A Financial Plan Is Essential

For The Small Home Based Business

Every business needs a financial plan. Without a plan, how do you know where you are going … and how will you know when you have "arrived"?

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Welcome to Bookkeeping Essentials - The Plan!

Strategic management of your business will keep you focused on your vision and goals for your business.

I am using the term financial planning here in a broad way to include your business plan and objectives, your budgeting and forecasting.

So where do you start such an overwhelming task? ...

... Start at the beginning - develop your business plan first.

Once you have your business plan in place, you will need to develop a budget ... so you have a concrete, quantitative method of tracking your progress towards ... your overall financial plan for your business.

This section is entitled “The Plan” because it is going to discuss :

• financial planning from a strategic management point of view,
• how to create your business plan,
• how to develop your first budget (it’s not as hard as it sounds) and then
• finally how to monitor your financial plan.

Purpose of Financial Planning

Sometimes a picture can say more than words. I've put together a flowchart that depicts the purpose and objective of having a financial plan for your business. As your business grows, you will want to refer to this flowchart to make sure you haven't missed anything while developing and conceptualizing your plans.

The flowchart shows how your accounting systems and accounting information flows and pertains to financial planning.

In a small unincorporated business, your Board of Directors (BOD) will likely be your trusted advisors / mentors. Your "departments" will likely be outsourced to various professionals.

The big thing to notice is you are trying to define and communicate authority and responsibilities.

What you will find in "The Plan" section

Instructions on the practical side of making and montoring your business plans.

Just click on any underlined title of your choice and you'll go right to the page.

Capture your progress of the goals you have identified and set. Let your accounting system help YOU make informed business decisions.

Originally, I had planned to have you join me while I took you through the process I used to create a business plan for my small home based business.

But there is just so much information out there on how to do it ... and sites that have tools to help you build your financial plan ... so instead of following my original plan, I'm going to refer you to a great site ... or two.

Canada Business.ca has a free interactive business planner that you might consider using to get started. This site is hosted by the Government of Canada. I talk more about it here along with other government sites sponsored by the Australian and UK governments.

So for now all I'll share about my financial plans is my dream to have multiple sources of active and passive income (not putting all my eggs in one basket ... so to speak) ... this site being part of the dream. You see, I don't have a company pension plan. The long term goal is financial independence ... even without the luxury of a company pension plan.

Financial reporting is an essential planning tool that helps YOU mine your valuable small business information records.

Your accounting reports can help you make better business decisions ... if you spend some time planning your information needs properly.

You'll find four secrets to help you on your way.

Budgeting is one component of financial planning. It is easy to create a budget if you are systematic, logical, and thoughtful. For example, tie your budget into your business plan by putting numbers to your plans for the coming year.

To create your budget, follow these general guidelines.

1. Work on one account / category at a time from your income statement.
2. Keep notes on your assumptions. It will help when you have to try to figure out why you are out from your budget.
3. Budget at the level of detail you want to track and monitor. It may be different for each account / category.
4. Make sure you account for one time items as well as the ongoing items.
5. There is usually a lot of consistency from year to year, so look at last year's actual results to help you build this year's budget.

Once I've drawn up a budget, I like to review it and classify all the items as a way to set my priorities ... because I want and like to meet my financial planning goals. I reorganize expenses into discretionary (need to have) and non-discretionary (want or nice to have).

If you use QuickBooks and have at least one year's worth of data, QuickBooks can create a budget for you based on last year's actual results. You can then edit the information to reflect your goals for the coming year ... and adjust it for one time versus ongoing expenditures.

Budgeting gets easier the longer you do it ... so your first budget may take some time as you begin to quantify your vision into actual financial results, but each year you will get better at it and it won't take as long to develop.

Budgeting is creating amounts for each category of revenue and expense ... and then tracking your progress at meeting your budgeted amounts.

It is your short term plan on what you expect your financial results to be. On a regular basis, you review the differences to determine why you over or under spent within each category.

Forecasting is projecting into the future ... like running a "what if" scenario.

While my budget for the year remains static once I have finalized it , my forecasting is always changing.

I like to use the forecast so I can see the effect of changes I know are going to happen that are different from what I anticipated when I drew up my budget.

The more you budget, the easier it becomes each year to create a new budget ... especially if you have been forecasting on a regular basis.

Let's start by saying that your cash flow is different from your profit and loss. It's important to understand this difference.

Here is a cash flow calculator that pictorially shows you the difference between profit and cashflow. Their site says that it is a fact "many business failures are profitable when they go under."

The calculator allows you to input your numbers to receive a quick overview of your cash flow situation. Experiment so you can see and understand the effect the different factors have on your cash flow.

And because everyone is different ... here is another cash flow calculator that you may like better.

Here's a quick method to forecast your cash flow.

Use these reports to help you monitor your cash flow and meet your financial planning goals.

Improve your cash flow by using these cash flow tips. You'll find a few more cash flow tips here.

Five ways to improve your cash flow are:

1. cutting expenses in a way that will not affect the long term viability of your business;
2. improving on accounts receivable collections;
3. reducing your inventory;
4. setting pre-planned priorities on accounts payable payments (read more below on this); and
5. as a last resort (for me) securing a small business loan. I prefer to have all my financing well in place long before I ever need it, so I can manage it rather than have it manage me.

Setting Pre-planned Priorities on Accounts Payable Payments

The reason to pre-plan accounts payable priorities, as part of your financial plan, is so that you are not making bad decisions when you are in a crisis. You have thought out your financial plan when you were not stressed and you were thinking clearly.

Setting clearly laid out procedures will also help you reduce transactional costs. For example, tax compliance bills should receive different treatment than capital asset invoices, professional fees or utility services.

Timing your accounts payable payments is part of managing your cash flow to avoid cash crunches. Decide ahead of time who gets paid first ... and try to be consistent with each supplier. For example, here's one list that may suit your industry - Payroll and payroll taxes, sales and income tax installments, rent / mortgage payments, insurance premiums, utilities, and finally suppliers.

If you are short on cash when you sit down to pay your bills, consider making partial payments to your suppliers. That way everyone gets some payment and your credit rating stays intact.

... more cash in your pocket! :o)

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