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Financial planning 101

Financial planning is critical when it comes to managing a small business. While it paints a picture of your current financial situation, your financial goals and the strategies you’ve created to help achieve your goals, every business’s vision is different. If you don’t currently have a financial plan, now’s a great time to start. And if you do have a financial plan, now’s the time to review it and ensure you’re on the right track.

What is financial planning?

Financial planning is a long-term structured approach to help you reach your financial goals. It includes setting goals, setting budgets and spending within your means, preparing for emergencies, investing wisely, borrowing appropriately, managing taxes, accumulating funds for large purchases, estate planning, providing for comfortable retirement, and managing risk.

Why is financial planning important?

Financial planning is important because it requires you to evaluate your current financial position. It helps you see your assets and liabilities to determine your net worth; it enables you to assess your expenses and income to help you gauge your cash flow; and it’s essential for budgeting.

Creating a plan allows you to make the most of your assets and helps you plan not only for the present and immediate future but also for any retirement or succession goals. Here are some key steps to consider when creating a financial plan for your small business.

Step 1: Define your financial goals

Having defined financial goals is the key to your success. If you don’t know what you’re planning for, then managing your money to reach your financial goals will all be for naught. Ensure goals are well-defined and prioritized accordingly. Large financial goals should be broken down into more manageable chunks.

Step 2: Evaluate your money situation

Do you know how much money is sitting in an account or how much debt your business is carrying? It’s important to know your current situation. Gather your balance sheet and first determine your net worth. This means subtracting your liabilities (e.g., debt, loans, mortgages) from your assets (e.g., money in accounts, retirement or 401(k) accounts, home equity).

Step 3: Set a budget

Start by creating a budget that includes all business expenses, like rent, utilities, payroll, insurance, equipment or office supplies. This will help you evaluate where you need to curb spending or where you can afford to spend or save a little more.

Step 4: Create cash flow projections

You must understand how money flows in and out of your business to make informed decisions on when it’s best to spend or save. A cash flow projection breaks down your company’s income and expenses (or accounts receivable and accounts payable), so you can proactively identify potential risks (i.e., a customer not paying on time) before they happen.

Step 5: Outsource your taxes

Tax planning can be complicated for a small business owner, so it may be best to outsource your tax planning and preparation to a qualified accountant. Accounting and tax professionals know tax laws in your area and can help advise you on maximizing qualified business expenses and what to pay in estimated taxes, helping to reduce tax liabilities.

Step 6: Identify possible risks

Taking risks is part of a small business owner’s DNA. (You did start a business, after all.) But it’s also important to identify outside risks that could impact your business financially, such as a labor shortage, product or equipment malfunction, market competition, or even natural disasters or pandemics. When you have a plan for what to expect, you can plan your finances accordingly.

Step 7: Determine succession and exit plans

At some point in time, you may be ready to retire and hand over your business to a trusted partner or colleague. Or you may find yourself needing to sell or shut down your business. Either way, have a plan for each scenario so you’ll know your company’s worth when it’s time to move along.

Step 8: Consult a professional

Financial planning can be complex, and it’s often helpful to seek advice from a professional accountant or financial planner. They’ll help you develop a comprehensive financial plan specified to your business needs.

Financial planning is an ongoing process that requires careful attention and regular review. It’s recommended that small business owners review their plans at least every six months to make sure financial goals are being met. By developing—and sticking to—a solid financial plan, you’ll help ensure the long-term success of your business.

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