Andrew Carnegie, famous steel industry entrepreneur, philanthropist, and one of America’s richest ever business people, coined the phrase,
“Take care of the pennies (dimes), and the pounds (dollars) will look after themselves.”
Translating to this, we accumulate capital when we don’t waste cash.
Carnegie’s net worth today would be US$372 billion, more than Elon Musk and Jeff Bezos combined, so he’s worth listening to, right?
Carnegie talked about business, which applies to yours as much as it did his.
You must start and live to a financial plan to accumulate your capital.
If you need clarification, I’ll explain the importance of financial planning for small businesses, crucial strategies, and how to implement them.
What is a financial plan for small businesses?
A small business financial plan outlines your business’s financial status, where it is today, and where you want it to be tomorrow using income statements, cash flow projections, and balance sheets to clarify 3 things:
- Your business start-up costs
- Your operating budget
- How it’ll make money
That’s what a financial plan does now; let’s look at why that’s important to your small business:
Why is a financial plan important to your small business?
Your financial plan provides an unbiased evaluation of your economic status. Giving you a crystal clear picture and illuminating the financial reality, enabling you to identify opportunities and avoid poor investments.
And that can help you 3 ways:
- A solid financial plan makes your business viable to investors by showing that it generates revenue and manages expenses.
- Tells you what financial resources you’ll need to reach your business goals.
- Enables you to make projections and informed decisions based on past and current trends.
- Helps make the most of your dollars, giving you the highest ROI.
No financial plan guarantees a prosperous outcome, but it can prepare you for what might lie ahead!
Understanding your business finances
Step one: understand how your finances work and record them. Sounds simple, and it is; you only need an Excel spreadsheet or pen and graph paper.
- Create 2 columns and track your income and expenses, also known as credits and debits.
- Next, create a budget to ensure what cash is coming in is more than what’s going out.
Bringing us to an essential part of your financial plan, understanding cash flow management, IE, where your cash comes from and where it goes. Once you have those figures, you can begin allocating your funds effectively.
Track your income and expenses
Do you record every business income and expenditure?
Probably not, right?
But you should because it’ll tell you where your money is going and identify areas where you can cut costs or increase revenue.
Both mean more money for you!
Tracking your income and expenses also ensures you have enough cash to meet your financial obligations.
How to track your expenses for free:
Use your Excel sheet with the credits and debit columns, and include each transaction’s name, date, and amount.
At the end of each month, auto-sum the credits and debits, then subtract one from the other, and bam, you’ll have a balance sheet that tells if you made a profit.
And once you know that, you can create a budget.
Create your budget
The balance sheet you made provides a snapshot of your business’s financial health. A budget is how you make it balance in your favor.
Your budget is a simple calculation that shows what you expect to earn and spend monthly. It shows if you’re making more than your spending and adjust if needed.
How a balance sheet works:
A balance sheet, by nature, always balances out and does so using this simple equation.
Liabilities + Equity = Your assets.
Your liabilities (debits) and equity (credits) must equal your assets (what you have left when you take your debits from your credits); if not, your business isn’t in profit.
Embrace cash flow management
Cash flow is the life and blood of every small business because everything depends on it to continue.
The cash flow term describes how money moves into and out of your business. And always distinguish cash flow from your debits and credits; I’ll explain:
Debits and credits include all invoices you’ve yet to pay or receive; cash flow only looks at what money is moving through your account over a set period
When you separate them, you ensure you`ve enough funds to cover your expenses and pay your bills on time before running out of money.
Income and expenses, spreadsheets/budgets, and cash flow management are essential to successful financial planning. Together, they empower you to make informed financial decisions, control your costs, and ensure your business`s financial stability.
Set your financial goals
Financial goals come in 2 forms, short and long-term, and both help you hit your targets.
Once you’ve set your goals, it’s essential to determine the funds needed to achieve them and prioritize which goals to tackle based on their importance.
Determine your short and long-term goals
Short-term goals are objectives you can achieve within a few years, like paying off debt, saving for an emergency fund, or increasing sales.
Long-term goals can take several years, like expanding your business, updating equipment, or saving for retirement.
Calculate the funds you need
Financial goals in hand, calculate how much cash you need to achieve them and whether you`ll need to begin saving or borrowing to reach them.
Prioritize your financial goals
You might have multiple financial goals, most people do.
The key to success is determining which to tackle first because prioritizing your goals helps you focus on the most critical objectives and ensures your progress toward your overall financial plan.
For example, paying off debt or establishing an emergency fund should prioritize expanding your business, especially if the debt affects your ability to meet your financial obligations.
Setting Financial Goals helps you determine your short-term and long-term objectives.
And by prioritizing them, you’ll focus on what’s essential and make steady progress toward achieving your financial objectives.
Developing your financial plan
Now you understand how business finances work and have your goals; you can develop your financial plan.
And whether your goals are to increase sales or decrease expenses, what you create next is your blueprint for achieving them.
Take steps to reach your financial goals
You’ve probably heard about or read James Clears’s best-selling book, Atomic Habits.
- The synopsis is how small changes/steps can help you achieve your goals by creating a compound effect.
Your financial plan also needs steps to ensure you reach your financial goals. First, put them in a logical order, beginning with baby steps, which will become small jumps, resulting in giant leaps.
For example, your goal is to increase sales. In that case, your steps include launching a marketing campaign, expanding your product line, or improving customer service.
Customize your financial plan
Customizing your financial plan is about designing it to suit your business needs and circumstances by considering your revenue, expenses, cash flow, and other factors unique to your business.
Tailoring your financial plan will give you the best possible road map for success.
Keep your financial plan simple and implement steps you can take and reach without over-stretching your finances.
Implement your Financial Plan
That’s all the talking done; now it’s time to act.
Pick a starting day, like the first of the month, and implement a system for monitoring and updating your debits and credits so you can adapt as and when needed.
Your financial plan research should have illuminated a few economic issues you could improve on or need to implement, such as changing your spending habits, increasing your revenue, or taking out a loan.
It doesn’t matter what actions you take; the key is sticking to them to achieve your financial goals and keep your business on track for success.
Monitor your progress
Monitoring your progress shows whether you´re on track to achieving your financial goals, enabling you to take action and change course if needed.
Regularly track your income and expenses, review your budget, and measure key performance indicators (KPIs).
Keep your focus
Staying focused involves creating a system to track your progress, seeking support from others, or gaining outside motivation.
And reward yourself at the end of each month for a job well done; it`s excellent for maintaining your focus.
Now’s the time to walk the walk.
You take control when you understand your finances, set goals, and develop and implement a plan.
And no one can do it for you, so don’t let financial planning become an afterthought.
Start the process today and take control of your finances because, as Dave Ramsey (American finance personality, radio show host, businessman, and author) says:
“You will either learn to manage money, or the lack of it will manage you.”