Financial planning for your business is critical if you want to achieve your income goals.
Some small businesses just go from week to week hoping that they will have sufficient sales or provide services that will bring in suitable income. This hit and miss approach causes stress and all manner of problems.
A financial plan will establish financial goals, benchmarks and categories for the money you want to bring into your business. From that financial plan – or as part of it, you can create a cash flow forecast, which helps you manage your income and expenditure.
There are different ways to create a financial plan, and it doesn't have to be complicated. Here are two simple models you can choose from.
Start with the end in mind. Decide how much turnover you want to bring into the business next year. Remember this is only the gross revenue. Then look at your different revenue streams and assess how much turnover is required from each unit.
For example, if you have a mechanics workshop, one income stream could be performing warrants of fitness. Another could be fixing cars with problems and another could be regular contracts for maintenance.
Calculate how many hours you have available and how many jobs can be done in each hour. Estimate the number of jobs that can be performed in each category and the revenue they bring in. You may want to do this on a monthly basis then multiply out for your annual total.
Looking at these figures you then know how many clients or jobs you need to attract to reach your revenue goal.
This is similar to model A but starts with the revenue streams and time available first. This is useful if you are unsure how much revenue is possible for you to achieve.
Assess your revenue streams, your capacity, meaning the time it takes to serve a particular client or sell a particular product, and how much you charge for each transaction.
Using the mechanics example, you might estimate you could do 10 warrants a week at $50 each totaling $500 a week.
Then the regular maintenance contract might be for 10 hours a week at whatever charge you have agreed. The third income stream of fixing problem cars might fill 15 hours a week – potentially 5 clients and will add to your total tally.
You will assess what is an ideal revenue goal from this and also what is a likely revenue goal. Multiply it out to get your annual figures.
Using these figures you can then do a cash flow forecast, which takes into account income less expenditure, extrapolated into each calendar month. This basically means the cash coming in less the outgoings – fixed costs, operating costs, inventory, taxes etc.
It is an interesting exercise to do a cash flow forecast for each revenue stream as it will tell you which ones are the most profitable.
Financial planning can be as elaborate or as simple as you choose, but the most important thing is to establish clear financial targets for your business.
Join our mailing list to receive the latest news and updates from our team.
Don't worry, your information will not be shared.