Financial Planning & Budgeting
What it Means
Financial planning and budgeting involve the assessment of a small business's financial needs, forecasting future financial situations, and planning strategies to achieve business objectives.
Financial planning piece includes evaluating the business's current and future financial state by using current variables to predict future cash flows, asset values, and withdrawal plans.
Budgeting involves creating a plan to spend your business's money, mapping out your sales targets, overhead costs, and profitability.
Why it Matters
Business viability: Through financial planning, a small business can determine its profitability and and road map to long-term viability. It helps identify potential financial challenges and devise strategies to mitigate risks.
Funding and investment: Need a loan or investment? You'll need a financial plan for that. Financial planning provides clear, detailed information to investors about the business's financial status and the return on their investment.
Control pending: Budgeting helps a business allocate resources where they are most needed and stay on track. It aids in managing cash flow effectively, ensuring the business can cover all its expenses.
Evaluate performance: With a budget in place, a business can track its financial performance and make necessary adjustments to stay aligned with its financial objectives.
Suzie's Pies (a small bakery business) is planning its finances for the upcoming year. Here's how they may think about their financial plan and budget:
CEO Suzie forecasts the next three years of revenue by considering the sales of the previous years and market trends.
She then forecasts her operating costs (rent, utilties, wages, etc.) and also her capital costs, which include a plan to expand the kitchen.
Armed with her forecasted financials, she creates a detailed budget for next year as well as high level financial forecasts for all three years. Next year's budget includes details about the forecast sales, expenses, and margins.
Every quarter going forward, Suzie compares her actual financial results with her budgeted figures. She analyzes variances and makes adjustments as needed to stay on track or correct course.
Stack it - Resources & Tools
Financial Consultants: Hiring a financial consultant or a CPA to manage your business can be a great investment. They can offer expert advice on financial planning, budgeting, and taxes (structures, deductions, credits, etc.).