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Small business financial planning meeting

Financial Planning vs. Financial Projections: Making Them Work Together

Project your future, and plan accordingly. That’s our advice to all small business owners looking to turn their dreams into reality. Let’s get into how you can start today.

What are Small Business Financial Projections?

Small business financial projections are forward looking numbers that matter to you and your business. Ideally they’re long-term (2-5+ years), but you may want short term (<1 year) to get through hard times. Hopefully you projected how much money you could make from a certain number of sales before you ever opened your doors. If not, take a look at how to calculate your breakeven point.

Step one is knowing what you want. Examples include how much money small business owners take home, how much debt they owe, and how many locations they have.

Step two is defining what numbers impact what you want. In order to make more money, you either need more sales or fewer costs. If you want less debt, you have to focus cash flow on debt repayment, which may mean lowering your pay and living on less for a period of time. Looking to add locations? You need to know your bank’s financing criteria and covenants and how your balance sheet compares.

Step three is setting those numbers. Know your targets, and write them down. A written and routinely reviewed goal is much more likely to be achieved.

Example: A small business owner wants to take home $100k annually, up from $50k. Last year they had revenue of $500k, 60% gross profit, and fixed costs of $250k, resulting in $50k for the owner. Assuming fixed costs will increase by 10% inflation, the owner will need to grow sales by $125k to take home $100k this year. Now that they have their target number, they need to plan how they’ll do it.

What is a Small Business Financial Plan?

A small business financial plan is the culmination of your past, present, and future transactions. It lays out the specifics of how you’ll get what you want by evaluating what you’ve done up to this point.

Step one is knowing your past. Review your financial statements, tax returns, and industry trends.

Step two is knowing your present.  What things have changed in your life and business that need to be addressed?

Step three is thinking about your future. Tie in your financial projections, industry projections, and your own personal hopes and dreams. Is your industry dying and you need a way out? Is business booming and you hope to live a different lifestyle? Whatever it is, knowing where you came from and where you are now will help guide what may or may not be possible in the future.

Example: A small business owner wants to grow their annual revenue to $1 million. Reviewing their past financial statements, they’ve grown from $100k to $500k, but have stagnated over the last few years. They know their industry is growing, and it’s been easier to find talented staff. Personally, they’ve simplified their lifestyle so they’re able to take home less and make this work. They’ve projected how many people they’ll need to cover $1 million in revenue, and how many new customers they hope to receive from new marketing efforts. They’ve built a budget, which they’ll compare to actuals each month on their financial statements, and plan for 5 years of growth, culminating in sales of $1 million.

Which comes first, the Small Business Financial Projections or the Plan?

For most small business owners, the projection comes before the plan. Entrepreneurs are often looking ahead at what’s next, so projecting comes naturally. However, not all small business owners are alike, and some may need to start with the planning process, reviewing their past and present, before thinking about what that could mean for their future. Whichever way you start, the two should work in harmony and inform upon the other. The goal remains the same: getting what you want by thinking ahead.

Working with Haworth & Company, Ltd.

At Haworth & Company we deliver what small business owners need: accurate financial statements compiled monthly, and a trusted advisor you can call any time with your thoughts, hopes, and fears. You may not have anyone else in your life to share business secrets, talk about personal problems, or ask for advise, but you’ll always have us. We can help you analyze your financial statements and tax returns, as well as provide special statements like budget-to-actual, comparative, and 12-month rolling so you know your past and present. The future is up to you, but hopefully you’ll feel more confident knowing we’ll be with you ever step of the way. Please contact us today to start planning for your future.


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