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Financial Planning for Small Businesses: What It Is and Why It Matters

Financial Planning for Small Businesses: What It Is and Why It Matters

Planning is vital for a successful company, especially when it comes to money. Learn the ins and outs of financial planning for small businesses.


Thousands of people dream of owning their own business — more than 600,000 new businesses are founded annually in the United States alone. But despite all this enthusiasm and entrepreneurial spirit, many small companies only last about two years.

What’s interfering with their success? For many companies, the problem is a lack of financial planning. Here’s everything you need to know about financial planning for small businesses — and how it can keep your company afloat.  

What’s financial planning?

There are many perks to owning your own business, like being your own boss, following your passions, and building a legacy in your community. But there are also a few drawbacks. For example, many small business owners don’t have financial experts on their staff to help them manage the books. When you’re starting out, handling the money yourself can feel like a cost-saving maneuver — but if you aren’t careful, you could get your business into hot water. 

Financial planning helps prevent trouble for your business in the short and long terms. When you create a financial plan, you assess the business’s financial status (or your own), set long-term goals, and develop a plan to reach them — with short-term milestones along the way. For many businesses, the process involves obtaining a clear picture of expenses, assets, and income and creating a monthly budget. 

The importance of financial planning for small businesses

Financial planning is essential — but why? Perhaps the most obvious reason is this: if your finances are mismanaged, your business won’t last. 

But financial planning isn’t just about keeping your organization from closing its doors. Several day-to-day perks come with good financial hygiene, including:

  • Smooth operations: Financial planning ensures a company has the resources to achieve its objectives and operate effectively. You don’t want to overspend in one area and wind up without the resources to support an essential aspect of your business, like investing too much in marketing and winding up with too little capital to pay your supply chain.
  • No surprises: A long-term vision helps you identify and plan for potential financial issues in advance. For example, a business selling home goods might experience high sales in December and a steep drop-off in January and February. With this knowledge, an entrepreneur can put aside the necessary funds after Christmas to carry operations through the slower months. Plus, your business is less likely to face a hefty financial blow if you have well-managed funds — in an emergency, you need to have resources to fall back on.
  • Reliable cash flow: Good financial planning helps business owners manage their cash flow — how much cash an organization takes in compared to how much it expends. To keep your cash flow positive, you need to have your eye on all income and spending.
  • Smart moves: Entrepreneurs can make informed decisions about investments and expenses when they know their business’s financial status. Instead of making important decisions willy-nilly, a financial plan empowers you to anticipate when you can invest in growth and save up ahead of operational expansions.

6 steps to create a successful financial plan 

Effective financial planning can make running a business much easier — and drive your company’s success. But how do you know if you’re managing your finances correctly? Here are a few financial tips for small business owners who want to improve their bookkeeping practices:  

1. Define your business goals

The first step in creating a financial plan is to lay out your goals. These are business goals, not personal ones. For example, a personal goal may include the owner’s five- or ten-year plan for entrepreneurial leadership, while a business goal could be more immediate, like “acquire five new clients by the start of Q2.” Ask yourself the following questions to begin the brainstorming process:

  • Where do I hope to see my business grow?
  • What is a financial milestone I hope to reach this year?
  • Are there any large expenses I anticipate in the near future?
  • What’s a financial safety net I’m comfortable with?

2. Assess your current financial status

You can’t have a clear financial plan without looking at your business’s current finances. Gather all the information you have about your expenses, past sales numbers, assets, income, and personnel to see exactly what your business has now. 

3. Identify potential risks and plan for contingencies

The U.S. Small Business Administration (SBA) says most small businesses experience two types of risk: internal and external. Internal risks include theft, equipment failure, and cash flow issues, while external risks include market risks, natural disasters, and changing legislation. Part of your financial plan should be identifying the risks most likely to affect your business and making a plan to mitigate them. This could mean making intelligent investment decisions and creating a pool of savings to fall back on.

4. Develop a budget

This is probably the most essential part of your financial plan. Using the information you’ve gathered in steps two and three, make a budget that accounts for your projected earnings and expenses. The file should include all business expenses, tax costs, and contingencies for risk management. You can also use this budget to identify possible investment opportunities for your business when you forecast an influx of cash. 

5. Monitor and control expenses

Once you have a budget, closely watch your expenses to ensure they align with your business goals. This means putting your foot down on unnecessary expenses and keeping an eye on cash flow. Do everything you can to ensure enough money is coming in each month — this might mean increasing your marketing efforts to attract more customers or offering payment plans to make your product or service more accessible and ensure some incoming cash.  

6. Tweak the plan as needed

Financial planning is sometimes tedious for entrepreneurs — particularly those with a million ideas they want to bring to life. But managing finances is vital to your business’s success, so it needs to be a regular part of your routine. Business owners should closely monitor their financial plans and adjust them as needed, whether the changes are based on profits or losses. And once you have the funds, consider hiring a financial expert to help keep the business on track.  


FAQs about financial planning

Still have lingering questions about the financial side of entrepreneurship? That’s only natural. Here are the answers to common queries:

What should be included in a small business financial plan?

A small business’s financial plan should include the following components:

  • Sales forecast: How much you expect to sell over a given period based on your business type and current sales (if any). If your business has a subscription option, subscription-based sales should have a separate forecast.
  • Budget: Your expenses over a certain period. This will help you keep a close eye on cash flow and plan for investments and more future significant expenditures. 
  • Personnel costs: All expenses related to your team, including employee salaries, taxes, and benefits.
  • Profit and loss statements: How much money you make versus how much you spend over a given period (at least a quarter).
  • Balance sheet: A regularly updated document clearly showing your assets, liability, and equity so you can see how your business is doing at a glance. 

How often should a small business review and update its financial plan?

Small business owners should review and update their financial plans at least once a year. However, a quarterly review is ideal for new businesses, as it allows you to monitor your short-term goals more frequently when your organization is still finding its footing. 

Let Practice lend you a helping hand

Whether you’re brand new to the small business world or a seasoned entrepreneur with years of experience, the Practice blog has a wealth of information that can help your business reach new heights. Plus, our client relationship management (CRM) tool was specifically designed with entrepreneurs in mind. Use the CRM to streamline administrative tasks — such as data storage and secure payment — so you can dedicate more time to managing the financial side of your business.

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