6 Steps to Develop a Financial Plan for Your Small Business

Preparing to start a business is like planning for a long road trip. You need a map, a route and, above all, you need to know your destination. When it comes to business, you need a financial plan. Sounds basic but it's easy to get lost without sound advice. In this article, we share six easy steps to create a financial plan for your small business.

Create a Financial Plan in 6 Steps

1. Open a business bank account and get a tax ID

It’s difficult enough to keep track of your personal expenses, and when you mix your business income with the money in your checking account, things can quickly get out of hand.

For this reason, we recommend you open a business account before opening your business to start with a clean slate. Then, apply for your Employee Identification Number (EIN), a.k.a., your business tax ID or ITIN. If you forget while operating as a corporation or partnership, you can get into a lot of trouble with the government.

2. Identify your funding sources

The second steps of your financial plan is identifying your funding sources. You’re going to need money to finance your startup, but what’s the best way to find it? There are actually multiple ways to finance your small business, and it depends on your personal style and how much money you’re currently worth. Here are a few popular ways entrepreneurs fund their startups:

• Self-Financing – This can be risky, but there are multiple ways to accomplish your financial goals on your own. Whether you tap into your money market accounts, make use of credit cards, or take out a bank loan, almost any aspiring entrepreneur can find a way to finance their business themselves.
• Friends & Family – Many entrepreneurs run into bad luck when trying to go it alone – let’s face it, life happens, and that savings account can suddenly empty out after an emergency. So, it’s not a bad idea to ask close friends and family for their help. In fact, you wouldn’t be alone; 68 percent of SMB owners have tapped into their immediate network to obtain funds. Just be confident it’ll work out, or else your personal relationships could suffer significantly.
• Venture Capital – VC firms invest directly in companies that are first starting out in exchange for equity stakes. If you choose this option, keep in mind that the competition in this market is high, and they tend to pick those companies that show the most growth potential.
• Small Business Administration Loans – These are commonly utilized loans that are offered by qualifying banks, nonprofit lenders, and credit unions. One popular loan is the 7(a) Loan Program, which offered an average of $337,730 per loan in 2012.

The above are just four ways to finance your business in its early stages.

3. Calculate expenses

What is the real cost of starting or operating a business? Total expenses can be easily underestimated at the beginning of a business, so make sure to itemize every single thing you might need to invest in when you first start out – after all, this can be revised later as your business finds its footing. Here are just a few of the expenses you’ll want to consider for your startup:

• Legal
• Insurance
• Payroll
• Office equipment
• Office supplies
• Rent/Deposit
• Web and logo design
• Pre-opening marketing

Once you have the numbers, add these to your assets and recurring costs that keep your business going, and you will have your startup cost. You can also check out the Wall Street Journal calculator that help get you on the right track.

4. Create price points and profit margins

Figure out how much you'd like to make in profits. Once you decide how much you'd like to make in profits, you'll have to create a price point for your product that covers the expenses incurred in making the product and gives you the profit margin you're looking for. Not sure how to price your products or services? Follow these simple tips. And don't forget to add taxes to the equation for an accurate number.

5. Build a budget

 Building a budget is the most essential step in creating your financial plan. Take a look at the expenses such as product equipment, utilities and other services you pay for in order to maintain the business. Insurance and rent are major expenses for many businesses as well. Keep the budget in an Excel or Google spreadsheet, and factor in other items such as savings and an emergency fund. As a business owner, you really don't know what to expect: in the beginning stages, you may spend more money than you might have anticipated. For this reason, it's really good to have a financial cushion to make sure that the business is covered. 

6. Factor in advertising and promotion

Advertising and promotion are essential for growing your company. Because of this, it's so crucial for a small business to allocated a budget to cover marketing expenses. Most small business owners underestimate the power of a marketing budget to run the right ads and get in front of the right people. Thankfully, sites like Facebook and Instagram have excellent advertising programs that aren't nearly as expensive as creating a TV commercial. They work in the favor of the startup companies. However, it's still important to know that you'll get much farther as a company if there is a specified monetary amount to cover effective advertising and marketing campaigns.  In the end, you have to plan for where you want to go. It's important to factor in sustainability and growth for the company. Once you do this, you'll have an easier time focusing on outsourcing, product creation, and customer engagement. Before you know it, your small business will be making big financial moves.

Alex Briggs is a contributing author for Wages & Benham.