No business can expect to make money without also managing it effectively. Establishing and achieving key financial milestones is essential to the health of a business. Every financial decision you make can have a significant impact on the overall strength of your company, ultimately defining the future of your business. This is why financial planning is crucial.
What is financial planning for a business?
Financial planning is the task of determining how your business will finance its strategic goals and objectives. The plan is a document that describes the activities, resources, equipment and materials needed to achieve these objectives. It sets time frames for your goals and strategies for achieving them. It helps you be in control of your company’s income, expenses and investments and is essential to building a successful business. A good plan includes an assessment of the business environment, company goals, resources needed to reach these goals, team and resource budgets and risks that might be faced. It ensures a company is equipped in advance to deal with changing circumstances at both personal and business levels.
Why create a financial plan for your business?
There are a myriad of reasons to create a financial plan for your company.
- To manage your risk and respond quickly to financial issues: A business must plan for a lot of risks (death or disability of central figures, illness, property ownership loss, lawsuits, interruption of business, lower than expected revenue, high overheads, etc.). By regularly reviewing risks and planning a response, a company is prepared to tackle issues quickly, before they become hard to manage.
- To provide a road map for growth: It’s easy to focus on daily issues and neglect long-term planning. A financial plan helps a company focus on the future by providing clear goals for company growth and performance. It helps you analyze your current situation and project where you want the business to be in the future.
- To help you develop a good tax strategy: Financial planning is helpful when it comes time to submit your tax return or if you sell the company.
- To identify sales trends: A financial plan that includes quantifiable targets and sales records helps determine which individual products and which initiatives are most lucrative, making it possible to adjust your marketing strategy appropriately.
- To prioritize expenditures: A financial plan sets clear expectations for cash flow and helps a business owner to consider spending priorities.
- To identify necessary cost reductions: A financial plan helps you refer to past spending and identify unnecessary or over-inflated costs so you can adjust accordingly.
- To create transparency with staff and investors by sharing key figures (revenue, costs, profitability, etc.).
- To show progress: A financial plan is helpful in showing increased revenues, cash flow growth and overall profit in quantifiable data, encouraging business owners.
How to get started with your financial plan:
The following are the basic steps of creating a financial plan for your business.
- Determine your financial goals: Are you looking to expand your business? Do you wish to increase your product/service’s market share? Are you interested in strengthening your customer service? Do you need more equipment and/or staff? The financial plan you build for your company largely depends upon your goals and your unique stage of business development.
- Take stock of your assets: What is the balance of your business bank accounts? What are your accounts receivable, cash equivalents and short-term investments? How much stock do you have on hand? How many supplies are presently in storage?
- Determine your income, expenses and debt: Where does all your money go? Examine your cash flow and track your spending. Look at salaries (including your own), rent or mortgage payments, communication expenses (internet, telephone services, etc.), utilities, storage, distribution, promotion, office supplies and general maintenance. What is your monthly, quarterly and yearly income? What debt do you carry (bank loans, lease payments, income taxes payable, etc.)
- Develop financial projections: Create monthly projections based on sales forecast and anticipated expenses (labour, supplies overheard). Prepare a projected income (profit and loss) statement and a balance sheet projection. This is a crucial part of your business plan if lenders and/or investors are involved.
- Arrange for financing (if needed): Use your financial projections to determine your financing needs. Approach your financial partners to discuss options. Well-prepared projections reassure bankers/investors that your financial management is solid.
- Plan for contingencies: Decide what you will do if your finances suddenly deteriorate. Establish emergency sources of money (maintain a cash reserve or keep some room on your line of credit).
- Monitor your progress: Periodically, compare actual results with your projections to see if you’re on target or need to adjust. Monitoring helps you spot financial problems before they get out of hand.
- Get help: Consider hiring an expert to help you put together and monitor your financial plan. Your accountant is an invaluable resource. They can provide you with powerful financial planning solutions. By carrying out a detailed analysis of your current processes, bringing your objectives into focus, and developing viable strategies, they’ll help you utilize your company’s finances in the most effective ways possible. The result? Greater clarity, measurable results and long-term growth.
A financial plan affects day-to-day fiscal decision-making, defining the future of a business and shaping a company’s journey. A detailed financial plan brings a company’s objectives into focus and helps in developing viable strategies. Corporate financial planning demands a strong understanding of commerce and how companies operate fiscally. It also calls for attention and care for the immediate financial needs and specificities of your enterprise.
Need help preparing a financial plan for your business? Contact Cook and Company Chartered Professional Accountants. We can provide you with powerful financial planning solutions. Whether you operate a sole proprietorship or a sizable corporation with multiple subsidiaries, Cook and Company use their experience and expertise to help your business. Contact us for a complimentary consultation.