In-demand products and smart marketing are integral to the success of your online store, but the most successful business owners know if the math doesn't work, their business won't work. Thorough financial planning lays the foundation for growing a business that goes the distance.
In fact, our data shows high-growth stores, or businesses with outsized levels of year-over-year growth, are more likely than their peers to put together a financial plan. While this foresight can be invaluable further down the road, especially during times of economic uncertainty, every business owner can and should create a financial plan to help grow their business.
A detailed financial plan can reveal opportunities that other businesses might overlook, but it can also highlight potential limitations that can and should factor into a business’ growth plans.
Here, we’ll take a look at what financial planning entails and how it can help you grow your online business. We’ll examine exactly what financial planning is, how to go about conducting it, and other important considerations for merchants of all types and sizes.
Learn more: What Does It Really Cost to Start a Business?
What is financial planning?
Financial planning is the process of documenting a person’s or business’ current financial situation and identifying financial goals and how the person or business will achieve them.
A financial plan itself is a document that serves as a roadmap for a person’s or business’ financial growth. It shows where a person or company is currently, where they want to go, and how they intend to get there.
Some people mistake financial plans for budgets. However, the two terms are not interchangeable. Financial plans include budgets but also include other important information, like detailed, itemized breakdowns of a person’s or business’ assets, cash flow, income and revenue forecasts, typical expenditures, and other data that create an overall picture of an individual’s or business’ financial health.
Financial plans also typically include longer-term objectives, such as specific growth goals, as well as potential obstacles that must be overcome to achieve those goals.
Individual versus business financial plans
It’s worth noting that, while most financial plans include much of the same information, there are many differences between financial plans for individuals and for businesses. This is because an individual’s financial objectives are likely very different from those of a growing company.
For example, an individual’s financial plan will typically include a retirement plan, a strategy for making investments, and an estate plan. Similarly, an individual’s financial goals will more likely focus on achieving a minimum annual income, reducing their tax liabilities, and securing their estate for their children.
Conversely, a business’ financial plan is more likely to include goals such as hiring additional staff, purchasing additional inventory, diversifying into new product lines, and expanding to a brick-and-mortar location. These goals are radically different from those of our hypothetical individual above, which means an entirely different strategy—and financial plan—will be necessary to realize those objectives.
Does my business need a financial plan?
Not every business needs a financial plan—but every business can benefit from one.
Creating a financial plan forces you to consider not just where you are right now but also where you want to be and how you want to get there. Most businesses don’t grow accidentally; growth is usually the result of hard work. But without specific goals in mind, you could work hard and still fail to achieve your objectives because your efforts may not be focused on the things that can help grow your business.
For example, many online retailers aspire to open a brick-and-mortar location. But aspirations will only get you so far. By creating a solid financial plan with a specific, tangible goal—such as opening a physical location—you can calculate how much you’ll need to sell to meet your current financial obligations and establish the funds necessary to open that store.
The same principle applies to almost any growth goal for an online merchant. Launching a major marketing campaign, hiring additional staff, expanding into new product lines or service areas—all of these goals become much easier to visualize and achieve when you have a detailed plan of action to back them up.
How do I create a financial plan for my business?
If you’re considering applying for business financing, such as a loan, the lender will likely expect to see a detailed financial plan before making a decision. If this applies to you, it may be worth consulting a licensed financial professional before submitting any loan paperwork. However, you can also prepare your own financial plan to serve as a roadmap for success.
Regardless of the type of business you have (or plan to launch), there are three major components you’ll need to create a solid financial plan:
- A balance sheet
- A cash flow projection
- An income statement
Let’s take a look at each of these in turn.
In a financial plan for businesses, the balance sheet is a statement that outlines all of a business’ assets, liabilities, and any equity the owner holds.
For most merchants and business owners, assets typically fall into two categories: current and fixed. Current assets include the amount of cash a business has available as well as money owed to the business, such as outstanding invoices (also referred to as accounts receivable). Fixed assets are tangible things that a business owns, such as land, property, and equipment. There is a third category of assets known as intangible assets, which refers to copyrights, patents, and intellectual property.
Liabilities are debts that a business owes. This includes any money owed to entities such as suppliers and vendors, employee compensation, and, in some cases, unpaid tax obligations.
Equity is the value of your business’ assets after subtracting its liabilities. Business equity also includes shares or stock options, though this probably won’t apply for most merchants.
Cash flow projections
As its name implies, a cash flow projection is a forecast of how much money flows into and out of your business. Cash flow projections are one of the most reliable indicators of whether your business can afford to repay a loan, for example, so they’re a vital part of any financial plan.
This should not be confused with a cash flow statement. Cash flow projections focus exclusively on how much money is expected to come into and out of your business during a specific time period in the future. Conversely, cash flow statements focus exclusively on how much money actually moved into and out of your business during a specified time period in the past.
Cash flow projections typically focus on three main elements:
- Cash revenues
- Cash disbursements
- A reconciliation of cash revenues to cash disbursements
For most merchants, cash revenues mean how much money your business brings in on a monthly basis. Despite the potentially misleading name, cash revenues should include payments made to your business by credit or debit card, but only if those card payments are likely to be processed and deposited in your merchant account within the specified time period.
Cash disbursements are your monthly expenses. This should focus on regularly recurring expenses you pay most months, not one-off payments. This includes everything from lunches paid for with petty cash and office supplies to employee payroll costs and commercial rent (if applicable).
Reconciliations of cash revenues to cash disbursements are calculated by subtracting cash disbursements from cash revenues. This should include any balances left over from the previous month; this balance should be added to your cash revenues total.
An income statement is an itemized outline of a business’ expenses, revenues, and profits for a specified period.
Most established businesses create income statements either quarterly or annually, but many new businesses create income statements on a monthly basis. This is because it often can take time for these figures to stabilize as a business matures in its first year or so, and monthly statements offer a truer picture of a business’s financial health during that time.
Income statements typically include the following information:
- Revenue. The amount of money a business brings in based on goods sold or services provided.
- Expenses. This should include direct expenses, such as your salary, employee payroll, equipment costs, and materials, as well as general and administrative expenses, such as accounting fees, advertising costs, bank charges, insurance, and rent (if applicable).
- Total income. This is calculated as your revenue minus expenses before income taxes are subtracted.
- Income taxes. This includes both state and federal taxes.
- Net income. This is your total income once expenses and taxes have been subtracted.
How can financial planning help me achieve my goals?
As we mentioned earlier, preparing a financial plan can be a helpful tool in demonstrating your creditworthiness to prospective lenders when seeking business financing. But even if you’re not looking to take out a loan to grow your business, sound financial planning can still help you visualize the true financial health of your business and begin working toward tangible, specific growth goals.
Whether you’re hoping to diversify your business with new product lines, expand into a brick-and-mortar location, or hire additional staff, a solid financial plan can help you identify what’s realistic based on the historical performance of your business or projections based on actual data.
Many business owners fail to realize their goals because they don’t proactively prepare and plan to expand. Even businesses that are doing well can fall into the trap of waiting for growth to just “happen” when in reality it often takes a sustained, deliberate effort to grow a business. This is especially true in uncertain economic conditions.
Almost every business owner has experienced the anxiety that comes with preparing to expand and grow. But financial planning can be a shot in the arm that can give you the confidence you need to pursue opportunities you may not have considered otherwise.