Whether you are a mechanical, electrical, or industrial engineer, creating a financial plan for your practice can be challenging. You are used to systematically solving problems, but you may be wondering what is financial planning? When tackling this issue, we can use the engineering process to set us in the right direction. Before we can develop a solution, we have to define the current financial problems in your business.
Once you have a summary of your financial health, you can use it to project your growth and set projections for growth. This guide will show you how to create a financial plan and use it to take your engineering business to the next level.
What Are the Benefits of Financial Planning?
Businesses that do financial planning have the potential to grow quicker and easier. A proper plan gives a company the roadmap it needs to make the right decisions. This can include choosing where to put their resources and effort, which will maximize the company's effectiveness.
Another important reason to create a specific financial plan is you are ready to pitch investors or loan lenders if your business ever needs financing.
Speaking of business financing, if you are a veteran or retired military officer, you have special options when applying for funding. The Small Business Association (SBA) offers fee relief on small-dollar loans. Additionally, you can apply for special veteran-only grants to get your business off the ground. The government does this because they want to lower the barrier to entry for those who served our country.
Now that you know you need a financial plan, let's go over the specifics of creating it.
How to Write a Financial Plan for Your Engineering Business
When creating our plan, we are going to refer back to the engineering process. First, we need to define your problem by gathering all your financial information. We will do this by filling out a cash flow statement and balance sheet. Then we will do our research and develop a solution to reach our goals by creating a sales forecast.
To recap, every engineer's financial plan requires these key documents:
- Cash flow statement
- Balance sheet
- Sales forecast
Cash Flow Statement
Exactly how it sounds this sheet is an overview of the revenue your engineering business made, the money it spent, and the final cash balance is at the end of every month. Basically, a cash flow statement shows you exactly how much money the practice made, where it came from, and where it went. This is arguably the most important piece of the financial plan for engineers, because without knowing where you are, you can't diagnose problems or develop a solution.
It also helps you know how much cash you have on hand in case something goes wrong, such as during the testing phase of any product or service. Use a cash flow statement to prepare and protect your engineering practice in case of these instances.
You have two options of accounting when creating a cash flow statement.
- Cash : You only record sales and expenses when the cash is exchanged. If you need to record sales and expenses as they happen, then this is the best option for you. That way you get an in the moment snapshot of your financial health. Cash is hands down the easiest method.
- Accrual: This method only recognizes income when the sales happen and expenses when they are billed. It's most useful for businesses that get paid immediately for invoices, because otherwise it can look like the company is losing money.
This is a document that looks over the business' assets, liabilities, and owner equity. It's a fantastic way to see where the business stands financially for any moment of time.
Business assets usually fall into three categories:
- Current : This is the total amount of cash a company has and money that is owed.
- Fixed : Tangible assets that the business owns such as an office space, land or equipment used for engineering.
- Intangible : Intellectual property such as copyrights, patents, trade secrets.
Liabilities are debts that the business still has to pay. This includes money owed to employees, manufacturers or tax obligations.
The last piece of the balance sheet is owner equity. It's the total value of your business and assets after all your liabilities. This also includes the stocks or shares owned by the company.
Now that we have a good idea about the financial health of your company, let's begin estimating your future income so we can set goals.
Basically, this is a gross income projection of how much you think your business will make in a set amount of time. If you ever plan on pitching investors or getting loans, then a sales forecast is required. Your projected sales are usually estimated from your past income. It's a best practice to break down your sales by each different revenue source your business has. That way your projections are as accurate as possible.
Every engineering business will have a different sales forecast. It could quickly become complicated to forecast your own income. Consult with a financial planning company such as Stages Financial, to guarantee you do this step properly.
How Can Financial Planning Help Me Reach My Engineering Business Goals?
The greatest benefit to creating a financial plan for your engineering business is being able to confidently raise capital to give your business leverage. It can also help get you out of a tough financial situation when disaster strikes. For best results update your financial plan periodically, it can increase the value of your business if you ever choose to retire or sell it. Additionally, businesses that don't prepare for their goals rarely ever meet them.
Here at Stages Financial, we get it. As an engineer, you are very busy building your empire. Outsource the financial planning aspect of your business to experts that will hand you the plan that can make your goals achievable.
Don't put the financial success of your business up to chance schedule a 15 minute planning call with a professional today so you can spend more time building your revenue.