7 Steps for Building a Financial Plan for the Future

Every September, I begin the financial planning process for both my business and my household for the upcoming year.

Most people don’t think they have the time to do this (or don’t feel it’s important), but I believe it’s an incredibly valuable exercise, and is one I actually look forward to it. That wasn’t always the case; but now that I put a system in place, I am less fearful about the planning part and more excited about what the future holds.

When it comes to your business, your financial plan is the blueprint of how you want the future to unfold.

Because of external circumstances (recession, industry specific downturns) or internal issues (losing a key salesperson or client), things might not go exactly as planned. But those factors aside, it is critical to have direction. Even if you deviate 10 or 20 percent from your plan, you know you’re still on the right path.

Here’s how I recommend building a financial plan for the future:

Step 1: Review the past

To get a sense of the general health of your business, start by looking at your inputs (revenue) and outputs (expenses).

Then, to really understand the full picture, analyze each line item on your income statement, which contains your revenues and expenses. Look at the monthly trends line by line, then quarter by quarter, and then for the year overall.

While you’re analyzing the revenue side, ask yourself the following questions:

  • How much money did we make per month?
  • Why did it grow or fall in certain months?
  • What is our average revenue?
  • How many customers did we have?
  • Were there any highs or lows?
  • Did we lose customers and why?

On the expense side, spend a fair amount of time analyzing expenditures and try to determine whether or not it was worth it (does the spending reinforce your core values?) and what was wasteful (little to no return on investment or non-alignment with your values).

There is so much to learn about your company’s past, and those findings can help you explore ways to increase your income, make the money you do spend go farther, or cut back on extraneous costs.

As you undergo this exercise (I spend two to three days on this part, combing through the data with my accountant), keep a notebook close by so that you can jot down ideas, strategies or any other inspiring thoughts that should be reflected in next year’s plan.

This should be seen as an energizing exercise, and it can help you get a clear picture of how to hit your financial goals in the New Year.


Related: How to Tackle the Financial Portion of a Business Plan

Step 2: Understand your measure of profitability

For a business to truly scale (in other words, have your profitability improve while your sales increase), you need to make sure that you’re building multiple points of leverage.

For example, if you run a software business, then assess whether your sales team has leverage by asking the following questions:

  • Is your sales pipeline big enough to support your sales targets?
  • Are your renewal rates close to 100 percent?
  • Do you have a system in place to pre-screen clients and determine whether they are going to be profitable or not?
  • Do you have the right system in place to retain and incentivize your salespeople?
  • Do you have the right financial controls in place where expenses are kept low and revenue is collected on time?

The assessment of inputs and outputs will show you where everyone’s time, money and resources went.

For example, if you spent $15,000 on an ad campaign and you didn’t see a sales lift (hopefully at least 10X what you spent), then perhaps it wasn’t the right channel, the messaging wasn’t a fit for your target market, or it wasn’t enough spend to provide a meaningful return.

Look at failures as an opportunity to change future outcomes—this is where real innovation occurs.

Step 3: Plan for the future

In order to create a plan for next year, you need to know where you are right now. You can find your baseline after spending time looking back at the past year. When I get to this step, I will bring in two or three teammates who have optimism for the future. These individuals see the potential and the possibilities in the business, not just the constraints.

Step 4: Sort out the good, the bad and the ugly

This is an interim planning step that I do with my team of optimists. These folks may not have been involved in the backward-looking analysis, so this is an easy way to get the group up to speed.

Grab a whiteboard, and for each area of your business, create three lists:

  1. What outcomes you want more of (the good)
  2. What outcomes you want less of (the bad)
  3. What outcomes you don’t want at all (the ugly)

Keep in mind that things on the “bad” list could turn out positively with some tweaking.

If you do this every year and set out to accomplish the outcomes from your list, this will make it easy to evaluate whether you fell short or didn’t aim high enough.

Then, together with your team, assess whether you enjoyed the work that you did. Did it fulfill, challenge and energize you? If not, then modify your plan. Make sure that your goals for the future are emotionally energizing from the start.

Step 5: Plan forward

This is the meat of the exercise. Ask yourself the following four questions and build a financial plan from the ground up: 

  • Based on what went well and what didn’t, what are the outcomes you want more of and which do you want less of?
  • What are three things your business should accomplish one year from now?
  • How will we measure success for each of those three things?
  • What combination of resources will help us reach our target?

You might realize that you need to build a bigger sales pipeline, hire more salespeople or find ways to get your current sales team to become more effective.

For each new initiative, map out what metrics you can use to track whether the outcome is successful or not. (Also make sure that if you achieve everything you set out to do, it will get you closer to your three-year strategic plan).

Be sure to assess all of your goals to see whether they are too lofty or too light. Lastly, build revenue and expense targets at the line-item level.

Step 6: Decide what to tackle first

All startups have constraints: time, money, human capital or all of the above.

As an entrepreneur, you have to figure out what changes will give you the most mileage but not derail the rest of your plans for the year.

I like to figure out what I will take on in the first quarter, second quarter, and so on. Then I use an agile methodology where I start with the small tasks first, so I can put a win on the board (some projects might take longer and need to be started in parallel or when you have the right hires in place). Keep an eye on the longer-term projects and be on the lookout for opportunities to start projects earlier.

What do you go after first? How do you decide? Don’t assume every criterion has equal importance and score each option. It helps to weight your priorities.

For example, if you really want to grow your new clients, weigh all activities around generating new revenue a six out of 10 on the importance scale. Retention activities can be weighted at a four. Using this scoring system, you can easily figure out the order of operations.


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Step 7: Make your financial plan come to life

But first, you’ll want to vet the plan with your team. Get their buy-in!

Socialize the plan and be sure to highlight your company’s vision and strategies, which will remind everyone of the mission (why the work that you all do matters).

Then, review the plan with one or two mentors outside of your team who can provide you with meaningful feedback. Determine whether or not you are missing anything and then make any necessary revisions to your plan.

Then comes the hard part: execute, execute, execute!

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