Financial Planning for Small Businesses


As a small business owner myself, I understand the challenges that come along with starting your own company.  There are many reasons we take the risk to start our own business.  Whatever your reason, in order to succeed you need to be passionate about what you’re doing and have a clear vision of what your company will do, who it will serve and how you will grow the business.  

It’s not easy starting a business.  According to the Bureau of Labor Statistics, 50% of small businesses fail within 5 years.  There are many reasons businesses fail and I think it is worthwhile taking the time to understand why others have failed so you can avoid those same pitfalls.  Set yourself up for success by taking these steps.

Business Plan

Resources:  Free templates online.  The Small Business Association(SBA) has classes for creating a business plan.

A business plan should detail your vision, how your company is formed, it’s products/services, who you will serve, your goals, your marketing plan, budget and other financials.  In short it acts as a roadmap for your business.  Having a well thought out business plan is a key step to the success of your business.  It should be treated as a living breathing document, changing as your goals change for the business.  In addition, if you plan to go to a lender for financing, you will need to have a business plan to obtain financing.  Here’s a list of the key sections your business plan should contain. 

Executive Summary is the equivalent of your 30 second commercial.

Business Description will have more detail about your vision for the business and the key elements of your business that you will elaborate on in subsequent paragraphs.  The key elements include the following; 

Product or service description explain in detail the services you will be offering.  If you need materials from other businesses, list them and who will be the supplier.  List any potential pitfalls and how you will deal with them.  Doing a cost benefit analysis of each of your products or services is helpful to understand at what point that product/service will become profitable, how much profit you can expect to make and thus, help you determine if it is worth offering that product or service.  There are many free templates online to do this calculation.

Legal structure list the legal structure for your business; sole proprietor, LLC, partnership, C corporation, or S corporation.  

Market analysis and marketing strategy is perhaps the most important section because it is where you convince people that your business will be successful. The first step is determining if there is a need in the given area for another one of your business segment.  Taking the time to see who your competitors will be and what distinguishes your firm from the competition is crucial to establish your marketing strategy.

Financials are meant to show your current financial position and where you want to be.  It includes the following statements; cash-flow, balance sheet, profit and loss and a break-even analysis.




“If you don’t know where you are going, you’ll end up someplace else.”
-Yogi Berra



Resources:  There are online templates and classes at the SBA for creating SMART Goals.  

We all have goals but actually putting them down on paper and coming up with a plan for achieving those goals is what separates those that reach their goals from those that don’t.  If you use the smart system, it’s easier to figure out if the goal is worth achieving, create the steps you will take to reach your goal and measure your progress towards that goal.

Specific - list what you want to accomplish and why you want to accomplish it.  You should list the requirements to meet that goal and any thing that might get in the way.

Measurable - quantify or give an indicator of how you will know when you have reached this goal.

Attainable - it should be a goal that you can realistically achieve.  Think through the steps you will take understand if it is attainable.

Relevant - is it in line with the overall vision and objectives for your business?

Timely - when do you want to achieve this goal.

I like to reverse engineer my goals.  Let’s say my goal is to increase my monthly income by $1,000 per month.  I have to figure out how many new clients I would need to achieve that income.  Then I look at how many prospects I would need to speak to to convert that many new clients.  Finally I would look at how I’m getting prospects and see what I would need to do to increase the number of prospects I’m speaking to.  


Resources:  SBA offers classes on creating a budget.  There are free templates on the internet. This site not only has a good template but walks you through creating a budget.

Using historical data to create your budget is best.   If you’re just starting your business, make a list of all your planned expenses.  Create a miscellaneous category for unplanned expenses especially when just starting out.  Your cash flow and profit and loss statements you pulled for your business plan should provide all your expenses and your projected income.  It’s a good idea to revisit your budget at the end of every fiscal year to use what your actual expenses were to create the next year’s budget.  Add in any expenses for new product offering, improvements, etc.  

When you first start your business it seems like everyone is trying to sell your business a product or service.  Having a budget keeps you on track.  It’s a lot easier to say “no” to someone when you can say you didn’t budget for that this year.

Funding Your Business

Resources:  SBA, banks and other lenders.   

A common mistake many small business startups make is using credit cards to finance the business.  It often takes a small business longer to be profitable than anticipated.  Credit cards can be a pricey way to finance because of higher interest rates.  It can also adversely affect your credit score.  As you max out the credit card your credit score falls which can make it more difficult to obtain a loan later.

Alternative financing if you have a 401k from your former job, you could take a loan to finance your small business.  The interest you pay on the loan will go into your 401k.  If you have an annuity contract or whole life policy you can often borrow against those products and the interest is paid to you in your account.

Here’s a great article on other alternative funding sources.

Protecting Against Risk

Understanding the potential risks and how it will affect you financially is essential.  The First step is to identify the potential risks in your business.  Second determine if you can avoid the risk, reduce the risk or control the risk.  Lastly determine if you will obtain insurance to ensure these risks or self insure to cover potential losses.  The risk of self insuring is that the loss could be greater than your assets.  These are the common insurances small businesses have.

Liability Insurance covers you if something were to happen to an employee or a client.  Check with any associations you belong to first. 

Disability Insurance how will the costs of your business be covered if you become disabled and aren’t able to work?  There is a 1 in 4 chance that a person in there 20’s will become disabled.  Building an emergency fund to handle expenses for 3-6 months is one way to self insure for a short term issue.  Getting long term disability insurance is another.

Property Insurance to protect against any loss affecting your equipment and property.

Plan for Retirement

Resources you can open a retirement account at any discount broker dealer or mutual fund company.

Don’t forget to put some money aside for retirement.  As small business owners we have a tendency to reinvest in the business and take whatever is leftover as income.  In addition to ensuring that you have enough money to retire, there are tax benefits to contributing while you’re self employed.

For a small business with no other employees the SEP IRA is one of the more attractive alternatives.  It's easy to set up and maintain.  You can contribute 25% of your income up to $55,000 per year.  In addition to lowering your income taxes, the contribution is not subject to the FICA tax which is another tax advantage.  If you do have employees the same contribution must be made by the business to all employees 21 and older that have earned $600 in 3 of the past 5 years.  Employee contributions are not allowed.

If you have employees and can't afford to contribute a lot to the employee accounts but what to maximize your savings, then a SIMPE IRA might be better.  Your employees have the option to contribute up to $12,500 or $15,500 for those 50 and older.  The employer can match a fixed amount of 2% a year or opt to match 3% a year.  With the 3% you have the ability to reduce the match to as low as 1% in 2 of 5 consecutive years.  Thus enabling you to reduce the match when your business isn't performing as well.


There is much to do outside of actually serving your clients to ensure the success of your business. Build time each week to work on it.  If you find yourself putting it off then consider hiring a coach, joining an accountability group or working with a financial planner to ensure it gets done.