Financial Planning Tips For Small Business Owners

December 9, 2020

A financial plan is one component of an overall business plan. This living document serves as a critical guide throughout the duration of your business’ lifecycle—providing current and future projections of your company’s performance and illuminating exit strategies if needed.

Whether you have a budding startup or a thriving business, investing the time and energy into creating your financial plan is a vital step toward success.  

Do you need help planning out your financial future as a small business owner? 

Below, you’ll discover everything you need to know about proper small business financial planning. 

What Is the Purpose of a Financial Plan? 

A financial plan is an in-depth analysis of your current financial state. 

The goal is to round up all of the components of the business, keep a running tally (including revenue and expenses), and then extrapolate. In doing so, you can accurately plan for the future growth and set attainable financial goals. 

Although it is filled with your business’ numbers, a financial plan is not an accounting statement. They may have similar financial projections and records, but where they differ is their temporal perspective. Accounting takes a historical view of the company, whereas financial plan forecasts. According to Inc

“The most important reason to compile this financial forecast is for your own benefit, so you understand how you project your business will do. This is an ongoing, living document. It should be a guide to running your business.”

In the final analysis, financial planning for small businesses serves two primary roles:

Seeking Investment 

It takes a clear and thought-out plan to convince investors or lenders to risk their capital on your business. The financial plan must accurately describe your:

  • Present financial status (profit & loss) 
  • Top-down future projections (taking a macro perspective of your market and how much you can own)
  • Bottom-up future projections (line by line expenses by product revenue build)
  • Key assumptions

For investors, they’ll want to see the numbers of your current performance and whether or not those figures justify your growth projections. In addition, they’ll want to see profitable exit strategies in the case that the business does grow—and rapidly. 

For lenders, they’ll want proof that you have the liquidity and positive cash flow necessary to repay your loans as a small business owner. 

Guiding the Business

Your financial plan is a living document that your team can use and update to guide you toward your goals. Business consultant, Asha Mankowska writes: 

“It gives you direction and focus and speeds up your journey through all the necessary steps... it becomes easy for us to track our progress, review what goals have already been accomplished and what's still lying on the back burner, identify what changes should be made, and discuss what direction the business should be heading.”

By frequently updating it, you can produce a clear snapshot of the company’s financials. Those numbers can then be leveraged as a tool to help you decide how to allocate your cash between various parts of the business. For instance, the numbers may help you determine that you need to hire more employees, invest in a new product, or ramp up your marketing spend.

How to Write a Financial Plan

Organizing your finances is all a part of your business planning. The order in which you write the financial plan isn’t necessarily the order you’ll eventually compile and present it in. That said, by following these steps you can tailor one to your organization. The steps include: 

  1. Gather historical financials
  2. Understand your historical revenues and create a sales forecast
  3. Build an expense forecast and track business expenses
  4. Project net income
  5. Find where you break even
  6. Understand which levers you can pull to increase revenue and decrease expenses 

Step 1: Gather Historical Financials

It’s hard to project your financial future without the help of your previous historical performance. If you have no past data to go off of, you’re merely speculating. That’s fine if you’re a startup—everyone needs to start somewhere. However, if you’ve been in operation, you’ll need to gather your historical financials.   

Your financial statements can help you see how your business has developed and responded to changes in the market. That information can then be used to project future growth and your financial goals. 

Do you use financial and accounting software? It should be able to generate all of your financial statements. If not, you’ll need to handle all of that manually before you begin to forecast. Once those are accurate and updated, you’ll be prepared to move onto the next step.    

Step 2: Understand Your Historical Revenues and Create a Sales and Gross Profit Forecast

Investors and lenders alike will gauge your business growth by looking at your sales. The sales forecast often functions as the cornerstone of a financial plan, setting the expectations for expenses, profits, and growth. 

To paint a more accurate picture, it’s important to project sales over the course of a few years. According to angel investor, Tim Berry, “The sales forecast should show sales by month for the next 12 months—at least—and then by year for the following two to five years. Three years, total, is generally enough.”  

The spreadsheet should include the following blocks:

  • Unit sales forecast – Forecast your monthly sales broken down to the unit. A “unit” is just a stand in for whatever you’re selling (a good or service). An hour of work may be unit, or a single widget could be a unit.

  • Pricing – After you’ve projected unit sales for a year, you’ll also need to project prices.

  • Sales – This will be calculated by multiplying the units of different items by the estimated prices.

  • Unit costs – The cost of each unit needs to be multiplied by total units to estimate the direct costs, also known as the cost of goods sold (COGS).

Step 3: Build an Expense Forecast Across Fixed and Variable Costs

Next, you need to find out how much it will cost you to produce the sales that you forecasted. Your expense forecast will span fixed and variable costs, giving you a deeper understanding of your financial situation. 

Within your income statement you’ll need to ask three questions:

  • What is the cost of goods sold? – The direct cost to selling your product, typically in the form of acquiring or manufacturing them. It includes the labor costs, materials, and manufacturing expenses. 

  • What are the operating expenses (OPEX) – OPEX is the expenses that the business incurs during the course of daily operation. It includes equipment, rent, inventory, marketing, insurance, payroll, R&D, salaries, and travel. 

  • What are the other expenses – There are miscellaneous costs that might not fall into the other categories. For instance, you may need to pay interest, bank fees, or other random costs. 

Remember, much of this will be an educated guess, using your historical costs as a compass. You’ll have to speculate about various categories such as interest or income tax. 

Step 4: Project Net Income Based On the Sales Forecast and Expense Forecast

How much money is moving in and out of the business? What is your cash flow?  

This figure is estimated using sales forecasts, balance sheet items, and your expense forecast. However, if you don’t have a financial history, you can project a cash-flow statement breaking down the next 12 months. 

  • Gross sales is calculated by totaling all sale invoices and revenue transactions. 

  • Net income is calculated by subtracting the COGS, expenses, depreciation, amortization, and interest.  

If you’re making a cash-flow projection, it’s important you select a realistic ratio for how many of your invoices will be paid by cash in the 30-day periods. For instance, if you’re expecting to use all of that money to pay for expenses but only receive a percentage of cash invoices, you might find yourself in a cash bind. 

Step 5: Find Where You Break Even

Your break-even point is the stage at which your company’s revenues equals its cost. Once it surpasses that line, you enter profitability. If the revenue is beneath that point, then the company is operating at a loss. 

Break-even is when fixed costs = gross profit (i.e., sales – COGS). 


Once you’ve run the numbers, you may discover that you need to sell a lot more of your goods or services to reach break-even. If that’s the case, you’ll have to ask whether the current plan has set realistic goals, and whether you need to increase prices, cut costs, or make other changes. 

Step 6: Understand Which Levers You Can Pull To Increase Revenue and Decrease Expenses 

Business owners must always look for ways to increase profit margins. The first place many businesses attempt to address this is by lowering costs. But this isn’t the only recipe for success. 

These days, there are levers you can pull to increase revenue and decrease expenses: 

  • Pricing – Understanding when to increase or decrease prices by utilizing various payment terms and strategies can accelerate revenue accrual.

  • Cost of goods sold – Reducing the cost to make the product or sell the service, without sacrificing quality. 

  • Supply chain optimization – Decreasing the total number of touch points and optimizing inventory and distribution within the supply chain.

  • Operational expenses – Reducing or optimizing the cost-side expenses such as marketing acquisition, headcount, or travel. 

On top of this, there are other levers such as employee empowerment and retention, brand recognition, and operational excellence. 

Financial Planning Tips

Once you’ve built out a financial plan, the work isn’t done. Remember that the plan is a living document. This means it must be continually updated and reviewed. To that end, here are some tips for financial success.

Depending on the size of the business and fluctuations, consider reviewing every month or at least every quarter. That doesn't mean that you develop a new financial projection every month or every quarter. Instead you measure the budget against the actual numbers to see how far off you might've been in your planning, and then adjust as needed.

Like a scale, it must be carefully balanced by making little tweaks on one side or the other.  During your review, be sure to ask questions like: 

  • Do I need to expand?
  • Do I need to hire more?
  • Do I need new resources?
  • How will the plan impact cash flow? 
  • Will I require financing? 

Also, even the best planned budgets and financial plans often fail to account for unexpected events. Take COVID for example, a black swan event unlike anything in recent memory. 

Contingency planning helps prepare you for the worst-case scenarios. It’s a proactive strategy that helps you respond to a sudden market shock, ensuring your business’ continuity. Although you can’t plan for everything, it’s important that you:

  • List the key risks
  • Prioritize risks based on their potential impact
  • Create plans for each event
  • Share and maintain the plan among your team

Having the proper tools to manage company spend for small businesses (in real-time) is key to building contingency plans into financial planning models.

Plan For Financial Success, With Ramp

Building a financial plan is one of the most important things you can do to position your business for success. When done right, it will inform your business decisions and even entice outside investment. 

On top of that, it’s crucial that you’re monitoring your spend throughout the year. With the right corporate card, particularly one that comes with automated accounting and real-time expense monitoring built in, this becomes a much simpler task. 

Enter Ramp. Corporate cards for small businesses that help strengthen finances and plan for the future. With 1.5% cash back on all purchases and powerful automated finance software, Ramp is built with your financial success in mind. 

Want to manage the way you spend more effectively? Sign up for Ramp today. 


Inc. How to Write the Financial Section of a Business Plan.

Entrepreneur. Creating a Sales Forecast.

Harvard Business Review. How to Write a Winning Business Plan.

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