How To Write A Financial Plan: Components, Purpose & Benefits (2024)

Creating a financial plan is beneficial for any small business. The process lets you evaluate your current financial situation to establish goals that ensure your business is financially successful – whatever that looks like for you.

This guide covers the key components of a financial plan, when and how to create one, and who can help you pull the necessary information together.

What is a financial plan?

A financial plan details your current financial state and how you'll manage your financial resources to achieve your objectives. The document is an integral part of your overall business plan, ensuring your financial targets align with broader business goals. Financial planning is usually an annual activity undertaken with the help of a financial advisor.

What is the purpose of a financial plan?

A financial plan has many purposes:

• Provides a clear picture of the current financial position of your business. Shows you if there are sufficient resources to operate your business efficiently and effectively

• Outlines goals and projections to help you decide when to invest in growth versus saving for operational expenses

• Includes risk management plans if your business faces a hefty financial blow

• Develops strategies for growth or investment, including the resources you'll need and the decisions you'll make over the next financial year

• Prepares for sale or retirement with an exit strategy outlining the financial steps you'll take

When to create your financial plan

For new business owners, the best time to create a financial plan is once you’ve completed your business plan. The end of each financial year is a good opportunity to reassess your plan and check it still aligns with your business goals.

How to write a financial plan

When done well, a financial plan helps you set and achieve short and long-term goals, from reducing debt and avoiding cash flow problems to increasing your gross profit.

Follow these 10 steps to write a financial plan for your business:

1. Set financial goals

Before looking at any numbers, think about what you want to accomplish and what you'll need to achieve those goals. Think about all areas of your business – this way, you won't be too focused on one aspect.

2. Assess your balance sheet

Your balance sheet shows whether your business has enough assets to cover short and long-term liabilities at a specific point in time. This statement provides a good starting point for your financial plan and the projections you'll need to make.

3. Understand your break-even point

The goal for most small businesses is to turn a profit. To do that, you need to understand your break-even point. Completing a break-even analysis will reveal the minimum revenue your business must generate to cover your expenses.

4. Create a sales forecast

Extrapolate current and previous sales data to predict sales activity for the year ahead. Use your break-even point as a bottom line and consider internal and external factors that influence whether your sales forecast is realistic and achievable.

Some of these factors might be:

• Economic conditions

• Industry growth rates

• Fluctuations in operating costs

• Planned product or service launches

5. Forecast expenses and personnel costs

The next step is to forecast your personnel and operating costs. If you plan to launch a new product or hire more employees, those expenses will increase within the year. You’ll need to consider this when planning what financial targets you need to hit.

6. Create cash flow projections

How much money is coming in and going out of your business? With accurate cash flow statements, you can predict where cash is coming from and where it's going. With this information, you can forecast any quiet periods and ways to mitigate the impact on your financial plan.

7. Budget and plan for emergencies

Build a cash reserve into your financial plan specifically for unplanned expenses or financial emergencies. That way, you'll have the funds to cover the situation promptly – without derailing your other financial goals.

8. Implement your financial plan

It's time to put your plan into action. Follow the budget you've set and implement the strategies you've put to paper.

9. Actively monitor and analyse your business financials

How are your finances tracking compared with the targets you set at the beginning of this process? Regularly reviewing your progress will help you spot any issues or opportunities you may have missed in the planning stages.

10. Regularly adjust your financial plan

As demand and market conditions change, adjust your financial plan to ensure it stays relevant – and you stay on track towards achieving your financial goals.

What are the benefits of creating a financial plan?

There are various benefits of creating a financial plan, including:

Reach growth and investment goals

Good financial planning increases the likelihood that you'll achieve the targets and milestones you've set for your business. With a financial plan that maps out responsibilities and projected results, employees can see how they can help the business achieve its financial goals.

Improve cash flow management and profits

Part of creating a financial plan is knowing how much money goes in and out of your business – cash flow. Documenting this information will help you determine the amount of cash you need to cover your liabilities and where you can cut back on spending to keep cash flow positive.

Assist in effective risk management

When sales are down and times are tough, you need a comprehensive understanding of your financial situation to understand where to cut costs and optimise operations.

A financial plan involves an in-depth analysis of your income and expenses. It will help you build realistic budgets that allocate resources appropriately so that even during periods of uncertainty, you're in control of your finances.

Manage tax liabilities effectively

As you go through the financial planning process, you can utilise a range of tax planning strategies to manage your tax liabilities effectively and minimise the amount that you owe.

Facilitate exit or succession planning

Every business owner needs an exit strategy. Whether your plan is to sell, retire, pass ownership to a family member or simply ‘take a step back’ from daily management, a solid exit or succession plan may allow you to make money, limit losses or help your business carry on successfully after you leave. A financial plan will help you value your business so that you can prepare for and plan your exit strategy.

Build cash reserves

Using a financial plan, you can work towards putting aside money to cover the cost of sales and overhead costs should your business encounter financial difficulties.

Example of a financial plan

A financial plan typically contains the following components:

• Executive summary – a one or two page overview of your financial plan for your business, highlighting your current position, goals and strategies.

• Financial overview and projections – a summary of your current financial position and, based on that data, how you expect your business to perform over the next year.

• Key financial indicators and ratios – metrics and calculations that track, measure and analyse the performance and financial health of your business.

• Break-even analysis – the total units of product or dollars of revenue needed to cover your total costs.

• Financial statements – reports that show the financial activities and performance of your business, mainly cash flow statement, balance sheet, and income statement.

• Potential risks – the problems or scenarios that might cause your business to lose money.

• Funding requirements and strategies – an outline of future funding requirements, for example, a short-term loan, where the funding will come from, and where it’ll go.

Who can help create a financial plan?

While it’s possible to create a financial plan on your own, tapping into the expertise of a business financial advisor will ensure your plan covers all the essentials – and get you to your financial goals most efficiently.

Financial plan FAQs

What are the five common principles of a financial plan?

The five common principles of a financial plan are:

1. Budget and cash flow management

Design a budget that allocates financial resources efficiently and supports good cash flow management.

2. Saving and investing

Develop strategies for putting aside money for future use, and allocate funds to new investment opportunities.

3. Risk management and insurance

Identify potential financial risks and how you’ll protect your business or respond to them.

4. Tax planning

Take actions to minimise tax liability and maximise tax benefits.

5. Retirement and estate planning

Prepare for financial security during retirement or minimise tax liabilities and legal complications should you, unfortunately, pass away.

What are the three financial statements used in a business financial plan?

There are three primary financial documents used when creating a business financial plan. These are:

• Cash flow statement – shows where your business’ cash is coming from and where it’s going.

• Balance sheet – gives an overview of the value of your business’ assets, liabilities, and owner’s equity.

• Income statement – also known as a profit and loss statement, this statement provides details on your business’ income and expenses over a specific period and, with additional calculation, net profit.

Comprehensive financial planning with MYOB

As your business grows, the more complex your finances will become. With MYOB Business we have reporting and insights built into every package so you can keep track of your finances. With real-time access to your data, you'll have everything you or your advisor needs to get started with your financial plan. Start your free trial today.

Disclaimer: Information provided in this article is of a general nature and does not consider your personal situation. It does not constitute legal, financial, or other professional advice and should not be relied upon as a statement of law, policy or advice. You should consider whether this information is appropriate to your needs and, if necessary, seek independent advice.This information is only accurate at the time of publication. Although every effort has been made to verify the accuracy of the information contained on this webpage, MYOB disclaims, to the extent permitted by law, all liability for the information contained on this webpage or any loss or damage suffered by any person directly or indirectly through relying on this information.