Effective financial planning is an integral part of building a successful business. Constructing a financial plan will contribute to day-to-day decision-making and significantly affect the way that an organisation manages inflows and outflows. Looking at forecasts and results gives an overview of health and performance of a business, both currently and in the future. Whether the business is large or even of a sole trader, financial planning is important.
There are several aspects that businesses should consider for financial planning:
Cash & Sales Management
While many businesses keep a close eye on the income coming in and handling cash, they may fail to realise the mistakes made in cash flow. Handling such matters is an easy job, providing that you keep track of it all. However, one must be careful to avoid making these mistakes that are often found when taking on cost & sales management:
- Avoid assets that don’t generate positive cash flow.
- Incurring fees and high expenses – This may include unnecessary costs, fees such as account fees or withdrawal fees.
- Lack of foresight in budgeting – A major mistake to avoid. Not knowing where your business’s cash is going can significantly impact its stability.. This occurs when the business fails to have a budget, limitations, saving plans and investment plans. A strategy should be created that will push the business to spend wisely, for every pound they receive from income they will know exactly where they spent it. It is also important to set aside some money in order to prepare for unexpected expenses.
Long term plan
Often it becomes very easy to focus on issues that arise in day to day operation. Worrying only about the income from present sales can prevent the business from planning ahead. Not spending enough time strategizing for the future will prevent the business from growing and achieve long-term goals or prepare for future crisis. The financial plan will allow the business to have a better overview of the expenditures, substantially smarter investments and will be vastly helpful in the tracking of the business’s success. Long-term projection, therefore, is as critical as knowing what it is happening currently, as it provides a trajectory for the business that enables quantifiable auditing of it’s progress.
Businesses make many decisions in the course of weeks or months for better progress, however it can become difficult to understand which decisions or strategies resulted in success and which failed. Preparing a plan where quantifiable targets or decisions are compared with the results during the year will help to understand with why and how the decisions failed or success and therefore make new decisions accordingly e.g. whether there was a sales increase due to effective advertisement or due to a specific product/service.
Prioritising expenditures has an important role when looking through cash flows and business accounts. Analysing the expenditures will help understand where the money is being spent. We may not realise, but many times the spending of the business could be higher than the sales or higher than they should be. This is why spending efficiency should be thoroughly understood, especially in the early survival stages of a company. Therefore, prioritising will give importance to expenditures that are necessary e.g. staff salary, rent etc.
A huge part of growing a strong, healthy business is making quantifiable and realistic goals to measure progress against. This also relates to the point mentioned above on projection. After all of the necessary financial planning and decision-making has occurred, measuring progress becomes essential for the timeline of the business objectives, cash flows and accounts. This helps to understand whether goals set have been achieved as well as a way of predicting the growth of the business. It will also be a great aid in making more attainable, realistic goals in the future.