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Many entrepreneurs dream of starting their own business, but without solid small business financial planning, these business ownership dreams will not become a reality. Financial planning for a small business means an entrepreneur puts on paper all the financial considerations of running a business.

Assess the Competition

To begin with, an entrepreneur needs to assess if there is a market for his or her small business. If there are already several competitors for the same customers, then the business might not be profitable and maybe a different market or different business venture needs to be considered.

Determine Your Business Startup amount

Next calculate how much the business startup is going to be and then how much money is going to be needed to keep the business going, or the operating costs. The business startup expenses are the one time expenditures to open the doors of a business. Operating costs are the ongoing costs of a business like the wages, utilities and rent. In order for a business to earn profits, a businessman must think ahead and plan a budget of expected costs for both business startup and operating costs. A good way to plan is to have two worksheets, one for business startup costs listing its expenses, and the other for operating costs listing all of expenses linked to those costs. Then total up the costs of each worksheet. For a good estimate of how much money will be needed to start a small business, total the start up costs and three months of operating costs. If the entrepreneur doesn’t have that amount of money on hand, he or she will have to start investigating other financial options.

Locate Financial Backing

Finding a loan means locating a small business loan from other individuals or a lending institution. If a small business owner needs a loan, he or she will need to prepare a formal financial plan before a bank or other lender will provide a loan.

Calculate Break Even Point

Another part of financial planning for a small business is to figure out what the break even point is, or when will a business start earning a profit. When expenses are lower than income, then the business is profitable. There is actually a formula to help figure this out.
Total Fixed Cost/ (Price Per Unit – Variable Cost per unit) = break even point sales

Knowing the point of profitability can help verify if the business will be a success.

Prepare a Cash Flow Statement

The last part of financial planning is to write out a cash flow statement. It is the hub to understanding a business’s financial health and controlling a business’s finances. A projected cash flow statement estimates how much money will come in and go out each month. It helps a business owner know where the money is or where it is going. A cash flow statement tracks the cash balance at the first of the month through the closing out of the month. It figures into the balance the money received and the money paid out. A business owner can see the amount of sales in relationship to the amount of expenses in a given month. This is useful in tracking a slackening in sales.

Owning a small business is not out of reach. However, a potential business owner must sit down and think through the small business financial planning implications very carefully. By doing so, the chances of the business being successful are much greater.