Annual Financial Planning for Business Owners: 5 Tips for Creating an Effective Strategy

A robust and well-thought-out annual financial plan can help you boost profits and drive business growth in the new year. Here are tips to get yours started.

In an uncertain economy, effective financial planning and analysis are more important than ever. The end of a fiscal or calendar year is an opportune time for your business to reflect on and evaluate its progress, and begin strategizing for the year ahead. Developing a yearly financial plan can provide you with an overview of your business’s financial health, identify opportunities to reduce costs and help you set realistic goals for growth.

However, creating a yearly financial plan for your business can be a daunting task. While it may be tempting to put it off or forgo it entirely, doing so can have lasting implications for your business, both financial and otherwise. With a solid plan in place, you can make more informed spending decisions, allocate your resources effectively, save valuable time and minimize stress.

In this post, we’ll explore what a typical financial plan includes and provide you with five tips for creating your own.

What is the purpose of a financial plan?

A financial plan provides an overview of your business’s financial condition and projections for future growth. Developing a financial plan involves reviewing your revenue, expenses, assets, working capital, inventory and anything else concerning your financial affairs.

There are usually six key components in a financial plan: sales forecasting, expense outlay, a statement of financial position, cash flow projection, break-even analysis and an operations plan.

Several small business organizations offer free financial plan templates for small and mid-sized business owners to use. You can find templates for the financial plan components listed here via the US Small Business Administration (SBA) or SCORE.

Tips to help you develop your financial plan

1. Revisit last year’s goals and performance

Set aside time to review your financial plan from the previous year and revisit the financial goals that were set. What progress did your business make? Your evaluation should help you determine which goals you accomplished and which you might choose to revise or continue pursuing in the year ahead.

2. Review your operating expenses

Reviewing and tracking your operating expenses (OpEx) over time is a critical aspect of financial planning because it can help you identify areas to optimize so you can increase profitability. OpEx refers to ongoing expenditures your business incurs from core operations, including overhead costs such as rent, inventory, utilities, marketing and payroll. These are recorded as costs in your profit and loss (P&L) statement because they directly relate to the day-to-day cost of running your business.

Understanding operating expenses is essential for calculating your company’s overall profit and getting a clear financial picture of how operations are impacting your bottom line. With this information, you can determine your net profit and identify areas of opportunity and for improvement. For instance, if the cost of inventory has increased significantly, you may need to adjust your pricing or look into changing suppliers to protect your margins and improve profitability.

3. Forecast demand

Demand planning is an important step in developing your financial plan because it provides valuable insights you can use to optimize working capital and increase profitability, efficiency and customer satisfaction. It involves analyzing your historical sales, consumer trends and seasonality data to improve your ability to efficiently meet customer demand. The demand planning process combines sales forecasting, supply chain management and inventory management to strike the right balance between sufficient inventory levels and customer demand.

Failing to plan for demand can have major consequences for your business. For example, excess inventory ties up working capital, adds to carrying costs and increases the risk of the business being stuck with low-value or obsolete inventory. Alternatively, poor demand forecasting can leave you short on products, which can result in back orders or leave you scrambling last minute for higher-cost raw materials.

4. Map out goals for the year ahead

With your review of operating expenses, and last year’s performance and goals freshly in mind, you can begin the process of setting new financial goals for the year. Start with what you want to achieve and outline actionable steps you can take to meet these goals. If appropriate, you might also include stretch goals.

It’s helpful to break down your goals into measurable parts to make them easier to achieve. Whether you want to improve the financial health of your business, increase market share or create a new product, SMART goals — ones that are Specific, Measurable, Attainable, Realistic and Timely — can help you get there. Be precise with the numbers you want to see at the year’s end, too. For example, if you’ve set a goal of $200,000 in revenue, you could split this into quarterly, monthly or even weekly goals, so you can better gauge your success throughout the year.

Setting objectives and key results (OKRs) is another valuable approach to goal setting and tracking progress. OKRs comprise an objective (a clearly defined goal) and three to five key results (specific measures used to track the achievement of that goal). As you are setting your goals, ensure you consider growth opportunities and put money aside to properly invest in them. A commitment to growing your business will drive innovation, profit, employee retention and customer satisfaction.

5. Consider cash flow and working capital

Paying close attention to your cash flow and working capital is one of the most important aspects of financial planning. Conducting a comprehensive analysis of your key financial statements and metrics will tell you how much money is flowing in and out of your business. Tracking and managing cash flow can help you uncover unexpected cash flow gaps, or it may indicate you have a healthy enough cash reserve to make investments. For example, even if sales are high, you could be at risk of cash shortages if invoice payments are delayed in accounts receivable.

Positive cash flow enables you to cover your day-to-day operating costs while also building a reserve for investments and/or emergencies. Monitoring and forecasting your cash flow and working capital enable you to predict cash flow shortages and make more informed, proactive financial decisions. While drafting your financial plan, you’ll want to determine if you have the money you need to cover your overhead expenses and achieve the goals you have set.

If your working capital falls short of what you’ll need, it’s important to investigate why that is and explore debt-free ways to improve your company’s position. Consider implementing strategies or solutions that can help you optimize your working capital quickly.

For example, consider improving your billing practices, updating invoicing terms or leveraging an early payment program with dynamic discounting to get paid faster and free up cash. Or, see if you can increase working capital by reducing DIO (days inventory outstanding) or DSO (days sales outstanding) to tighten your cash conversion cycle. In some cases, you may need to use a combination of financial strategies and solutions to achieve your goals, or otherwise consider your options for working capital financing.

The takeaway

Strategic financial planning can help you find ways to overcome supply chain disruptions, handle rising costs and identify innovative solutions to optimize your financial position. But as a small to mid-sized business owner navigating a fluctuating economy, it can be challenging enough to plan on a quarterly basis, let alone annually.

It can be even more difficult if you lack the in-house expertise to help you create and realize your financial goals. If this is the case, it may be in your best interest to hire a finance manager to help your company execute a robust financial plan.

Ultimately, taking the time to review your finances, set goals and put together a plan to accomplish them will propel your business forward in the new year.