3 Steps to Craft a Flexible Financial Plan for Your Business

You may be nervous to build out a year-long business budget or financial plan. I get it. NO ONE could have predicted all the twists and turns of the past couple of years, and the roller-coaster ride is far from over. 

Why you need a financial forecast even with so much uncertainty

Most business financial plans start with looking back at recent history and using a trend line to predict the future. For most companies, it's felt impossible to do this recently with the pandemic, political unrest, social injustice, and now, recession. Even so, skipping financial planning is NOT an option!  

When life and business are full of uncertainty, having a map of where you want to go and how you plan to get there is a critical tool. 

So yes, even now, you can and should create a 12-month financial forecast to plot out a full year of what you think can or will happen. 

But, don’t treat it like a fixed business budget and try to make it 100% correct.  

Instead, acknowledge something that has always been true: Today’s forecast can’t fully predict next month’s challenges.  

This high level of uncertainty means that you and your business need plans that are updated frequently to roll with the changing times. In accountant speak, that means it's time for your business to create a rolling forecast. 

A rolling forecast is simply one that gets updated each quarter, and also gets extended as each quarter ends. By extending the projections your business will always have a plan for the coming 12 months — even though you KNOW the plan will change as you move through the year. 

My 3-step framework for a Flexible Financial Forecast

Here’s my recommendation for how to create a truly flexible financial plan.

#1 Create three versions of the future.

Start by creating scenarios to think through different paths for 2021.  

• Start with a solid estimate of revenues based on current reality.  Rather than looking at last January; start with where your revenue is right now, and forecast possible growth from there. Based on seasonality and sales cycles from prior years (pre-pandemic and recession) and assuming that the worst is now behind you; what kind of sales can you forecast for each month or quarter? This is your baseline projection.

• Consider the possibility that the worst is NOT behind you. What if your baseline is wrong and sales come in lower than you expect? How much cash would you need to make it through another dip in sales?  What kind of cost-cutting would be required to make it through another downturn? 

• Now turn your eyes to a brighter horizon and think about upside options.  What if instead of a downturn your company experienced even faster growth.  Maybe it doesn’t start for a few months, but at some time in the next year, demand will surge and you’ll be able to reward your loyal team members and hire new staff. What would that look like in your business? How can you prepare for potential opportunities while managing for your current reality?

#2 Expect the unexpected and use a rolling forecast to flex your plan and adapt to changes throughout the year.  

A business budget or financial plan is not a one-and-done kind of activity. Instead, make solid plans based on what you really think will happen next quarter. Monitor your actual sales and cash weekly, and make decisions quickly when you see changes in the environment you operate in. 

Move quickly to cut costs if needed, or take advantage of a new opportunity to keep the cash flowing in your business. 

Towards the end of each quarter, update your plan for the coming quarter. 

Start with your current actual revenue at that time and build out from there. If your sales pipeline is strong, go with a faster increase. If you’ve been short on materials and will have a hard time fulfilling orders, slow your expected growth.  

Then update each future month and roll out your plan for the next 3 quarters. Each quarter your plan will be grounded in your current reality AND look ahead to the not-so-distant future.

#3 Obsessively Monitor Cash  

Cash is the lifeblood of a business — the diva that can fuel or kill your company. Your financial plan should include a robust effort to build or maintain a cash reserve. 

But first, your financial plan needs to cover five cash demands on your business:  

1. Owners Pay: Salary for you and any partners 

2. Regular Operating Expenses: Including both inventory and all overhead expenses (marketing, sales, payroll, facilities...the works)

3. Debt Service: All your monthly loan payments, plus any cash needed to reduce credit card balances and pay off old bills sitting in Accounts Payable. 

4. A Tax Reserve Fund: To cover the taxes that will be due on your profitable business 

5. Cash Profit: When your business can comfortably cover the four core cash needs you’ll be able to build up cash reserves, invest in growth, and experience the value of your work through dividends and profit draws.

How much cash is enough?  

If you have to ask that question, then my answer is “More than you currently have!”   

In general, I recommend building up a reserve fund to cover 90 days of operating expenses, but please note that if your business is carrying expensive or excessive debt you should focus on paying down debt before you try to build up significant reserves.  

Cash Profit is not an afterthought. Its the result of processes and habits that are focused on preserving cash.  

Your rolling financial forecast starts by creating a revenue plan to cover ALL your business needs, including profit.

To help you set a revenue target to cover all of these cash needs, I’ve built a simple calculator.  

To start creating clear revenue targets for your business, try our FREE revenue calculator HERE