To anyone who is new to financial planning and is totally intimidated by it, fear not, we’re here to help. The first step to financial planning is to know the numbers you have today and to identify any metrics that are important to your company (key performance indicators, aka KPIs) and that you want to track. The best way to lay this out is through a basic profit and loss statement, also known as a P&L. The formula for calculating pre-tax profit (PTI) is revenue minus expenses. In plain terms, take all the money you spend and subtract it from all the money you make. There are different components that go into each of those buckets. For example, if you run a podcast, a main source of revenue would be advertising and some of your expense items would include your recording software, a podcast editing team, recording platform and a podcast hosting platform (just to name a few). You need to know how much you are spending each month and how much you are making each month. It is important to go through your bank statements in fine detail to see your monthly spend. This also can show you areas where you can save money at times too (who doesn’t want to save a few bucks here and there)?
Your Turn to Take Action
I created a basic P&L template for you which you can access here. The numbers in this template are all made up as well as the different buckets under the revenue and expense categories based on the example company. You can adjust the categories as needed, but before you start adding and deleting rows, just check the formulas that are there, so that it becomes easy for you to recalculate and does not yield you any fun excel/google sheet formula errors. Fill your own numbers into the categories.
Now, when it comes to the planning piece, it is important to be honest and realistic with your expectations. If you really want to go all out here, you can even create 3 different scenarios, the base case, with average and reasonable numbers that you expect you will make and spend for the rest of the year, the conservative case, with lower numbers, assuming your growth will not be as headline making as you may want, and best case/highly optimistic case, with very exciting numbers that reflect best case scenario sales projections. Usually the base case wins in terms of what actually happens, but it can be fun to play out all 3 scenarios to give yourself a range of possibilities, allowing you to better prepare and plan for what would happen in any of those scenarios and what type of business decisions you would have to make and what other things you would have to adjust for. If you know you are doing a huge sale or promotion, you can forecast your sales accordingly for the month you will run the promotion in. Seasonality is very common, meaning when you run a holiday sale, such as a Black Friday sale, you usually see an increase in the number of people buying your product or service. Think about months where you may have bigger expenses, potential investments you think you will make into growth initiatives, or other events that may impact your revenue and expense numbers. When it comes to basic forecasting, it is important to look at the pattern of average month over month growth. For revenue, if on average you grow 3-5% per month, it would be fairly safe to assume that the rest of the year would continue at that pace, excluding any months with huge sales or events as mentioned before, that may spike up that revenue growth in a particular month. Expenses are usually a bit more straightforward, because many of your operational expenses will be fixed, meaning they stay the same every month. However, if you know you are going to hire a new team member later in the year, you can easily add in the expected salary you will pay them into your forecast.
Each month, you will adjust your numbers based on what you actually did. For example, let’s say you calculate that in the month of March you will have $500k in revenue and $250k in expenses, making your pre-tax income $250k. However, somehow, Oprah Winfrey was gifted what you offer by her assistant, and she loved it so much she decided to share it with her audience, giving you a very unexpected, but oh so majestic, major increase in revenue, bringing your actual revenue in March to $25M (thank you Oprah for your golden touch). If you’re an online business, your website, merchant fees, and course hosting expenses will also increase due to the volume of traffic you received and you may have to hire a new team member to support the boom in new customers, so you will update your expenses accordingly. Now, here’s the fun part of forecasting, where you have to put on your thinking cap. In 1 month, thanks to Oprah, your sales went up to $25M; the question becomes, how many of those new customers will stick around, love what you do and share it with everyone they know? Will your sales in April therefore stay roughly the same, increase, or show a huge drop, because the impact of these new customers won’t be reflected in the next month, but rather in 2 months from now? That’s where you will have to decide if you believe your sales will be closer to the $500k range, $25M range, or somewhere in between, and how it will continue to play out for the balance of the year and this will depend on your business, what the model is, etc.
Financial planning can be fairly straightforward. At the end of the day it comes down to knowing your numbers, because when you know how much money you make and spend, you can make strategic decisions and decide whether you should launch new initiatives and/or have the financial wiggle room to experiment with new strategies and offerings. Knowing your numbers is also crucial if you plan on looking for investors in the near or distant future. Knowledge is power and having clear data to track and update when it comes to your company’s finances is not just informative, but also empowering.