Most people dream of becoming an entrepreneur and living as their own bosses. What could be better than working at your own pace while not being answerable to anyone? However, in reality, many small businesses do not survive past infancy.
There may be various reasons for this, from economic depressions to tough competition. But among the major reasons is the lack of foresight by owners. Talk to any of the lucky few that did make it through and you’ll unearth one thing they had in common: a strategy with an emphasis on realistic and strong finance planning for business.
Financial Plan: What is it?
Any sound organization begins with an idea that is backed by a solid strategy to help rake in profits. A strategy, in turn, is composed of various elements and the one at the heart of it all is the fiscal plan. Finance planning for business envisions all possible future inflows and outflows to a practical degree and makes arrangements for sources of funds should the need arise.
This is kind of like the process of drafting the financial statements. Except where those statements are based on data from the past, a fiscal plan would be hypothetical and forward-looking.
Depending on whether your organization is just sprouting or has been running for a while, you’ll need those past figures as well on which to design future assumptions. In the case of a new business, a competitor’s results could provide the historical trends.
Past numbers are not the sole input. Entrepreneurs will have to realistically look at all upcoming expenses, both capital, and running expenses as well as anticipate outflows that are one-off. Revenue figures along with any inflation in numbers will need justification so the fiscal plan is based on reality and not just hope.
And should there be a shortfall, the owner must make a game plan of how they will cater to that, whether it’s negotiating an overdraft facility or a loan. By arranging all these elements financial statement style, a business finance plan is born. Equipped with this, the business owner is ready to deal with surprises and opportunities that are part of any economic lifecycle.
Purpose of a Financial Plan
When owners make the time to thoroughly mediate and carry out finance planning for business, quite a few goals are accomplished along the way. Monetary planning helps in steering clear of common pitfalls, reliable prediction of results and even course correction should new prospects present themselves.
- Perhaps, the most important purpose of monetary planning is the capacity it has to shine a light on the path the business will follow over the period under consideration. Since a fiscal plan is part of the strategy, both will have clear alignment, and solutions to any possible hurdles can be dealt with in line with the vision of the company. This grounds the owners and gives them a clear sense of direction. It is also their motivation when times get tough and stakeholder assurance starts to drop.
- A plan instills confidence in the future for not only the owner but also the lenders and investors. So, when a proprietor who regularly maintains these plans, has a need for borrowings, they will have an easier time proving to potential sources their sense of responsibility and their level of commitment to the business.
- The day-to-day hustle of a small business can often overwhelm the proprietor so much so that they could miss regulatory deadlines for taxes or licenses. Or they could hit tough times and find they had no contingency plan for buoying them through. Had they made the plan, most of these issues would either already be accounted for or circumvented via insurance or an emergency fund.
- Using a business financial plan, small and medium companies can compare their performance in actual to that predicted at regular intervals. In case of deviations, course adjustments are a simpler task than being caught completely unawares.
- It’s not always high tides and stormy weather. During smooth sailing, a well-prepared proprietor will have the space to consider how to best engage excess funds or take the chance on an expansion or new investment.
Steps involved in finance planning for business
Luckily, business financial planning is not necessarily for professionals. With a bit of guidance from online sources and deep introspection of your own company, a custom fiscal plan for your business should be simple enough. Mentioned below are 5 core stages to go through while mapping monetary necessities:
1. Evaluating strategy
When considering new businesses, this means drafting a long-term goal for your organization that guides your hand in making a profit from your resources. For companies already in operation, the owners might reconsider their goals for just the current period. This involves macro targets like onboarding new staff or opening at a new location. However, during economic recessions, small businesses might just be thinking of survival instead of expansionary or diversification activities. As long as there is a realistic view of the year ahead an effective proposal can be designed.
Once you have an idea of what you plan to accomplish, then turn to think up the actionable steps on how to achieve it engaging the most crucial resource of all: money.
2. Budgeting & Forecasting
Now that you’re sure about the big picture, you need to solve the finance equation in a way that incorporates your vision with the committed expenses of the company. These include any major capital expense that is already budgeted for the period as well as running costs, both of which may be available from past financial statements and plans.
To be meaningful and comparable, these projections will be incorporated into a cash flow forecast, projected balance sheet, and projected profit & loss statement. There are also software’s available that help with this sort of fiscal modeling. However, in the event that you aren’t sure about any of these things, consider getting help from an accounting professional.
3. Buffer for uncertain times
Good luck is the result of good planning. And once you take a microscope and put the lives of folks you consider lucky underneath, you’re bound to find they had end goals and some type of disciplined planning guiding their hand all along.
The same applies when finance planning for business. It is inevitable to hit snags in the roadmap you layout for your organization. There will even be unexpected golden opportunities that may land at your doorstep.
However, only if you have adequately used your resources will you be able to navigate either situation. Insurance covers for risky aspects, surplus funds, and savings only help if they were thought of before the scenario presents itself.
4. Sources of funding
In most fields, especially in the initial years of a business, there are many highs and lows faced by the proprietor. This is why they must have in mind some plan for arranging finance when faced with a liquidity crunch.
Provisioning for such sources in the finance planning for business ensures continuity and smooth operations. It is always prudent to at least have an overdraft limit approved by the bank in case of a quick pinch. However, this form of finance is only good for daily or running expenses.
When the need is for renovations, expansion, or any sort of capital expenditure, it should be answered with long-term loan facilities like borrowings from the bank or lenders.
This is because capital expenditures are larger amounts and it is wise to match these with small interest rates that accompany long-term borrowings. Another possible source is pitching to investors that may be among the owner’s circle of family and friends or venture capitalists.
5. Monitoring and course correction
Of course, it is quite inadequate to draft a plan just to chuck it underneath the latest performance reports and correspondences, only to be picked up at the year end. After all the hard work and time invested in the plan, the rewards can fully be reaped by its periodic review against current facts and figures.
Any deviations should be investigated and reasoned out. Methods for course re-alignment should be brainstormed and implemented.
And this is not only in the case of a bleaker picture than what was predicted. When results are rosier than predicted, a wise proprietor would still aim to reason out the variation so they can understand the reason behind the success and replicate it again. Or they can adjust the plans and maybe increase savings and investments while they have the chance.
Good or bad, a deviation from the original roadmap should always be monitored and made allowances for.
No one can really tell when starting out if their entrepreneurial venture will be a hit or miss. There is certainly no lack of enthusiasm when it comes to small business owners setting out on their journey.
But what most people lack is the discipline in their routine, especially monetarily. This is why it is very critical to make finance planning for business as well as its constant review a lifelong habit so you never lose sight of the bottom line. After all, what is a business without profits?