How to create a strategic financial plan for your business in 2024

What is a financial plan?

A financial plan maps out your business’s current situation and future goals. It’s a living document that usually projects income, expenses, assets, and debts within the context of a broader business plan.

Leaders ask themselves how the business will stack up in the next one, five, or even 10 years. The “plan” answers that question by outlining the company’s operational and financial objectives. It covers strategies for bringing in revenue, managing costs, and optimizing cash flow. It guides your company’s financial moves, helping you use resources wisely and make smart choices.

Colloquially, the “financial plan” is sometimes used interchangeably with the most recent budget or forecast.

Why finance teams need strategic financial plans

Here are the three main reasons why your finance team needs a strategic financial plan:

1. Improves budgeting and forecasting accuracy 

A thoughtful financial plan enhances the accuracy of budgeting and forecasting processes. Finance teams can use historical data, market trends, and company goals to create realistic projections. A good financial plan provides a top-down operational framework to explore various scenarios.

This accuracy helps allocate resources better and avoid overspending. A solid plan lets teams adjust forecasts with real-time data and respond quickly to market changes. It ensures budgets stay flexible and aligned with business goals throughout the year, creating more tactical and agile financial management.

2. Provides transparency and confidence for stakeholders

Transparent financial planning builds trust with stakeholders, including investors, board members, and employees. 

A well-crafted financial plan clearly communicates the company’s financial health, growth strategies, and potential risks. This transparency instills confidence in the organization’s financial management and decision-making processes. Stakeholders can easily understand the company’s financial direction, making them more likely to support strategic initiatives and invest in the company’s future.

3. Supports risk management 

Strategic financial plans are crucial tools for identifying and mitigating financial risks. Consider a software company planning to expand into a new market. Their financial plan might include scenario analysis for different adoption rates:

• Best case: 30% market penetration
• Base case: 15% market penetration
• Worst case: 5% market penetration

By forecasting these financial scenarios, the finance team can develop contingency plans for each. If the worst-case scenario unfolds, they might have pre-planned cost-cutting measures or alternative revenue streams ready to deploy. 

The financial plan might also earmark funds for cybersecurity insurance, recognizing the increasing risk of data breaches in the tech industry. By anticipating and planning for potential risks, the company strengthens its financial stability and resilience in the face of unforeseen challenges.

Common components of a financial plan

Here are the essential components of a financial plan:

Income statement

An income statement showcases your company’s profitability. It lists revenues, expenses, and profits over a specific period. Think of it as your business’s report card. It tells you if you’re making money or losing it.

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Balance sheet

Your balance sheet is a snapshot of your company’s financial position. It lists assets, liabilities, and equity at a specific point in time. Assets are what you own. Liabilities are what you owe. Equity is the difference between the two. That way, you understand your company’s net worth.

Cash flow statement

Cash is king in business. This statement tracks the flow of cash in and out of your company. It shows where your money comes from and where it goes. Understanding your cash flow helps you avoid liquidity problems. And it ensures you can pay bills and invest in growth opportunities.

Sales forecast

Predicting future sales is crucial for planning. Your sales forecast estimates revenue for the coming year or years based on historical data, market trends, seasonality, and growth plans. 

A realistic sales forecast forms the foundation of your entire financial plan. It gives you insights into: 

• How much revenue you can expect to generate in the future
• How actual sales compare to projected revenues
• Which lead types make the most significant impact on forecasts

Expense budget

This outlines your expected costs. It includes both fixed costs (like rent) and variable costs (like raw materials). A detailed expense budget helps control spending. It also identifies areas where you might cut costs to improve profitability.

Break-even analysis

This calculation shows how much you need to sell to cover all your costs. It’s the point where total revenue equals total expenses. Knowing your break-even point helps set realistic sales targets. It's also crucial for pricing strategies.

Funding requirements

If you need external funding, this section is critical. It outlines how much money you need and what you’ll use it for. This could include loans, investments, or grants. A clear funding plan shows investors or lenders that you’ve thought things through.

Steps to creating a financial plan for your business

Let’s walk through each step to creating a robust financial plan so you can confidently steer your business toward financial success and sustainable growth. These steps will help you build a roadmap that aligns your financial strategies with your business objectives.

1. Establish financial goals

Start by setting clear, measurable financial objectives for your business. These goals should align with your overall business strategy. For example, you might aim to increase revenue by 20% within the next fiscal year, reduce operational costs by 10%, or achieve a specific profit margin. 

Make your plans specific and realistic. Instead of a vague goal like “grow the business,” set a target like “Open two new retail locations by Q3.” Or, if you’re a SaaS company, you might aim to reduce customer churn rate from 5% to 3% within six months. 

Remember to set both short-term and long-term goals. This could include reaching $1 million in annual recurring revenue within 18 months or achieving a 15% market share in your industry within five years.

2. Track your cash flow

Start by creating a cash flow statement that tracks all money coming in and going out of your business. This includes revenue from sales, investments, and loans, as well as expenses like payroll, rent, and inventory purchases.

You can use cash flow management software to help visualize your cash flow. For instance, you might create a graph showing monthly income versus expenses. This can help you identify seasonal patterns or potential cash crunches. 

For example, if you’re a retail business, you might notice higher cash inflows during holiday seasons and plan accordingly. Or for a B2B service company, you might see that clients typically pay invoices 45 days after issuance, allowing you to adjust your cash management strategy.

3. Make and review your financial statements

Regularly create and analyze your key three financial statements: income statement, balance sheet, and cash flow statement. These documents provide a comprehensive view of your financial position.

For example, your income statement might reveal that while revenue is growing, profit margins are shrinking. This could prompt you to investigate ways to reduce costs or increase prices. Your balance sheet might show that your inventory levels are increasing faster than sales, suggesting a need to improve inventory management. 

Review these statements monthly or quarterly, comparing them to previous periods and your projections. This practice helps you spot trends and address issues promptly.

4. Make financial projections

Based on your historical data and market research, create projections for your future financial performance. This typically includes sales forecasts, expense projections, and cash flow predictions.

For instance, if you’re a software company planning to launch a new product, your projections might include estimated sales based on market research and your existing customer base. You’d also have project-related expenses like development costs, marketing spend, and additional support staff. Be sure to create multiple scenarios to plan for various outcomes. For example, you might project 10,000, 5,000, or 1,000 new customers in the first year of your new product launch.

5. Include a budget for unforeseen expenses 

Always allocate funds for unexpected costs. This could be for emergency repairs, sudden market changes, or opportunities that arise. For example, if you’re a manufacturing company, you might suddenly need to replace a critical piece of equipment. Or, as a service-based business, you might need to quickly hire temporary staff to handle an unexpected influx of projects. 

A good rule of thumb is to set aside 20-30% of your gross revenue for unforeseen expenses. Having this buffer can prevent these surprises from derailing your financial plan. It also provides flexibility to seize unexpected opportunities, like a chance to acquire a competitor or invest in a new technology that could significantly boost efficiency.

6. Conduct break-even analysis

Determine the point at which your revenue will cover all your costs. This helps you understand how much you need to sell to start making a profit.

For instance, if you’re a coffee shop, calculate your fixed costs (rent, equipment leases, base salaries) and variable costs per unit (coffee beans, milk, cups for each drink sold). If your fixed monthly costs are $5,000 and you make $2 profit per drink, you’d need to sell 2,500 drinks to break even. 

This analysis can inform pricing strategies and sales targets. It’s also valuable when considering new products or services. Then, if you’re thinking of adding a new menu item, you can calculate how many you’d need to sell to justify the additional costs.

7. Monitor and adjust the financial plan 

Lastly, your financial plan should be a living document. Regularly compare your actual performance against your projections and adjust your plan accordingly.

Set up a system to review your plan monthly or quarterly. For example, you might have a dashboard that compares actual versus projected revenue, expenses, and cash flow. If you’re consistently exceeding or falling short of projections, investigate why–and then update your plan. 

Perhaps your marketing efforts are more effective than anticipated, leading to higher sales. Or maybe a new competitor has entered the market, affecting your customer acquisition costs. Be prepared to pivot: you might need to cut costs in one area to invest more in another or adjust your pricing strategy based on market response.

Build a financial plan with confidence 

When it comes to creating a comprehensive financial plan, remember: Don’t aim for perfection at the start. Begin with the basics and refine your plan as you gain more insights into your business’s financial dynamics and market trends.

To streamline your financial planning process, consider leveraging FP&A software like Cube, which can automate data consolidation and provide real-time insights.