Small business financial planning: 5 key steps

Like the hours of recipe hunting and grocery shopping that set the stage for a hit dinner party, financial planning is the unseen but critically important groundwork that paves the way for business success. 

Financial plans are where the rubber meets the road on your business goals, helping you align your finances with strategic plans for growth and expansion. At the same time, planning can help you to mitigate risks and improve decision-making at crucial junctures, making you more likely to reach your goals.

In this article, we’ll cover the essentials of small-business financial planning, from why it matters so much to how to set up a financial plan step by step. Let’s dive in.

What is financial planning?

Financial planning is the process of assessing your current and projected financial picture, and planning ahead to achieve your business goals. It entails preparing financial statements, making a budget, forecasting revenues, and aligning planned spend with objectives like growth, acquisition, launching a new product, investing in R&D, or preparing for a sale. 

Financial plans allow you to proactively pursue goals and make financial decisions based on data and analysis, rather than making reactive or uninformed decisions. They require you to make choices about where and how to allocate resources, and they ensure that your overall financial picture is stable and your growth plans are funded. 

The best plans account for the fact that they are just that—plans—and could be impacted in a variety of ways by changing market conditions. With that in mind, financial planning involves accounting for potential slowdowns or other unforeseen challenges to ensure business continuity across a variety of operating environments.

Why is financial planning important for small businesses?

Small-business financial planning is key to growth,stability, and reaching long-term objectives. It allows you to make well-thought-out decisions aligned with overall business plans, and make the most out of perhaps limited resources. Here are a few reasons why it’s so critical for the health of a small business:

Optimizes the balance sheet

A thoughtful financial plan takes into account assets, liabilities, projected revenue, and planned and unplanned expenses in order to maintain a healthy balance sheet for the year ahead (or however long the financial plan covers; some extend up to three or five years, or longer). This is helpful to ensure that you have enough liquidity on hand for investment or to recalibrate if investment plans are too modest relative to projected revenue or growth plans.

Provides long-term visibility

Financial planning offers a window into your company’s long-term financial trajectory, which helps you make adjustments to cultivate the financial conditions you want to see over time. For example, you may hope to have start-up loans paid off by a certain date, and long-term planning can help you balance repayment with other objectives related to growth and investment.

Creates a plan for sustainable growth

It’s great to have growth ambitions, but you don’t want those ambitions to jeopardize day-to-day operations or the overall health of your business. Making a financial plan can ensure that you don’t overspend prematurely and put your operations at risk if the business underperforms, investments don’t pan out, or market conditions worsen unexpectedly. 

Helps identify risks and opportunity

Financial planning also opens your eyes to potential risks and opportunities you wouldn’t otherwise see. For instance, you might learn that sales aren’t rising fast enough to bootstrap growth, and your business can’t execute expansion plans without a capital injection. You might also spot cost centers ripe for cutting, or earmark certain product areas or services for investment if they’re performing well. 

Enhances decision-making

The financial planning process necessitates a hard look at the current state of your business, and what’s most likely in store for the months and years ahead. This exercise provides you with invaluable situational awareness, data, and forecasts that can improve your decision-making process. Instead of a glance at your bank account and a hunch, you can look at the numbers, see how they’re tracking versus forecasts, and use those insights to make data-backed decisions as time goes on. 

Measures profit and loss

Financial planning helps you get a clear overview of your profitability both presently and projected into the future. You can even experiment with hypothetical revenue and cost scenarios for the year ahead to see how different variables might contribute to or detract from profitability.

Components of a financial plan

Financial planning for small-business owners can be broken down into a series of key components—namely the income statement, cash flow statement, balance sheet, and any metrics you can derive from the numbers on those documents. Here’s a look at the different elements you’ll need to assemble to get your plan off the ground.

Income statement

An income statement, also known as a profit and loss statement or P&L statement, summarizes financial performance over a period of time. It explains how a profit was made or how a loss was incurred by listing out all of the business’s revenue and expenses. That said, the income statement makes it easy to track trends in efficiency, revenue, and expenses—and pinpoint the drivers of each. 

Income statements typically start with net revenue and subtract expenses to reveal your net earnings (profit or loss). A basic income statement would typically include:

• Net revenue or sales: How much money came in during a given period of time.
• Gains: Other sources of income, such as from the sale of assets.
• Expenses: What the business paid out during the period, including the cost of goods sold (COGS); selling, general and administrative (SG&A) expenses; depreciation and amortization; and research and development (R&D). These comprise the typical business expenses you’d expect—raw materials, utilities, wages, rent, and so on.
• Losses: Such as write-downs on assets or liabilities owed from a lawsuit
• Net income: The result of summing your revenue and gains then subtracting your expenses and losses.

Cash flow statement

The cash flow statement essentially tracks how much cash entered and exited the business during a given period of time, culminating in net cash flow. These statements are typically broken out into three sections:

• Cash flow from operations: Operations includes business activities like sales and expenses, which can indicate whether basic operations are sustainable and to what degree sales revenue outpaces the costs that go into making goods and services.
• Cash flow from investment: Investment frequently entails the purchase or sale of assets such as property, plans, and equipment. High numbers here might indicate that a lot of capital has been invested toward future growth.
• Cash flow from financing: Financing is the movement of money related to borrowing, repaying debt, and issuing equity. This part reveals how a company finances its growth.

Balance sheet

The balance sheet reports assets, liabilities, and shareholder equity—which boil down to the value of what the company owns and what it owes its creditors and shareholders. It contains three main parts:

• Assets: This includes cash, inventory, investments, property and equipment and reveals the ability of a company to support future operations.
• Liabilities: This section is primarily made up of loans, accounts payable, and other forms of debt. It reveals to what degree the company can support additional debt or whether steps should be taken to reduce it.
• Shareholder equity: This is the difference between assets and liabilities, and thus the value of a company attributable to owners and shareholders.

Key metrics

Much of the info contained in the three statements above can be used to calculate a host of metrics that offer insight into the efficiency and performance of your business, which can help guide your strategic plans. You might uncover, for example, that your return on investment for marketing is suboptimal and needs to be improved. Or that your debt load is too high relative to your assets and needs rebalancing. 

Here are some metrics to consider during your financial planning:

• Customer acquisition cost (CAC): The CAC calculates the cost of acquiring a new customer. You can use this to determine whether your sales and marketing strategy is effective in the context of what you’re spending to acquire a new customer versus the expected lifetime value (LTV) of that customer. This is called the CAC to LTV ratio. To get it, simply divide CAC / LTV. A higher number indicates more efficient sales and marketing.
• Gross margin: Gross margin is the percentage of revenue that remains after subtracting the cost of goods sold (COGS) from sales. Gross margin is primarily a measure of profitability that can help you make pricing or cost-management decisions—if your percentage is too low, your price may be too low or production costs too high.
• Burn rate: Your burn rate measures how quickly you’re using up cash and how much runway you have until you run down your reserves. Especially for new businesses financed with loans or investor capital, this metric is critical to understanding how much time  you have to achieve profitability before shutting down or seeking additional financing. 

For more financial metrics and advice regarding capital allocation, Rippling’s CFO Adam Swiecicki created this step-by-step playbook for managing cash burn.

How to create a financial plan for your small business

Financial planning for small business owners can be broken down into a series of steps that make the process more manageable. Here’s how you can go about it:

Step 1: Create a strategic plan

A strategic plan sets the stage for your business’s evolution over the coming years outlining your key objectives and how you plan to achieve them. For best results, break down your objectives into specific and measurable goals, such as the number of customers you’re hoping to acquire, your annual revenue targets, the expansion revenue from existing customers you want to add to your bottom line, and the products or services you’re going to launch. 

For each strategic objective, identify the resources required and key actions that need to be taken in order to achieve them—this could mean everything from hiring outside consultants to buying new equipment to expanding to a new location. 

Use this strategic plan as the north star that guides your financial planning and decision-making. You may find that during the planning process your financial circumstances position you closer to certain goals, and farther from others. You’ll need to assess your strategic priorities relative to your ability to fund them and prioritize accordingly. 

Step 2: Develop financial projections

Financial projections provide a view into what your future financial position will look like,whether you’re positioned to meet your goals,and how ambitious your goals can be based on your expected future finances. 

Financial projections are, of course, imperfect, but you can take steps to ensure they’re as accurate as possible. Look at historical data to estimate growth rates, costs, and seasonal trends, and look outward toward your industry to gauge prospects for growth. Reach out to your cross-functional partners to get more detailed inputs for sales and marketing. You can also take into account the macroeconomic picture and how it might affect your business. Finally, you’ll need to make some informed guesses about the return you expect to see on past investments and planned initiatives. 

To be safe, you can develop a series of projections—a base case (your most realistic estimate), a “low” projection if the business underperforms, and “high” projection in the event it overperforms.

Step 3: Measure against key metrics

Your financial planning process should include creating financial targets for efficiency, growth, and return on investment—among other key benchmarks. You can use your current financial statements to establish a baseline, identify the metrics that need improvement, and then strategize around how to improve them.

For example, you may have an objective to improve your gross margin by increasing prices and renegotiating with suppliers to bring down costs. During financial planning, you can outline exactly how you plan to do that and what cost/revenue mix you plan to achieve. You may increase prices, or offer new pricing tiers to segment buyers based on their appetite for premium offerings, advanced functionality, or high-end services. 

Step 4: Plan for contingencies

Even the best-laid plans are vulnerable to market swings, supply chain disruptions, new competitors, and natural disasters, to name a few risks. To that end, make sure your financial plans establish a reserve fund that covers up to six months of operating costs, just in case. 

You’ll also want to establish a contingency plan if you need to cut expenses quickly and suddenly. That may entail rolling back discretionary spending, furloughing staff, and renegotiating contracts. These are unpleasant steps to take—but better to consider them proactively so you can act fast if you need to. 

Step 5: Monitor and adjust the plan

A key benefit of having a financial plan is that you can track your progress against it, and adjust both the plan and your business as you go. Set up a regular review process to measure  your performance against the plan—monthly, quarterly, and annually. During those reviews, dive into metrics and financial statements to see what’s driving any overperformance or underperformance. That will keep you agile and prepared to pivot as needed for the sake of reaching your goals and improving the business.

Simplify your business finances with Rippling

Managing your finances and measuring progress against financial plans doesn’t have to be a juggling act of spreadsheets and financial statements. Rippling Spend can streamline the way your business tracks, approves, and reports expenses—all from one easy-to-use platform. 

Everyone from fast-growing startups to established companies can use Rippling to stop waste, improve efficiency, and boost transparency.

Here’s how Rippling Spend can help you take control of your finances to keep costs under control:

• Automated expense tracking: Rippling automatically captures and categorizes expenses, saving hours on admin work and boosting compliance.
• Customizable approval workflows: Set up tailored approval flows that align with your expense policies and management structure, so every dollar is authorized and tracked.
• Real-time analytics and reporting: Get actionable insights into your spend with detailed live reports to quickly identify cost-saving opportunities and make data-backed decisions.

Business financial planning FAQs

What is financial planning and analysis (FP&A)

Financial planning and analysis—commonly referred to by its acronym FP&A—is a series of activities carried out by finance departments to collect and analyze the financial data that fuels business planning, forecasting, and financial modeling. FP&A collaborates cross-functionally with other departments and stakeholders to optimize financial health and performance across the business—all with an eye toward achieving strategic business goals.

What is the financial planning process?

The financial planning process entails reviewing your current financial position, developing strategic goals, creating financial forecasts and budgets aligned with those goals, and then regularly monitoring performance and adjusting plans accordingly.

What is corporate financial planning?

Corporate financial planning focuses on managing corporate finances to maintain stability, plan for growth, and achieve profitability. It entails developing strategies to manage cash flow in accordance with the company’s strategic objectives and shareholder obligations, mitigating risk, and conducting analysis to make thoughtful investment decisions. 

What are the 3 rules of financial planning?

Three tried-and-true rules of financial planning for small businesses are:

1. Align financial goals with business objectives. Financial goals divorced from business objectives may not be serving your long-term business interests. Make sure the two are aligned and reviewed regularly for optimization. Keep in mind that not all conventional financial goals may apply to you. For instance, you may skimp on profits some years in the name of investments that will drive profitability down the line.
2. Plan for cash flow stability. Cash flow is the lifeblood of your business—and no matter your goals, you’ll need to have enough cash on hand at all times to fund operations, debt service, and other obligations.
3. Always have a safety net. In the event of an unforeseen downturn or a force majeure, a safety net could keep your business afloat. Keep three to six months of operating expenses on hand.

This blog is based on information available to Rippling as of February 7, 2025.

Disclaimer: Rippling and its affiliates do not provide tax, accounting, or legal advice. This material has been prepared for informational purposes only, and is not intended to provide or be relied on for tax, accounting, or legal advice. You should consult your own tax, accounting, and legal advisors before engaging in any related activities or transactions.