A financial needs analysis is a thorough and detailed observation of our assets against liabilities and investments. It creates a comprehensive overview of your financial position, providing insight to meet your objectives or plan for future ventures. A financial needs analysis is the foundation for creating a well-crafted and tailored financial plan. It covers expenses, income, insurance, debt, assets, and revenue.
Let’s explore the step-by-step guide to conducting a financial needs analysis successfully.
Collect Relevant Financial Information
First off, you need to dig deeper into your financial details. Start by collecting your financial documents like bank statements, tax returns, insurance contracts, investments, and loans — all documents that contribute towards your annual financial statements.
Collecting your financial information is mandatory for financial needs analysis because it provides an understanding of the current economic situation. Compare your documents with the financial statements to ensure your records are accurate.
Keeping your track up-to-date and accurate ensures users make informed decisions regarding their present and future goals.
Define Your Goals
After collecting relevant financial information, you must define clear and achievable goals that provide a roadmap to creating a financial plan. Your goals should align with your current business ventures. For instance, if you sell cosmetics online, your financial goals should revolve around increasing company revenue, selling more cosmetics, or creating a better turnover.
Now, let’s link your financial information with your goals. The data from your financial statements, tax files, and other documentation assists in determining your strengths and weaknesses. Moreover, you can seek realistic opportunities and potential threats that take your business to a new level.
Follow the SMART criteria when establishing goals.
Specific goals without vagueness or ambiguity.
Measurable against different performance metrics.
Achievable and attainable.
Relevant to your business.
Time-bound.
SMART goals provide a clear direction for the financial needs analysis. Whether you want to purchase a new car or save some money to invest in stocks, SMART goals will let you know how to proceed.
Evaluate Your Income and Expenses
Next, you need to understand where the money comes from and what you spend it on. Financial inflow and outflow are mandatory to evaluate your financial plan in depth.
First, list all sources of income. It can be anything from your current salary to business, rental income, receivables, share dividends, interest from the savings account, and anything that brings money to your bank account. You need to categorize each income and understand how much cash is received.
Once you have a record of your income, list your expenses. You can divide them into recurring and non-recurring expenses to understand your spending habits better. In most cases, recurring monthly expenses include student loans, insurance premiums, utilities, subscriptions, rent money, and mortgages. Anything you do not plan to repeat monthly is known as a non-recurring expense, i.e., shopping spree, birthday party, attending a nearby event, and more.
A deep breakdown will give you an idea of whether your monthly income is sufficient or if you need an upgrade in your monthly income. Regular checks on income/expenses keep your financial needs analysis up-to-date and ensure your goals and objectives are aligned with the financial position.
Assess Risks and Risk Tolerance
Whether you are a millionaire businessman or someone who works 9-5 to provide for his family, there is always some risk in what you do. Although eliminating risk is not an option since we don’t live in an ideal world, intelligent people prepare to avoid troubles in their personal and business endeavors.
Risk is the unfortunate possibility of losing some or all money, depending on factors like market fluctuations, economic changes, and any other unforeseen events. For instance, when you start a new business, there is a risk it won’t take off like expected. Or maybe your new house is not worth the money as the real estate agent claimed it to be. Regardless of your circumstances, understanding risk and a suitable risk assessment plan can save you from more significant losses.
Types of Risk
To determine risk toleration better, you must know about the different types of risks that exist.
Market Risk: The overall market conditions that impact investments positively or negatively.
Inflation Risk: The changes in the cost of living affect one’s ability to buy services and goods.
Interest Rate: Changes in the interest rate that affect the value of your savings, investments, loans, and bonds.
Risk Tolerance
Risk tolerance is your ability to endure fluctuations and unexpected changes in the business without going through a significant loss. Ask yourself simple questions regarding the situation to assess your position better. Use a risk tolerance assessment questionnaire that will help you understand your concern on the matter.
Conservative Risk Tolerance: Higher worry and shorter investment time.
Moderate Risk Tolerance: Willing to take risks but in moderation.
Aggressive Risk Tolerance: Ready to take risks and challenges.
Risk Assessment
To finalize your financial needs analysis plan, it is mandatory to identify the different risk factors that might arise.
- Market risk
- Credit risk
- Interest rate risk
- Inflation risk
- Currency risk
- Reputational risk
Evaluate the risks as mentioned above to create a solid plan that helps counter the potential concerns of the business.
Develop a Future Financial Plan
Your financial needs analysis is complete once you have evaluated the potential risks and identified goals through relevant financial information. All you have to do is create a financial plan that aligns with your goals.
Your financial plan must include the budget, investment strategy and prospects, debt management, insurance recommendations, and tax strategies. Remember to create a contingency plan to stay on track toward the primary goal, despite any changes in the expected situation.
You can hire a professional financial or fiduciary planner to review your financial position and create a plan matching all needs.
Final Thoughts
Financial Needs Analysis is the observation of your current financial situation. It helps observe your assets, liabilities, income, and expenses. You can create a financial needs analysis plan by collecting relevant financial information, defining your goals, and assessing risks.
A financial needs analysis is an ongoing process that evolves as you change your goals and financial performance. Keep a contingency plan crafted by professionals to stay on track toward your primary goal without deviation from the actual plan.
