Money Matters

Business financial planning: Key strategies for small businesses

When you set up a company you surely have a vision of what it will look like 10 years down the road. You know it will take careful investment and shipshape accounting to make that vision reality. There’s a term for that: financial planning.

Setting your company on the right path is not something you want to leave up to chance. You may have great faith in your product or service, and you may have proof that customers will be lining up.

But you can’t provide the best service if your company’s financial backbone is not properly in place. Financial planning and budgeting give you the structure to manage your resources effectively and keep the business ticking over.

You’ll learn how to build that plan, where to get the information it rests on, and which tools you can use for best results.

Here’s what we’ll cover:

What is business financial planning and why does it matter?

Business financial planning is the process of creating a detailed roadmap for managing a company’s finances. It helps you set financial goals, allocate resources, and plan for growth.

Typically, the plan covers a 3-5 year period, with projections for factors like income, expenses, and cash flow. The idea is to make sure your business remains financially healthy and on track to meet its long-term objectives. However, the plan also guides your teams’ day-to-day decisions.

One of the primary reasons financial planning is so important for small businesses is that it helps secure funding. Investors or lenders want to see a clear, strategic plan before they commit to your business.

A well-crafted financial plan demonstrates your understanding of the economic and business landscape affecting your venture. This builds trust with potential backers.

The goals outlined in your plan, such as projected revenues and profit margins, serve as tailored benchmarks to refer to when gauging your business’s performance.

One of the more important benchmarks is cash flow, because that’s the liquidity you need to cover operating expenses and handle unforeseen challenges. Attention to that goal helps you identify potential cash flow issues before they become serious problems.

Finally, business financial planning is invaluable for making decisions about investments and growth opportunities.

Overall, the plan—or more specifically your monitoring of it—allows you to adjust strategies when necessary, and avoid major disruptions to the mission.

Essential components of small business financial planning 

The financial statements you compile each month or quarter serve as the foundation for your financial plan. There are three core financial statements that every small business should create regularly: the income statement, the cash flow statement, and the balance sheet.

Each one offers a different perspective on your company’s financial position, and those are the insights you use to model the plan.

Two other major components of the plan are cost forecasts and break-even analysis, which draw more on external information.

Here’s how to use each report:

Income statement 

The income statement, also known as a Profit and Loss statement (P&L), provides a detailed overview of your business’s revenues, expenses, and bottom line over a specific period. In other words, is your business making money or running at a loss? Key components of the income statement include:

• Revenue: stats on the money you earn from sales inform your future plan by showing if your revenue targets are being met. You may decide to adjust your pricing strategy or rearrange the sales team.

• Cost of Goods Sold (COGS): these are the direct costs tied to producing your goods or services. Your ongoing COGS result tells you that it may be time to improve operational efficiency, negotiate supplier costs, or change your production methods to improve profit margins.

• Gross profit: this is your revenue minus the COGS figure. Gross profit helps inform future plans by indicating how much money is left to cover your operating expenses, allowing you to decide whether to focus on cost-cutting or increasing sales.

• Operating expenses: these are the day-to-day costs of running your business, like rent, utilities, and salaries for staff. Monitoring operating expenses helps you understand where you might be overspending and where you could potentially streamline costs to improve profitability in the future.

• Net profit: your bottom line—the final figure after all expenses are subtracted from revenue. A healthy net profit provides the baseline for reinvestment into growth or innovation efforts, the ultimate goal of your roadmap.

Cash flow statement

While gross profit indicates your business’s overall ability to generate income, the cash flow statement reveals whether you can meet immediate obligations.

This distinction is important because a business can be profitable on paper but still face financial strain if its cash flow is mismanaged. The cash flow statement is broken down into three main sections:

• Operating activities: this covers cash movements resulting from your daily operations, such as incoming cash from sales, or outgoing payments to suppliers. Positive cash flow is a sign that your future plan will work because you haven’t been running into cash shortages. Negative cash flow may indicate the need to adjust your pricing, payment terms, or cost structure to ensure long-term viability.

• Investment activities: this section reflects cash flow related to buying or selling assets, like equipment or property. Your financial plan needs to spell out whether you should expand your asset base or divest certain non-essential assets to free up cash.

• Financing activities: This tracks cash flow from loans, investments, or dividends. The way your business is financed dictates whether you need to secure additional capital to support growth or cover operational needs.

Balance sheet

The balance sheet provides a snapshot of your business’s financial position at a specific point in time, showing what the business owns (assets), owes (liabilities), and the owner’s equity stake. It’s built on the fundamental accounting equation: assets = liabilities + owner’s equity.

Here’s how these three components influence your plan:

• Assets: these are the resources your business owns, such as cash, inventory, equipment, and property. Taking stock of your assets helps you ensure that your business has enough resources to meet future obligations, invest in growth, or cover unexpected costs.

• Liabilities: these are the debts and obligations your business owes to others, such as loans, accounts payable, and other financial commitments. Planning for debt management is how you ensure the business doesn’t become over-leveraged, which could limit the resources you have for reinvestment or operational flexibility.

• Owner’s equity: this represents the owner’s investment in the business plus retained earnings (profits that have been reinvested into the company). It reflects the cumulative value that the business has built over time. It has less influence on the financial plan than the other components listed, but it’s capital that you can draw on to reinvest. For example, if you’re planning for new projects, owner’s equity is part of the resources you have available without resorting to external financing.

Expense forecasting

Looking at your current position is a great start, but you must also consider external factors that could affect the viability of your operation.

The most important of these are your costs, which you can divide roughly into predictable and unpredictable costs. You’ll want to break these down into three types: fixed, variable, and one-time expenses. Each type requires its own approach to forecasting:

• Fixed costs: these come under the “predictable” category because they remain largely constant regardless of your sales or business positioning. They include items like rent, salaries, and insurance. Fixed costs are the core foundation of your forecasting, as they provide a reliable baseline for budgeting. However, it’s important to periodically check whether these costs remain steady or flag potential increases due to factors like inflation or contractual adjustments.

• Variable costs: these unpredictable costs fluctuate based on your business activity. Typical examples are materials, shipping, and commissions. To predict variable costs, you can analyze historical data to identify patterns or trends and estimate how they may change as your business grows or scales.

• One-time expenses: irregular costs, such as equipment purchases or renovations are much harder to predict, though you can estimate a ball park figure based on your industry. It’s easy to look up the average lifetime of things like computers and vehicles.

The basic tools for expense forecasting include databases of industry standards or benchmarks, and your own historical data that may indicate trends in your capex investments.

However, always build in contingencies for unexpected costs, to mitigate risks within your estimates. Financial fluctuations are hard to quantify in advance, but one certainty is that they will happen.

Break-even analysis

Everyone goes into business knowing that it will take time to become profitable. But how long? A break-even analysis calculates the most likely moment based on your revenue projection and your cost analysis.

You then organize your sales strategy and staff with that goal in mind. You should regularly recalculate the break-even point to see how changes in cost structure or pricing will affect your ability to generate profits.

The basic formula for break-even analysis is:

Break-even point = fixed costs ÷ (Price per unit – Variable cost per unit)

For example, if your fixed costs are $10,000 per month, you sell products at $100 each, and each product costs $60 to make, your calculation would be:

$10,000 ÷ ($100 – $60) = 250 units

This means you’d need to sell 250 units each month to break even, covering all your expenses but not yet making a profit. Understanding your break-even point helps you set realistic sales targets, adjust pricing or costs as needed, and manage expectations around profitability. It also serves as a valuable tool for.

Here’s an at-a-glance rundown of these components:

Component	What it shows	Why it matters
IncomesStatement	Profitability over time	Tracks if business is making money
Cash flow statement	Money moving in and out	Ensures business can pay bills on time
Balance sheet	Assets, liabilities, equity	Shows overall financial position
Expense forecast	Anticipated costs	Helps budget and avoid surprises
Break-even analysis	Sales needed to cover costs	Determines when business becomes profitable

Step-by-step guide to create a business financial plan

A rough plan is better than none, and it gives you a blueprint that you can refine as you go along. The key is to break it down into manageable steps that aren’t necessarily laced with financial jargon.

Follow a structured process so that each goal is backed by appropriate monitoring and corrections.

Here’s how to approach it:

1. Set clear financial goals

Your financial goals should follow the SMART framework, meaning they should be Specific, Measurable, Achievable, Relevant, and Time-bound. Make sure they adhere to your overall business strategy. Here are some examples of typical small business goals written out with that structure:

• Increase revenue by 15% within 12 months

• Reduce overhead costs by 10% in the next quarter 

• Save $50,000 for expansion by the end of the fiscal year

Also consider the “how” behind each goal. For example, if you want to increase revenue, identify which areas of the business are best placed to achieve this. Then work out whether you should approach this through marketing, product development, or customer retention.

The point about being measurable is particularly important, because you will refer to the plan again and again. That’s how you see whether you are meeting expectations or need to make adjustments.

2. Estimate revenue and sales forecasts

If your business is already up and running, you have historical data hinting at past performance and trends. There’s no guarantee that the exact figures will be repeated, but it does give you a realistic projection of what future revenue is possible.
 
Similarly, you can review industry benchmarks and consult market research as a guide to the potential size of your market and where your business can feasibly fit into it.

A more scientific method is bottom-up forecasting. This involves estimating how many units you will sell and multiplying by the price per unit. It’s a granular approach that builds projections based on real operational metrics.

That is, unit sales per day, month, or season, weighed up against factors like market demand, customer behavior, and historical trends.

Top-down forecasting, in contrast, starts with an overall estimate of the market size and then calculates your share of that market to determine potential sales.
 
It’s a good idea to forecast according to multiple scenarios (e.g. conservative, moderate, and optimistic) so you can rapidly switch to the more credible estimate in case of uncertainties or changing external factors.

Additionally, adjust your projections based on seasonality or industry trends to make your estimates as realistic as possible.

3. Outline expense categories

Next, create a comprehensive list of your business’s expenses and costs. This helps you see where adjustments might be needed.

In addition to the fixed expenses, variable costs and one-time expenses mentioned above, you may also consider:

• Semi-variable expenses: costs that are not entirely fixed but are also not fully dependent on sales. Examples would be staff overtime or maintenance costs.

• Hidden costs: taxes, compliance fees, and wastage can often be overlooked but should be included in your financial projections.

For hidden costs there’s no alternative but to engage in some detailed groundwork. Consult with an accountant or tax professional to understand any overlooked tax obligations or upcoming changes in tax laws.

Regularly check for updates to legal requirements in your sector, such as industry-specific regulations, permits, or licensing costs. Identify wastage—such as inefficient processes, overstocking inventory, or underutilized resources—by tracking your operations closely, looking for spikes in inventory loss or energy usage.

Researching industry standards for expense ratios (for example, rent should typically be less than 10% of revenue for retail businesses) can help you benchmark your expenses and identify areas where adjustments might be necessary.

Refer to an essential guide to financial forecasts for strategies on predicting your expenses more accurately.

4. Develop cash flow projections

Create month-by-month cash flow projections for at least 12 months. The essential components of a cash flow projection include:

• Starting cash balance: the amount of cash you have on hand at the beginning of the month.

• Cash inflows: the expected incoming cash from sales, loans, or investments.

• Cash outflows: all expenses, including both fixed and variable costs.

• Ending cash balance: the remaining cash after all expenses have been paid.

Keep in mind that cash flow can be affected by seasonal fluctuations, delayed payments, or unexpected expenses. Stay prepared for possible challenges by maintaining adequate cash reserves for slower periods.

Also, aim to negotiate favorable payment terms with suppliers and customers. This promotes good cash flow because it ensures that you have a predictable schedule for incoming and outgoing payments.

5. Identify potential risks

Risk assessments put the spotlight on potential threats to your business, allowing you to prepare for them. Risks can be internal (e.g., loss of key employees) or external (e.g., economic downturns or supply chain disruptions).

While different risks denote different degrees of potential impact, the most important consideration is the likelihood that each one will happen.

Isolate high-impact risks so you can dedicate more time to thinking about mitigation strategies for them. Mitigation might take the form of contingency plans, an emergency fund or an insurance policy for certain assets.

Stress testing your financial projections against different risk scenarios will help you assess how resilient your business could be in the face of adversity.

6. Monitor and refine regularly

A financial plan is not set in stone; your business changes internally as you grow, and is subject to changing external conditions. So your plan should adapt accordingly. Pencil in the following checks and reviews:

• Monthly performance comparison: review actual financial performance against the projected goals.

• Quarterly snapshot analysis: run a deep dive analysis of core financial aspects, including revenue, expenses, and cash flow. Make adjustments as needed.

• Annual comprehensive update: At the end of each fiscal year, perform a thorough review of your financial plan to assess long-term progress and make necessary adjustments for the upcoming year.

Pro tip: set calendar reminders for regular financial plan reviews. Even a 30-minute monthly check-in can help keep your business on track.

How a business plan and financial plan work together

A business plan and financial plan are often discussed together because they serve complementary purposes in steering your business.

The business plan provides the overall strategy and roadmap—essentially answering the “what” and “why” of your business. It defines your mission, market positioning, and long-term objectives.

On the other hand, the financial plan translates this strategy into numbers, focusing on “how much” is needed to achieve those goals. That’s why our previous sections dealt with the information needed to manage resources, generate revenue, and control costs.

Although it’s more strategy-focused, the business plan still has direct financial implications.

Its four main components are:

• Market analysis–informing your revenue projections by helping you understand market size, competition, and customer demand.

• Marketing strategy–determining the marketing budget, which is a key investment component of your financial plan.

• Operations plan–defining your operational expenses, including staffing, inventory, and production costs.

• Management team–laying out salary expenses, another major part of your cost structure and cash flow projections.

Lenders and investors will examine both plans closely to ensure that your financial projections are realistic and supported by a sound business strategy.

Tools and tips for better business financial planning

Following the correct procedure helps to make sense out of all the elements needed for drafting a financial plan, but that’s only half the story.

This complex task becomes much more manageable and accurate if you use modern tools.

Here are the options available to small businesses:

Automated accounting solutions

Accounting software has evolved to streamline many of the time-consuming processes outlined above.

One of the most significant benefits is real-time access to the financial insights hidden in your documentation. This makes decision-making a breeze because the data involved is always up-to-date.

Most tools today can integrate with your other business systems, such as payroll, inventory management, or Customer Relationship Management (CRM) software. This helps with those instant updates, with no need for manual entry, but also ensures that the information is accurate.

These benefits are particularly apparent with recurring tasks like invoicing, expense tracking, and bank reconciliations.

All in all, automation means your systems are always ready to generate tax filings—again, accurately and on schedule.

When choosing accounting software, look for features that will further foster these benefits:

• Cloud-based access: allows you to access your financial data from anywhere, ensuring you always have the most current information.

• Automated bank feeds: help streamline the reconciliation process by automatically importing transactions from your bank accounts.

• Invoice generation and tracking: mean your accounts receivable system receives a steady stream of payments.

• Expense categorization: automates the process of organizing business expenses, making it easier to track spending and prepare for taxes.

• Report generation: allows you to configure reports for insights tailored to each challenge.

• Multi-user access with permission controls: allows you to collaborate with specific team members while keeping sensitive financial data secure.

Scenario planning software

An important subcategory among financial planning software is scenario planning tools. This creates “what-if” analyses and model the various outcomes that could occur in each case.

You can assess best-case, worst-case, and most-likely scenarios to better understand the potential impact of different decisions. For example, you might model the effect of a price change on sales or explore how an increase in operating costs would affect profitability.

In short, the software allows you to visualize the impact and consequences of different decisions.

Free and low-cost financial planning resources

For small businesses just starting or those with limited budgets, there are several free or low-cost resources that can help you improve and manage financial planning:

• Small Business Administration (SBA): offers tools, workshops, and resources to help small business owners with financial planning and management.

• SCORE Mentoring: provides free mentoring from experienced business professionals who can offer guidance on financial planning, strategy, and more.

• Small Business Development Centers (SBDCs): offer free consulting and low-cost training in areas like financial planning, funding, and growth strategies.

• Industry association resources: many industry-specific associations offer resources, webinars, and best practice guides related to financial planning. Search for associations relevant to your niche.

• Online financial planning templates: various websites offer downloadable templates for budgeting, cash flow projections, and other financial planning tools.

Building stability with financial planning and budgeting software

Modern financial planning and budgeting software has completely transformed the way businesses approach their financial management. Gone are the days of manually managing budgets and projections in basic spreadsheets.

Dedicated software tools take the complexity out of the process, turning financial planning into a strategic advantage rather than a tedious exercise.

If you’re looking to automate key tasks, integrate data for better insights, and keep track of financial health in real time, consider financial planning and budgeting software solutions from Sage that can grow with your business while providing the security and reliability you need.

FAQs about business financial planning

What if my small business has seasonal income, how will this affect financial planning?

Businesses with seasonal income should create monthly cash flow projections for at least 18 months, build larger cash reserves during peak periods, and consider complementary products or services to smooth revenue throughout the year.

When is it time to hire a financial advisor?

Consider hiring a financial advisor when your business is experiencing rapid growth, facing complex financial decisions, preparing for funding rounds, or when you find financial management is taking too much time away from running your core business.