Running a small business is not easy. You have to deal with various challenges, such as managing your cash flow, paying taxes, hiring employees, and more. But one of the most important aspects of running a successful business is financial planning. Financial planning is the process of setting goals, creating a budget, tracking your expenses, and saving for the future. It helps you to make informed decisions, avoid financial pitfalls, and achieve your business objectives.
But how do you do financial planning as a small business owner? Here are some tips that can help you get started:
1. Set SMART goals
The first step of financial planning is to set SMART goals. SMART stands for Specific, Measurable, Achievable, Relevant, and Time-bound. These are the criteria that make your goals clear, realistic, and trackable. For example, instead of saying “I want to increase my sales”, you can say “I want to increase my sales by 10% in the next quarter by launching a new marketing campaign”. This way, you can easily measure your progress and adjust your actions accordingly.
Setting SMART goals helps you to:
- Focus on what matters most for your business
- Motivate yourself and your team to work hard and smart
- Align your actions with your vision and mission
- Evaluate your performance and learn from your mistakes
- Celebrate your achievements and reward yourself
To set SMART goals, you need to:
- Brainstorm possible ideas for your goals based on your strengths, weaknesses, opportunities, and threats
- Prioritize the most important and urgent goals that will have the most impact on your business
- Write them down in a clear and concise manner using the SMART criteria
- Review them regularly and update them as needed
2. Create a realistic budget
The next step of financial planning is to create a realistic budget. A budget is a plan that shows how much money you expect to earn and spend in a given period. It helps you to allocate your resources wisely, control your costs, and monitor your cash flow. To create a budget, you need to estimate your income and expenses based on your past performance, current situation, and future projections. You also need to account for any seasonal fluctuations, unexpected events, or emergencies that may affect your finances.
Creating a realistic budget helps you to:
- Plan ahead for your income and expenses
- Track where your money is going and how much you are spending on each category
- Compare your actual results with your budgeted figures
- Identify any gaps or discrepancies between your income and expenses
- Adjust your spending habits or income sources accordingly
To create a realistic budget, you need to:
- Gather all the relevant information about your income and expenses from various sources, such as bank statements, invoices, receipts, etc.
- Categorize your income and expenses into fixed and variable costs, such as rent, utilities, supplies, salaries, taxes, etc.
- Estimate how much money you expect to earn and spend in each category based on historical data, market trends, or assumptions
- Record them in a spreadsheet or a software tool that can help you create and manage your budget
- Analyze them periodically and make any necessary changes
3. Track your expenses
The third step of financial planning is to track your expenses. Tracking your expenses means recording every penny that you spend on your business operations, such as rent, utilities, supplies, salaries, taxes, etc. It helps you to identify where your money is going, how much you are spending on each category, and where you can cut costs or optimize efficiency. You can use various tools to track your expenses, such as spreadsheets, accounting software, or mobile apps.
Tracking your expenses helps you to:
- Monitor your cash flow and avoid running out of money
- Reduce unnecessary or wasteful spending that can eat up your profits
- Optimize your resource allocation and improve your productivity
- Increase your profitability and grow your business
- Prepare for tax season and avoid penalties or audits
To track your expenses, you need to:
- Collect all the receipts or invoices that document your spending
- Enter them into a tool that can help you organize and categorize them
- Review them regularly and look for any patterns or anomalies
- Report them accurately and timely to avoid any errors or discrepancies
4. Save for the future
The fourth step of financial planning is to save for the future. Saving for the future means setting aside some money from your income for long-term goals, such as retirement, expansion, or contingency. It helps you to prepare for the unexpected, secure your financial stability, and grow your business in the long run. You can use various methods to save for the future, such as opening a savings account, investing in stocks or bonds, or creating a retirement plan.
Saving for the future helps you to:
- Protect yourself and your business from any unforeseen events or emergencies that may disrupt your operations or income
- Build a financial cushion that can help you cope with any downturns or challenges
- Invest in your business growth and development by expanding your market, product, or service offerings
- Retire comfortably and enjoy the fruits of your hard work
To save for the future, you need to:
- Determine how much money you need to save for your long-term goals based on your current situation and future expectations
- Choose a suitable method or vehicle that can help you save and grow your money, such as a savings account, a mutual fund, a stock portfolio, etc.
- Set a specific amount or percentage of your income that you will save every month or year
- Automate your savings by setting up a direct deposit or a recurring transfer from your checking account to your savings account
- Review your savings performance and adjust your strategy as needed
5. Review and revise
The fifth and final step of financial planning is to review and revise. Reviewing and revising means evaluating your financial performance regularly and making necessary changes to improve it. It helps you to stay on track with your goals, spot any problems or opportunities, and adapt to changing circumstances. You can review and revise your financial plan by comparing your actual results with your budgeted figures, analyzing your strengths and weaknesses, and updating your goals and strategies.
Reviewing and revising helps you to:
- Measure how well you are doing financially and how close you are to achieving your goals
- Learn from your successes and failures and identify what works and what doesn’t
- Improve your financial skills and knowledge by seeking feedback, advice, or guidance from experts or peers
- Change your financial plan as needed to reflect any new developments or situations that may affect your business
To review and revise your financial plan, you need to:
- Schedule a regular time to review your financial plan, such as monthly, quarterly, or annually
- Gather all the relevant data and information that can help you assess your financial performance, such as income statements, balance sheets, cash flow statements, etc.
- Compare them with your budgeted figures and look for any variances or deviations
- Explain the reasons behind the variances and determine if they are positive or negative
- Take corrective or preventive actions to address any issues or challenges
- Update your goals and strategies based on your current performance and future outlook
These are some of the financial planning tips that can help you run a small business successfully. By following these tips, you can manage your money better, avoid financial stress, and achieve your business dreams.
