Financial planning is a make-or-break matter that includes budgeting, investing, and avoiding debts. Use this guide to learn how to lay a solid financial foundation for your business from an innovative expert’s perspective.
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Build a plan so success can come. Most business owners must heed this advice, but not all of them know that for success and growth to happen, a venture needs more than just a business plan. It should also have an early warning system when it comes to the financial status of the organization. That’s what financial planning can do for you.
A financial plan helps determine your business’ capabilities in achieving your strategic goals and objectives, as cited in your business plan. Although most business owners do it after the creation of the company’s mission and vision, you can always revisit and adjust it as needed. More importantly, a financial plan must describe all the projects, resources, equipment needs, and materials necessary to reach your goals along with the set timeframe.
There are two critical elements of a decent financial plan. One is a definite planning horizon, and the next factor is aggregation accuracy. The planning horizon is defined as the period when you’re implementing the plan. It can be on a short-term basis, which usually lasts for 12 months—or a long-term basis that covers two to five years of the business calendar. On the other hand, aggregation is the total of all projects and investment proposals from each unit in the organization. But how can you make sure that your financial plan is a sound one? Take note of these tips on how to generate a savvy financial plan.
Check your strategic plan again
Before your business becomes operational, you have already set your targets and objectives. The details may be in your business plan or any other internal document in each team.
So the thing to do now is to revisit those plans and see if they are still feasible. By doing this, you can determine you need to add or lessen certain aspects of the business. It can be in terms of your equipment, projects, or overhead costs.
Once you know what and how to adjust, you can see your decisions’ affect on your cash flow. The record of all minor and significant expenditures helps you know what kind of financing is necessary for the coming months or how your finances are faring within the planning horizon.
Work up your financial projections
There are recurring expenses that you can easily see while running your business. It includes labor, supplies, and overhead costs. Anticipated income should also be considered based on prior transactions and business arrangements with your customers. Combine all these records to create a financial projection that you can do on a monthly or weekly basis. If the documents are ready, you can add the cost for the projects and other planned activities in the pipeline. To make it easier for you, use financial planning tools, such as a simple spreadsheet software or other accounting software available.
One thing to consider is not to assume that sales always convert to cash right away. To make your financial plan more accurate, enter these records as cash only during the scheduled payments based on previous client data.
It is also good to prepare a projected profit and loss statement, along with a balance sheet projection. Include both optimistic and pessimistic scenarios so you can better anticipate the effects of both foresight in your cash flow.
Plot your financing needs
Can you afford to expand your budget to accommodate more projects? Will you need to loan a certain amount to operate for the coming months? These questions help you prepare your schedule of business activities in line with your needs. Since you’re planning ahead of time, you can explore more options once the issue of financial assistance comes up. Well-thought of financial plans look good when you talk to banks and other monetary institutions as you seek for investors or loan programs. Just talk to your partners if you have any, to discuss your preferred approach on this matter.
Prepare your contingency process
Surprises in business are not always a good thing. Yes, it’s a blessing if it takes your company to greater heights. But if it leads your cash flow to a deteriorating state, then you need to act fast. That is why it’s a good idea to have emergency sources of money and backup plans. In case your finances take a sudden dive due to unforeseen factors, you can lessen your panic and stress. There are many ways to have a contingency plan, but the most common methods are: maintaining a cash reserve and making sure that there is enough room in your credit line.
Keep an eye on your finances
Throughout the year, regularly monitor your records. Try to update them as much as possible. Compare actual results to your projections; see if you’re still on track, or if you need to make adjustments. Looking into the numbers help you determine the possible problems before they escalate into bigger ones.
Hire the experts
If you’re not confident to do the financial plan alone, or if you have too many projects on your plate, it’s a good move to hire an expert. Ask for advice on how to do it, or work with a professional to craft your financial plan.
As a last note, financial planning is different from making a financial statement. When you talk about the latter, you are reporting what has happened to your company’s finances. The numbers on the financial statement provide the results of the operational effort, financial position, and cash flow. However, financial planning is a system that lists down your overall expenditures and profit while giving you financial projections, whether conservative or expanded ones, to avoid any issues in the future.
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