Whether in a brand-new start-up or an established company, financial plans are important in business. Because they aren’t revenue drivers, they’re often overlooked, but when it comes to determining the feasibility of a business and mitigating risks, nothing could be more important. In the same way that Human Resources exist to create the best team to pursue a business’s mission, financial plans exist to help ensure a business can continue to pursue that mission, and that stakeholders will be compensated adequately and on time.
For most larger businesses, this planning can be incredibly lengthy, complex, and involve numerous professionals with different areas of expertise, in consultation with additional legal and accounting resources; but even single-employee business owners need to engage in some level of planning. In order to build the beginnings of a strong financial plan for your business, here are a few important steps to take.
- Assess your business and revenue models. Beyond your pricing structure, think about how often your business will or should get paid. If your business is relatively new, how quickly do you plan to get paid? If revenue doesn’t start as quickly as you expect, how will you handle expenses? Next, determine the degree of control you have over client payments. Are you collecting payments up-front? Are clients having invoice payments deducted from their accounts, or are they being billed after delivery or service is complete?
- Consider the demands that will be placed on this future revenue. Will you need to take a certain amount of money out of the business each month? How will your financing future grow – by saving a portion of profits until you can pay for it, or do you have a line of credit? If you’re buying a business or having to make the initial investment in capital equipment, is this being done with borrowed money that will require monthly payments?
- Compare the structure of your revenue model with that of your expenses. Start by listing all fixed and variable expenses, along with their respective payment schedules. Determine how likely they are to change in the future – be sure to over-estimate expenses going forward to be conservative. If certain expenses were taken on at a time when expectations for the business were different, be sure to take note of why the expense is higher and what has changed from the old expectations.
- Look for areas to improve. Consider changes that might be implemented so the company can get paid faster. Look for areas where expenses can be lowered. Is there work that can be cut to keep from having to hire additional people? If revenue drops, think about where you can make cuts first without hurting the long-term viability of your business. If expectations or the model for your business have changed, think about how you would do things differently if you were making the decision with new information. Is there any way to bridge that gap?
- Make sure you have formal procedures in place to review items like costs and revenue, along with any prospective changes to either. The impacts of any changes need to be measured and considered so you can determine the appropriate steps to take. Decide who needs to be included in any discussion of potential changes and who should have approval authority. A certain degree of autonomy can be good in business, but think about what limits you want to place on employees.
- Lastly, and perhaps most importantly, make sure to repeat this process periodically. Financial planning – whether for individuals or companies – is not a single exercise. Managing a company’s finances requires constant attention, and the plans that go along with these functions need periodic review and updates with new information as a business changes in size, scope, and complexity.
As your business grows, it will become increasingly important to use additional resources, such as bookkeeping software, as well as outside experts like auditors and financial consultants. The decisions of when and whom to hire can be daunting, but in the long-run, these additional tools and experts should share the load of managing your company’s finances. The value they provide – even if only in a new objective perspective – should vastly exceed their cost.
Following this short guide will help you as a business owner to begin assembling the financial aspects of your business plan. It will help you to address a number of contingencies, and perhaps even force you to face some glaring weaknesses or threats in your business which might otherwise go ignored. Those who rest on their heels will soon find themselves in trouble.
About the Author:
Sarah Porter is a money-savvy writer and mum of two based in Manchester, UK. She is the Brand and Marketing Manager at the UK loan website oinkmoney.com, as well as the founder of a well-known money-saving website. Sarah is originally from Edinburgh where she studied Business and later worked in finance for a FTSE 100 company. She left her career in finance to pursue her passion for writing, a move which allowed her to travel the world with her laptop while running her blog.