Small Business Financial Planning

Been thinking about being your own boss lately? Feel like giving that ‘great high school plan’ a try? Starting a small business comes with its perks but demands an equal amount of your patience. The finances especially, could get the better of you, if you are unprepared. But take heart, we have just the thing for you: a crash course in small business financial planning! We’ll take you through all that you need to do before you start your own small business.

Ask yourself: Don’t overestimate and ask all the hard questions. How much can you pool in and how much will you need to borrow? Is your business cyclical or seasonal? Does it seem risky? Trust us, the banks will want to know. Your loan eligibility will depend on the answers.

Check personal finances: Prepare a worksheet of assets and liabilities. On the asset side, record details like cash at hand, savings, investments in stocks, bonds and real estate, life insurance policies, vehicles owned and other liquid assets you can think of. On the other, record your credit card debts, auto loans, real estate loans, insurance payments, taxes and other liabilities. The difference between the two will give you your net worth. This will come in handy while requesting a loan.

Prepare a family budget: Effective small business financial planning requires you to have a clear idea about your family’s annual expenditure. Prepare a budget that covers all the major expenses incurred and the income earned in the past year. Divide the expenses into fixed and flexible. Fixed expenses should cover such details as auto & insurance payment, mortgage or rent and taxes. Flexible expenses should cover all others such as clothing, entertainment, gas, repairs, gifts etc. Use this to make a survival plan for your family, in the event that your business does not make or loses money. To be on the safer side, save at least one fourth of your annual income and cut down on expenses that can be done away with.

Figure the costs of your venture: What is small business financial planning without a plan for your business? You need to calculate startup and operating costs. Ordinarily, start up cost comprises expenses on advertising, equipment, insurance, legal fees, licenses, remodeling, deposits and other one time expenses. Operating cost is what you need to run the business. You need to account for supplies, utilities, rent, wages, telecom bills and so on. Balanced against your net worth, the costs will give you an idea of how much you can finance yourself and how much will have to be borrowed. On an average, small businesses must have ready cash to meet with at least three weeks of operating costs.

Investigate financing options: The success of small business financial planning will lie in the sort of financing you finally opt for. You could borrow capital from banks, raise it through the stock market or opt for tradeable instruments like debentures. We recommend a mix, to help you leverage expenses and share risk.

Calculate break even: Once in the business, it is essential to know how much you need to sell before you cover all your costs. The formula to be employed is:

Total Fixed Costs/ (Price per Unit – Variable Cost per Unit) = Sales at Break Even Point

Calculating this beforehand can help you plan targets for sales.

Keep an eye on the cash: Prepare a cash flow statement to keep track of your financial strength. Maintain details of cash balance at the beginning of the month, all cash received and paid out during the month, and what your balance at the end of the month is. Such statements effectively capture lags in sales that you would have missed otherwise as well as help you find avenues to save.

Do an industry comparison: Look up some industry reports and compare your profits with others in the business, to know whether or not you need to buck up.

Can’t wait to start? Try or “201 great ideas for your small business” by Jane Applegate, available at for some neat ideas on starting your own small business. “Financing your own small business” by Art Dethomas available at could give you a useful insight into strategic financial planning for your business.

Small business financial planning can be a success only when you do a reality check on your finances and your business. Apart from making a good financial plan, research your industry, look out for competition, and explore cheap financing options. Plan well and stay ahead!