As your business heads into 2023, now is the ideal time to review your financial processes from the prior year. How frequently did you receive financial reports? How many of your decisions were backed by financial data? How well did you safeguard your business against fraud? How often were there errors in your financial data? If your answers to these questions are less than ideal, it may be necessary to dedicate time to reviewing your financial plan.
A strong financial plan not only helps you feel confident in your business’ ability to achieve its objectives, but can allow you to know how to better allocate resources for performance and growth. Using a financial plan makes tracking spending and meeting financial obligations simpler. It also dictates how certain decisions will impact revenue and the instances that call for resorting to using reserve funds.
What Does a Financial Plan Include?
Though your specific plan will vary depending on industry and business size, a basic financial plan should include the components listed below.
Essential Financial Reports
Financial reports that every business should have include the income statement, the balance sheet, and a statement of cash flows. These statements together list all of the business’ assets, liabilities, costs, revenues, and cash flows from different areas of the business.
Financial Ratios
Financial ratios, in addition to financial statements, are used to judge the overall strength of a business. Ratios can also be used by auditors to gain insight into a company’s financial statements. They essentially serve as a key performance indicator; for example, it may not matter that your revenue is high if the ratio to your spending is close to one. Some common ratios to analyze include:
- Cash flow to debt
- Net profit margin
- Gross margin ratio
- Accounts receivable turnover
- Inventory turnover ratio
- Leads generated to closes
- Projections and Forecasts
Projections give you insight not only into current data, but to potential future scenarios. This allows you to make adjustments, optimize your strategies, and alter current processes and procedures as needed. If your business does not currently utilize forecasts, consider adding one or more of the following:
- Sales projections, which predict how much a business will sell in a specific period of time.
- Cash flow forecast, which dictates how much money a business expects to receive in and pay out over a given period of time. A typical cash flow forecast is built for a rolling 13-week period, allowing you to better manage liquidity.
- Income projections, which estimate the amount of money your business will make in a given period as well as its expenses. Often, these projections are rolled in with profit and loss statements.
Break-Even Analysis
Finding your break-even point allows you to prioritize functions within the company that will aid or hinder success, establish accurate operating costs, and evaluating the timing of your business’ cash flow. A break-even analysis provides an opportunity to verify that you aren’t paying for unnecessary expenses, and sets a specific number that you must hit to cover your expenses.
Employee Plan
Achieving organizational goals and making prudent business decision relies upon having the right employees in place to execute the work. An employee plan evaluates existing positions, analyzes hiring needs, and determines the resources available to make those hires. An employee plan can serve as a forecast, looking specifically at whether the cost of an additional hire will bring a satisfactory return on the investment.
The Bottom Line
The overall purpose of a financial plan is to create visibility surrounding your business, allowing you to better plan for future scenarios, make decisions, and meeting goals. Having a strong financial plan is a crucial part of achieving organizational goals; your goals may be the “what”, but the financial plan is the “how”. If you’re unsure of how to build a financial plan for the new year, or need more high-level oversight, contracting an outsourced accounting consultant is a great place to start. A fractional accountant can provide general business consulting and help you develop a plan centered around your goals. By using an outsourced firm, such as NOW CFO, you can receive expert help while saving on costs associated with full-time hires.
