Small Business Financial Planning Overview

The Small Business Act defines a small business as “one that is independently owned and operated and which is not dominant in its field of operation.” Starting a small business is an exciting prospect that offers incredible opportunities for independence and unlimited financial growth.

Beginning that journey properly takes meticulous planning and clear directional vision. Preparing a comprehensive business plan will serve as a roadmap that identifies your business, your goals and the steps needed to achieve those goals.

According to the Small Business Administration, that roadmap should include a pro forma balance sheet, income statement and a cash flow analysis. Despite the common misconceptions, ‘hanging a shingle’ does not mean that money just flows into your personal bank account. Depending on the business venture into which you enter, it could take months or even years before enough profit is generated to allow you to begin to support you and your family.

Preparing a comprehensive business plan should include utilizing the experience and talents of your financial planner. One of the biggest hurdles small business owners face is financing their new venture. A business in its infancy has no credit history or reputation to present to potential lenders, so it is important that the new business owners are aware of their personal credit history and work to make it as appealing as possible before seeking financing.

Short of bootstrapping, there are basically two types of financing available to entrepreneurs, equity financing and debt financing. Debt financing relates directly to the money borrowed versus the money invested in a business. The more equity or money a business owner invests into his or her business, the more attractive the business will be when seeking additional funds. This type of financing is usually available to established businesses that are looking for growth capital.

Equity financing is how most small businesses start, relying on funds invested from family and friends because start up expenses exceed current or initial cash flow projections. Depending on the business type, equity financing may be sought from professional investors who invest their own money into new business ventures in exchange for a financial return. These types of investors are, however, very particular about the types of businesses in which they chose to invest.

As complicated and time consuming as a start up can be, the day may come when selling your business to begin a new challenge may be an appealing idea. Selling your business can be just as complicated and time consuming as the start up experience.

Just as the expertise of a financial planner helped you to begin your venture, that same experience can be invaluable to achieving and retaining the full financial benefits from the sale of your business. Not only can a financial planner or affiliated firm give you an objective view of the valuation of your business and present plans to help you capitalize on its sale, but a financial planner can put together strategies to protect your capital gains and help you effectively direct your earnings toward future growth.

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