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Finance Learning Lab – Micro Course on Small Business Bookkeeping and Finance (Part 2 of 10)

In this lesson, we’re going to talk a little bit about your financial plan, sometimes called your forecast, sometimes called your budget or your pro formas. What we’re talking about here is not where your numbers were in the past historical. We’re talking about you building out a plan to say, “Here’s where I’m going financially”. This “Where I’m going financially” is going to be some of the information that any investor would be interested in.

Anyone that’s going to be loaning you money for your business, they’re going to want to know what your plans are. And more importantly yourself as the owner are going to want to know, if you’re putting blood sweat and tears into your business, what is the outcome that you’re expecting to have as a result of it? At the end of the day what is going to be that final profit that you make from your business associated with all the effort that you’re putting into it. So your financial plan is really important to build out, to show yourself and also to give yourself all of these regular checkpoints where you can look and you can ask if you’re hitting your goals or are you on track. The biggest mistakes people make whenever they’re building a financial plan is: 1) the mistake of not doing one at all. I talked a little bit already about how people can run into this trap of spending more time on the past and less time to the future. That is a huge mistake. The value in your business and the value of knowing your numbers comes far less from knowing about the historical component. The far more important piece is whenever you’re trying to say all of these things that I’m planning to create and do with my business, what am i going to get from it? What do I actually think the numbers will be? What will they translate to and when will they materialize? So it’s a two-part thing. It’s going to be how much and when.

And one of the simplest ways to be able to build a financial plan is using a very simple tool called Microsoft Excel or Google Sheets. Now despite all the fancy accounting softwares that are out there, whether you’re using Quickbooks or Wave, 99% of really big businesses are still using Excel Spreadsheets because it is the most adaptable and it’s probably the best tool for planning. So what you’re going to want to do when you’re building your financial plan is: 1) Open one of these tables. You’re going to start with the bottom section and the bottom section is going to be starting with what your existing expenses are. So you’re gonna make a laundry list of the things that you’re spending money on today that you intend to continue to spend money on. You’re just gonna jot them all down. So you’re gonna jot down these different rows. And then along each of the columns is gonna be month by month by month. So you’re gonna build the months on every single side. So you’re going to list the ones that you’re spending money on already.

Now on the top, you’re going to start to build out the key drivers of your business. So the top section will be your revenue. That’s going to be the money that you’re making for different customers. What you’re gonna do is actually break it into price and number of units for any particular service line or product line that you offer. So you’re gonna kind of take your business model and you’re basically going to translate it into this relatively simple per unit number of units and price per unit. And then that is going to allow you to play around with some different levers. So you want to break it down that way not by just taking what was the amount of revenue that you had last month. You really want to be able to start dissecting this and you want to start being able to analyze it because that’s where the real magic is going to come from in financial planning. You’re going be figuring out what the impact would be if you added an additional product line or additional service line. You’re going to build that out and break it into the individual components. You’re going be able to start to analyze and to see you know you’re spending all of this time and effort and you’re gonna start to really become obvious to say you know these are the 20% of customers that are driving 80% of my revenue. And you can also use that very simple dissection to be able to play around on the expense side of your budget to say, “What if I were to spend x dollars on marketing, what impact would that be projected to have on the number of customers (the units at the very top)?”. So that you can start really playing around with a bottom line picture. Bottom is expenses, you’re already going to spend money on. The top is going to be basically one row of your price and your units and then you’re going to break it out if you have more than one product line. And then the real good part happens when you start to run around with some different scenarios and you take those and you say and increasing these units and of course to increase those units you’re going to want to have the corresponding expense captured in there when you put those pieces together all of a sudden you have a view at the bottom in a one-page document you have a view of saying you know what here’s the profit i’m going to make this month next month the month after you start to drive a lot more certainty into your business

Bottom is expenses, you’re already going to spend money on. The top is going to be basically one row of your price and your units and then you’re going to break it out if you have more than one product line. And then the real good part happens, when you start to run around with some different scenarios and you take those and you say and increasing these units. And of course to increase those units you’re going to want to have the corresponding expense captured in there. When you put those pieces together all of a sudden you have a view at the bottom in a one-page document. You have a view of saying you know what here’s the profit I’m going to make this month next month, and the month after. ou start to drive a lot more certainty into your business

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