For both individuals and businesses, financial plans are essential for tracking long-term monetary growth and success. If you’re responsible for an organization’s finances or interested in improving your own, knowing the key aspects of a financial plan can help you create one that’s effective. It can also help you set financial goals that are both realistic and achievable.
In this article, we define financial plans, describe the elements to include in your outline, and offer tips to help you take action to achieve your goals.
What is a financial plan?
A financial plan is a financial document that details the goals, financial status, and action plans for achieving a specific goal or objective. Businesses and individuals can create financial plans to outline the trajectory of their financial futures and the actions they can take to achieve goals.
In business, a financial plan is crucial to outline a company’s current financial health, project future cash flow, and analyze risks to financial growth and success. An individual can take a similar approach when creating a financial plan, even though some elements can differ from a financial plan for a business.
9 important financial plan elements
Whether you’re creating a financial plan for your individual goals or a plan for an organization, the following financial plan elements provide insight into what to include:
1. Financial goals and objectives
One of the most important sections within a financial plan is the section where you include your financial goals. For individuals, this section can include your long-term financial goal and specific short-term objectives that support the achievement of your future goal.
For instance, if you set a goal to earn $500,000 within 15 years, short-term objectives that would support this goal could include depositing funds into a savings account or creating investment strategies. Your financial plan outlines your goals and helps you break them down into an action plan with steps you plan to take to accomplish your objectives.
In business, the financial goals a company sets differ from individuals. For example, a company developing a financial plan may set a long-term profitability goal and then break it down into short-term revenue objectives. The company may set objectives for sales quotas and cost reduction strategies that support the achievement of the company’s financial goals.
2. Income statements
An income statement is part of a financial plan that gives details about cash flow generation and expenditures. Income statements, or statements of cash flow, are primarily for business finance employees to record transactions that bring revenue in and dispense cash out. These documents are essential in a business’s financial plan because income statements outline all cash flow activities like revenues, profits, losses, and expenditures.
Individuals can apply the concept of an income statement to track all incoming salary and outgoing payments on expenses. If you’re creating an individual financial plan, your income statements can include your job earnings, along with the expenses you’re responsible for on a monthly and yearly basis, like utility payments, loans, and credit purchases.
3. Balance sheets
Balance sheets are typically only necessary to include in a business financial plan but individuals can apply the concept of tracking any assets, equity, and liabilities they have. In corporate settings, the balance sheet within a financial plan includes a company’s assets like accounts receivable and inventory, along with liabilities like accounts payable or credit balances. Many companies may also have equity, such as stock proceeds or retained earnings, which the balance sheet tracks within the financial plan.
Individuals who earn outside income from investments in stocks, bonds, or real estate equity may also use a balance sheet template to track these assets in their financial plans. Individuals may also track liabilities like money owed on stocks or credit interest repayments within a similar section of their financial plans. This element of a financial plan can also help individuals plan for retirement and wealth management, as it tracks long-term assets and liabilities that can affect their overall financial health.
4. Risk analysis
Risk analysis is essential for both business and individual financial plans. Assessing potential risks that can challenge financial growth and success is important for applying strategies to save money, reduce spending, and boost financial standing. In business, a financial risk analysis covers factors like credit risk, procurement strategies, revenue generation, and economic factors that affect a company’s ability to generate profits and succeed in its market.
Individuals can use risk analysis to predict changes in economic factors like interest rates, retirement contribution limits, and other changes in financial management applications. The risk analysis for individual financial plans may also include an evaluation of insurance methods, wealth management strategies, and coverage for liabilities in case of adverse market effects.
5. Investment strategy
Investment strategies in business and individual financial plans include approaches to allocating money that add to financial growth. In a business, investment strategies can include long-term plans to gain financially beneficial partnerships, mergers, or company acquisitions.
Other investment strategies in a corporate financial plan may outline the strategies a company uses to sell company stocks, obtain project funding, and reinvest revenue into business operations. Establishing improved methods of cash flow management to achieve long-term success may also be a part of a business’s investment strategies in its financial plan.
An individual financial plan that includes investment strategies can be highly beneficial for achieving long-term financial goals. If you’re creating a financial plan for yourself, consider applying an investment strategy that outlines tools like long-term investments for retirement and wealth-building. This element of a financial plan can help you outline how to apply investment management to achieve your financial goals.
6. Net worth statement
For personal and business financial plans, a net worth statement can help you understand the total value you have or a business has to plan. For example, a business with $980,000 can give approximately that value if it slowly closes and ends its contracts and leases. If you’re creating a personal financial plan, understanding your net worth helps you collect your liquid and non-liquid assets.
7. Debt management plan
A debt management plan is important for both personal and business financial plans because it accounts for money owed. For a business, it can use the debt management plan to close its accounts and become more self-sustaining. For a personal plan, you can use a debt management plan to complete your debt payments before you retire from your profession, allowing you to retire without continuing payments.
8. Retirement plan
A personal financial plan, including your retirement, can help you plan for your life after you retire. This helps you save money for that period of your life and creates a way to ensure you can meet your basic needs and other payments you make. Your retirement plan can include trips you may take, the money you owe as part of your debt, and payments for food, shelter, and other needs you have.
9. Emergency funds
In any financial plan, knowing what emergency funds you have can help you plan for emergency events. For business, an emergency fund can keep the business operational if demand drops drastically, for example, or if there’s a major loss for the business. For a personal plan, having an emergency fund to help you in case of an injury or other expensive event can help you remain within your goals and objectives.
Tips for creating a financial plan
Whether you’re creating an individual financial plan or developing an outline for a business-focused plan, consider the following tips to help you get started:
Set realistic goals for long-term achievement. Set goals you can measure regularly and for which you can account. Establish check-ins to monitor your progress toward short-term objectives.
Stay updated on current financial trends. Be aware of economic standards, changes in financial applications (like accounting methods), new trends, and other updates that can affect your financial strategies.
Evaluate your financial plan regularly. Review your financial plan consistently to evaluate your methods and approaches to accomplishing objectives.
Make changes when necessary. Change your financial plan when you need it so you can ensure your goals, strategies, and practices are in alignment with current trends and financial procedures.
I hope you find this article helpful.