"Businesses that don’t plan thoroughly are more likely to struggle."
This axiom is particularly true when it comes to financial planning. Financial planning analyzes current and future costs and income to help determine the best plan of action. It touches every aspect of an organization, including payroll, workforce training, marketing, inventory and research and development.
Business financial planning allows companies to determine how to allocate their resources with greater confidence. Does the company have the capital to invest in a new technology platform or new office space? Is it a good time to dip into reserve funds? How will signing a new client impact revenue?
Comprehensive financial planning demonstrates a company's commitment to sound business practices - an ongoing ability to meet financial obligations and spend wisely. That can encourage outside investors and increase the likelihood of long-term success.
Yet, many companies bypass planning or don't pay enough attention to it. In some cases, they may find the thought of creating a financial plan intimidating.
Below you’ll find guidelines to help you focus your financial planning efforts, which will make the process less daunting.
Crafting a solid financial plan
To create a solid financial plan, you'll need to analyze the main components of your business. Make assumptions about cash flow – how much money you're taking in and paying out. What are your biggest costs, and where are they likely to increase spending the most in the near future? Where will you be able to cut costs? How is competition likely to affect your business?
You'll also be looking at potential changes to your workforce and at external circumstances, such as fluctuations in the economy - a recession or growth cycle - and inflation. These can have dramatic effects on business growth. You may also consider how your business compares to similar companies in your industry. Their stories, particularly if they're a little further down the road in terms of experience and success, can inform your decisions. How have they tended to invest their earnings? What are their priorities?
Remember, too, that a financial plan isn't a one-time event. Conditions change. You’ll likely repeat the process at different stages of your business and see different results.
All these variables will help steer your company's actions. Some of the important elements to include in your plan should be:
- Amount of capital required for operations
- Planned use of this revenue
- Future earnings
- Balance sheet: a line-by-line account breakdown of your debts and income
- Cash flow
Revenue projections should be detailed and broken down quarterly for the first two years, and then the plan should offer annual projections for years three through five. Among other things, a financial plan should explain how you'll finance your venture.
Mastering cash flow projection
Cash flow projections ensure that you handle income and expenditures properly. They let you know how much money you have and how long it's likely to last.
Because income can rise and fall unexpectedly, projections can miss the mark. The point is to be as accurate as possible with them so you can create a reasonable budget.
You want to be able to plan several months in advance - or more. For example, you might know there's going to be a short-term dry spell or that you're about to see an infusion of cash based on renewal fees for a service-oriented business. You also might anticipate the start date for a large, new client. In these cases, you can plan accordingly. You'll know when you’ll have funds to pay back a loan or if it's better to hold off on borrowing2. Banks and other lenders weigh this type of information heavily in their lending decisions.
A sound business practice
The more detailed you are in your planning and cash flow forecast, the better it'll be for your business. You’ll have a solid framework for making major business decisions and smaller ones in every area of your organization, and you'll be better equipped to set achievable milestones and goals. As you proceed, you'll also more readily see where your missing projections alter courses quickly. In today’s rapidly changing economy, the ability to adjust is increasingly important.
Like most entrepreneurs, you have a personal interest in seeing your venture succeed. Taking the time to project cash flow and develop a solid financial plan can ensure that your business thrives. Nationwide can provide your business with coverage and other resources to help you achieve this goal.