Financial planning is the task of determining how the organisation will afford to achieve its strategic goals. A financial plan can help startups, and more long-standing businesses – who want to go back to the drawing board – alike. It can determine how a business can achieve their organisational goals, and it’s one of the first things to create if you need to make decisions that are in the best interest of the company.
Normally, a business creates a financial plan immediately after the vision and objectives have been determined. The plan outlines each of the activities, resources, equipment, and materials that are needed for a business to achieve its objectives, within the projected time frame.
Financial planning is critical to the success of any business, it validates the business plan, by confirming that the objectives are obtainable from a financial standpoint. It can also be useful to set financial targets and incentives for your staff to reach them.
A financial plan is different from your financial statement, instead of looking at what’s already happened, you make projections for the coming months/years, forecasting income and outlays. Your projections will act as an early warning system, it will help you plan for cash flow dips, identify financing needs and pinpoint the best timing for projects.
Some key questions to explore when financial planning:
- How much will your business cost to open? There’s going to be fees associated for registering a business name, incorporating, licensing, buying insurance, and trademarking your logo or name.
- Where will your initial investment come from? Do you have savings, family investors, or a loan? How bad will it affect your finances if your business doesn’t succeed?
- Once opened, how much cash income will your business need to stay operational?
- What are your revenue targets for year one, year two, year five, and so on?
One of the benefits of financial planning before your launch your company to the public, is that you’ll see clearly what the risks and prospects are. If the financial risks are too high, you’ll have to revise your plan before taking the leap.
What are the steps to creating a financial plan?
Review your strategic plan
- You need to think about what it is you want to achieve. Do you want to expand? Do you need more equipment? Do you want to grow your team? Do you need financing? If so, how much? Etc.
Create financial projections
- Develop monthly projections by documenting your anticipated income based on sales forecasts and expenses. Now use those costs you identified and apply them for upcoming projects and this will give you a forecast. You can use an accounting software to help you with this.
- Use the previous projection to determine how much financing you’ll need. Approach your partners or investors ahead of time to discuss your options.
- Have an emergency source of money before you need it. Maintain a cash reserve or keep your credit options open. What would you do if your finances suddenly deteriorated?
Monitor your progress
- Compare your actual results with your projections to see if you’re on target or if you need to adjust.
- If you lack expertise, seek advice from an expert to help you put together your financial plan.
Financial planning might feel overwhelming when you get started, but this part of your business plan is absolutely essential and you must understand the ins and outs. Using an invoicing and billing software to help you manage your budgets, sales and expenses can help you keep track of your progress on the go.