Meet Sarah, a small business owner who runs a local bakery. Like many entrepreneurs, she juggles multiple tasks, from managing employees to serving customers to marketing her brand. Nonetheless, formulating a financial plan for her business has consistently remained a top priority for her.
Why is a financial plan so important? Simply put, it enables you to make more informed business decisions, evade financial setbacks, and eventually attain your objectives. Here are six steps you can take, like Sarah did, to create a financial plan for your small business:
- Set realistic financial goals: Start by defining what you want to achieve in the short and long term. Be specific, set measurable and realistic financial goals like reducing your expenses by 10% in the next year. For instance, Sarah’s goal was to increase her bakery’s revenue by 20% in the next quarter. She broke down her revenue goal into achievable steps and established a plan to reach each milestone.
- Track your income and expenses: Once Sarah had a clear idea of her financial goals, she began to track her income and expenses using accounting software and spreadsheets. This allowed her to categorize her transactions and better understand her business’s financial health. By reviewing her expenses, she realized she could cut costs by finding a cheaper supplier for her ingredients.
- Create a budget: Based on her income and expenses, Sarah then created a budget that outlined how much she could spend on each category. She made sure to include all her fixed and variable costs, such as rent, utilities, salaries, and marketing expenses. By doing so, Sarah gained more control over her finances and could identify areas where she could save money.
- Manage your cash flow: Cash flow management was key to keeping Sarah’s business afloat. She forecasted her cash flow and identified a potential gap that may arise. To manage this gap and improve her cash flow, she planned to offer discounts for early payments and negotiate better payment terms with suppliers.
- Monitor your financial performance: To stay on track, Sarah also regularly monitors her financial performance by reviewing her financial statements, such as her income statement and balance sheet, to identify trends or issues that require attention, like declining revenue or increasing expenses. She uses this information to make informed decisions about her business and take corrective actions when necessary.
- Plan for the future: Lastly, no one can predict the future, but you can prepare for it. Sarah created a contingency plan for unexpected events, such as a sudden drop in revenue or a key employee leaving. She also explored financing options that could help her grow her business without putting her finances at risk.
In conclusion, creating a financial plan is critical for small business success. By setting realistic goals, tracking income and expenses, creating a budget, managing cash flow, monitoring financial performance, and planning for the future, business owners can take control of their finances and achieve their goals. So, take the time to create a financial plan for your small business, and watch your business thrive like Sarah’s bakery!
Callistus Ekpenga is the Principal Consultant at CardinalOne Consulting. He is a management consultant with extensive experience in the financial, petroleum, and manufacturing sectors. He specializes in business strategy, finance, and operations management, and has expertise in helping businesses grow and improve their performance. Callistus has mentored, facilitated and provided consulting services on various business development programs for the World Bank, MasterCard Foundation, Fate Foundation, Bank of Industry (BOI) Nigeria and Enterprise Innovation Center of the Lagos Business School (LBS).