific savings goal by 50 is a critical benchmark for a secure retirement for many, factors like health, lifestyle choices, and debt can significantly impact this target.

We don’t recommend throwing benchmarks out the window completely, though. However, this guideline should be a starting point. Considering other factors is vital for saving enough for  your  retirement, specifically.

Let’s explore how to adjust this one-size-fits-all savings target into a customized retirement plan.

Importance of Saving by 50

Saving for retirement by 50 is a vital step towards financial security. Saving early is important, as it allows you to harness the power of compound interest. Your money grows not just on its initial value but also on the accumulated interest over time. The earlier you start saving, the more money you’ll have to snowball.

That said, don’t feel like you’ve missed the bandwagon if you’re approaching 50. There is no better time to start saving than  today .

Build a Buffer

Reaching your savings goal by 50 also provides some peace of mind. Having a nice financial cushion helps reduce stress and allows you to be more flexible with retirement planning. If you surpass your goal, you can take on larger obstacles later with ease, too.

The Recommendation

We recommend saving 3 to 6 times your annual salary by 50 for most individuals, as we explained above. This target puts you on the “average person’s” retirement path. That said,  you  are not an “average person.” We recommend adjusting this goal to meet your needs for the best results.

Why a One-Size-Fits-All Goal Doesn’t Always Work

We all want a retirement goal that will be “enough.” Sadly, this goal is often harder to define than it is to reach! Individual circumstances heavily impact how much money you’ll need in retirement, and you may not even know these circumstances yet. Things can change a lot between 50 and retirement.

Many Factors

For instance, here are just some factors that affect retirement savings goals:

• Health:  Medical expenses can be costly and often increase as we age. Those with chronic health conditions or a family history of health problems may need more money to cover these costs. Of course, no one truly knows how healthy they will be after retirement.
• Lifestyle:  Do you want to travel extensively in retirement? Planning on retiring somewhere expensive? How you plan to live during retirement greatly impacts the amount of money you need.
• Debt: Carrying a significant mortgage or student loans into retirement reduces your monthly income and requires a larger savings base to compensate. Preferably, your debt should get paid down before retirement, but this isn’t always practical.
• Income Sources:  What sources of income will you have in retirement? Social Security benefits, pensions, and rental income can all supplement your savings. Factor these in to determine how much you need to have saved.
• Retirement Age:  If you plan on retiring earlier, you’ll need more money to cover your longer retirement period.
• Gender:  Women typically live longer than men. For this reason, women also need more money saved up for retirement. Their retirement will be longer, on average.

With all these factors in mind, let’s adjust the “3 to 6 times your income” goal to meet your specific situation.

Developing a Personalized Retirement Savings Plan

Now that you’ve considered what may affect your retirement needs, let’s examine how you can create a retirement plan that considers these factors.

Firstly, you’ll want to estimate your retirement income needs. Basically, you need to know how much money you’ll need by calculating your anticipated expenses. Consider how much money you need now. Then, factor in areas where you may save money (like the lack of a commute) and areas where you may spend more money (like travel).

Next, take this number and determine how much you need to save to reach your target. Consider your current income and what is doable, too. While extravagant travel during your golden years may seem fun, is it worth working an extra ten years?

Choosing the Right Place

You can maximize your retirement savings by choosing the proper “vehicle” for retirement. You can choose from an IRA, 401(k), and other investment accounts for tax advantages. Some companies also offer 401(k) matches, helping you save more quickly.

If all this feels overwhelming, you can consider talking to a financial advisor. These advisors help people retire daily, so they’re very good at offering personalized guidance.

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Thank you for reading! Have some feedback for us? Contact the 24/7 Wall St. editorial team .

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Understanding retirement calculators

How to use a retirement calculator, benefits of using a retirement calculator, accurate retirement calculator: plan your future with ease.

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• Retirement calculators provide a rough estimate of how your invested savings will grow over time.
• Our retirement calculator tracks your retirement savings progress and shows if you might fall short.
• Compare the estimated retirement funds with the amount you will need by your desired retirement age.

Taking advantage of the compound growth, tax advantages, and investment opportunities provided by the best retirement plans is the first step in building long-lasting wealth. But how do you know if you've contributed enough to support yourself during your golden years?

Business Insider's free retirement calculator offers free estimates to help you plan accordingly based on personal details like your life expectancy, income, expected expenses, and estimated retirement age.

Here is how you can use an online retirement calculator and the information you need to generate an accurate estimate. 

Retirement Calculator

Use insider’s calculator to see if you’re on your way to a comfortable retirement by answering a few questions about yourself, your savings, and how long you expect to keep working..

70% of pre-retirement income

*Need is based on covering 70% of your annual pre-retirement income and a life expectancy of 100 years.

What is a retirement calculator?

Retirement calculators are free online planning tools that estimate how your invested savings will grow based on personal and economic factors. 

"If you start investing in your retirement plans in your early 20s, the more likely you'll have a larger pool of money to support you in retirement than if you start saving and contributing to retirement accounts later in life," says Chloe Wolhforth, financial planner and senior managing director at Angeles Investments . 

Business Insider's retirement calculator, above, is designed to track your savings progress with detailed retirement projections. It's based on the idea that Americans generally spend less as they age and can sustain a 30- to 40-year retirement on 70% of their pre-retirement income. 

The calculator generates two important numbers:

• The amount you will have by your desired retirement age. By providing your current savings rate and retirement account balances, the retirement calculator can estimate how much money you'll have in savings or investments by retirement. 
• The amount you will need by your desired retirement age. Using your current income and expected salary increases, the retirement calculator can estimate how much money you'll need in savings or investments by retirement. 

How much you'll need to retire may be more or less than the 70% rule of thumb, depending on your lifestyle. For a more accurate estimate of how much you can expect to spend in retirement, consult a financial advisor . 

Why you need a retirement calculator

The best retirement calculators estimate how much you need to save for your future using personal and financial information. A general rule of thumb is that the earlier you start saving, the better.

Investing your savings and accumulating compound interest is the best way to grow long-term wealth. Now is the time to start if you're not already contributing to a retirement savings plan like a 401(k) or IRA. 

Inflation is considered when calculating retirement savings. But remember, a retirement calculator can't predict the future, and the actual inflation rates may vary. It can't predict market crashes, failed investments, or future financial hardships. It is only one of many financial planning tools you need to ensure a comfortable retirement. 

Input your personal and financial information

For the retirement calculator, we define a comfortable retirement as living on 70% of your pre-retirement income. However, the calculator is customizable. If you're able, incorporate as many specific details as possible. 

Here's what you'll need to input:

• Personal information: Current age and the age at which you expect to retire. 
• Current retirement balance: The total retirement savings across all your accounts, including 401(k)s and IRAs .
• Current household income: Your annual gross income (the amount you earn before taxes).
• Rate of savings: How much money you save toward retirement each month. You can enter this as a dollar amount or a percentage of your income.

The following inputs are pre-filled, but you can change some to customize your retirement calculation further.

• Expected annual salary increases: How much do you expect your salary to increase each year? The calculator's default is 2%.
• Anticipated monthly spending in retirement: We assume you'll spend 70% of your pre-retirement income (the amount you're projected to earn right before you retire), but you can change that number if you expect to spend more or less.
• Life expectancy: How long do you expect to live? The default calculation uses a life expectancy of 100 years.
• Investment returns: We assume your savings are invested and earn a 5% annual rate of return. If your retirement savings aren't invested, you may be missing out on earnings through capitalizing on compound interest. 

Analyze the results of the retirement calculator

Don't be discouraged if the retirement calculator shows you fall short of your financial target. There's still time to adjust your savings rate or investment strategy to meet your goal. 

Increasing your income is one of the most effective ways to catch up on retirement savings. If you cannot score a raise in your current position, consider switching jobs for a higher salary or better benefits, such as a more generous 401(k) match, or investing in stocks and similar assets.

Other strategies you can consider are maxing out your 401(k), contributing to a Roth or traditional IRA , or working with a financial advisor to boost your savings further. 

"Investing is a critical part of growing wealth. It is important to invest savings that you have identified as long-term so your assets can grow over time," Wolhforth says. 

Above all, be flexible. As you approach retirement, consider taking a part-time job, waiting to claim Social Security benefits, downsizing your home, or relocating to a more affordable city. 

Using a retirement calculator to see where you stand provides several perks. Here are some of the benefits of retirement calculators:

• Snapshot of your future: A rough estimate of how much money you'll need to retire by a certain age is better than having no estimate.
• Identify shortfalls: The calculator shows if you might fall short of your financial goal, allowing you to plan for a higher savings rate or find supplementary income sources.  
• See your options: By adjusting the calculator's inputs — such as changing your savings rate or your planned retirement age — you can see how your overall plan is affected.

"Depending on when you want to retire, your employment, your tax status, and other considerations, a blend of multiple accounts may be suitable," says Jordan Gilberti, senior financial planner at Facet. 

FAQs about retirement calculators

The accuracy of a retirement calculator can vary, but it is always a rough estimate. Online calculators cannot predict economic shifts or financial hardships that may impact invested funds. Retirement calculators provide estimates based on your inputs, but their accuracy depends on the data you provide and the assumptions used. 

The information you need to use a retirement calculator includes details about your current savings, income, retirement age, expected expenses, and similar data. Retirement calculators also adjust estimations based on predicted inflation and compound growth. 

A retirement calculator can help you save more by revealing whether your current contributions and investment strategy are on track. Based on your estimated retirement age and preferred lifestyle, you can better gauge how long your savings will last. It helps to set realistic goals and adjust your retirement saving strategies accordingly. 

Many free retirement calculators are reliable financial planning tools using standard financial models. However, retirement calculators only provide estimates, so the generated rate of return may not always be accurate. If you're worried about coming short, consider consulting a financial advisor to help grow your retirement savings. 

You should use a retirement calculator on an annual basis or whenever your financial situation changes. It is a good idea to recalculate your estimated retirement savings if you change your salary deferral rate, have increased income, or are considering withdrawing from your retirement savings to afford other expenses. 

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Yahoo Finance

5 reasons insurance is important when financial planning, according to experts.

When you think about financial planning , odds are, you’re more focused on creating budgets and researching savings accounts. You’re probably thinking of how to invest, maybe for the first time ever, while feathering your financial nest and securing that egg through a robust retirement plan.

You might not be thinking of insurance — and nobody could blame you. Finding the right insurance plans may be an under-discussed aspect of financial planning, but it’s no less important than any of the other aspects that typically take the spotlight.

To help guide you through an understanding of how — and why — you should factor insurance into your financial plans , GOBankingRates caught up with some experts.

Learn More: Here’s the Salary Needed to Actually Take Home $100K in Every State

Try This: 7 Reasons You Must Speak To a Financial Advisor To Boost Your Savings in 2024

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Insurance Can Serve as a Buffer Against Financial Catastrophe

As senior vice president of operations at SmartFinancial , an insurance-comparison company, Michael Orefice thinks a lot about why people need good insurance. While acknowledging that insurance premiums do add up every month, he encouraged people to think of health insurance as a preventative tool for lowering medical costs in the long-run.

He said that many healthy people skip buying health insurance because they regard it as betting against themselves. However, even paragons of perfect health can be hit hard by a sudden accident or illness that lands them in the hospital or needing more long-term care.

“Without health insurance, one health setback can cause financial ruin in the form of medical bankruptcy,” he added.

Health insurance can make life-saving screenings for prostate cancer and mammograms more affordable; without insurance, these screenings can cost hundreds of dollars. But those hundreds of dollars are nothing compared to your life — or to the hundreds of thousands of dollars in medical costs.

Check Out: I’m a Self-Made Millionaire: 5 Stocks You Shouldn’t Sell

Having Insurance Can Support You as You Age

It’s no secret that a major component of financial planning involves thinking about the kind of life you want as you grow older. As your retirement years approach, health insurance becomes even more critical-especially if you’re forced to retire before you’re eligible for Medicare, according to Orefice.

“Not only are premiums more expensive as one ages, but health insurance becomes more critical to have because the alternative is to pay much more in out-of-pocket costs for care and prescription drugs-at staggering prices,” he said.

Car Insurance Can Potentially Save You From Bankruptcy

Car insurance isn’t only a legal requirement in nearly every state, it’s also essential to your financial security, Orefice said. While everyone wants to imagine that they’re a good driver, not everyone on the road can say the same — and whether you want to admit it or not, you have your own bad days.

“To take on the risk of having a collision with a newer car without car insurance in place is to gamble everything you have, especially if the accident is your fault,” he added.

Even if the accident isn’t your fault, you can get in some hot water if you’re caught driving while uninsured. Orefice warned that you’ll immediately be categorized as a high-risk driver, regardless of how pristine your driving record may be otherwise.

However, the blow to your wallet may be even worse than the rear-ending of your ego.

“If you get sued for the cost of an uninsured accident and the injuries to the driver and passengers, you may be forced to liquidate all your assets and your wages may be garnished. Consider the fact that a new car on the market may easily cost over $40,000,” Orefice said.

Term Life Insurance Can Help You During a Big Stage in Life

If there’s another seminal life moment that requires some financial planning, it’s becoming a new parent. That’s why Melanie Musson, insurance industry expert with InsuranceProviders.com, said that term life insurance is ideal for people who have significant debt and dependents.

“For example, most people have the most amount of debt when they’re new parents because they have recently purchased a house,” she said.  “They will have children depending on them for at least 18 more years. You can purchase a term life insurance policy that will provide for those expenses.”

Nursing Home and Long-Term Care Insurance Can Protect Assets

For many people, a huge part of successful financial planning means having assets to pass on to your family when you’re gone. Unfortunately, if you should find yourself needing long-term care or skilled nursing care, you can lose those assets — especially if you end up with an extended nursing home stay.

Musson shared that getting nursing home insurance can help provide a way of paying for your care while maintaining your assets. With proper planning and the right insurance, you’ll be able to achieve a life-long financial dream of making sure your loved ones are cared for, even when you’re not there.

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This article originally appeared on GOBankingRates.com : 5 Reasons Insurance Is Important When Financial Planning, According to Experts