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In business, anyone will tell you that you cannot succeed without a plan. However, the reality is that you will need several plans if you are going to manage everything properly. One of those will be a financial plan that ensures that your money is always where it should be, doing what it is supposed to and that you aren’t on track for a big financial nightmare because of poor planning.
The financial section of a good business plan will include several different elements. It is an integral part of the whole plan because it shows readers that you can conduct business in a profitable manner. Even just planning out the finances can tell you whether or not the business will be viable, which is enough of a reason to do it for anyone.
To create a business plan that allows you to succeed, you must include a financial section that summarizes your financial forecast while being realistic. This isn’t an idealist area of planning; you need to make sure that you’re not overselling yourself or your financials. Let’s talk about how to go about creating your financial plan, and then we’ll dig into the benefits of doing so.
How to Create Your Financial Plan
There is no single plan that is going to work for every business, but the process of creating one is similar in any industry. You need to start by creating a sales forecast that plans out at least three years of your business. That should include all of the information about sales and margins, profits, and other factors so that you have a total view of the potential sales of the business, no matter what your “product” is.
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Then, you need to create an expense budget so that you know exactly what it costs you to run your business and generate sales. What kind of costs are you going to have? You’ll have two main categories: fixed and variable. Fixed costs are things that you need to pay each month like your building rent, or your SaaS costs for running your tech stack. Variable costs could be things like supplies and inventory that will change over time.
Remember, these are forecasts, not accounting ledgers. Estimations are fine, so long as they’re realistic estimations.
The next task on your list will be to generate a cash flow statement. This will show everyone the actual money that is coming into and going out of the business. In the world of business financials, cash flow is king. The key here is to make sure you won’t run out of money.
You will need to project incomes, as well as your potential assets and liabilities. Some of this will be obvious, such as the liability of startup assets that will eat up a lot of your capital, and the debts of your business loans that you used to get your business off the ground. Others might require more creative thinking and investigation to determine.
The final element of a good financial plan is to create a breakeven analysis. This is essentially telling you, potential investors, and everyone else when your business will break even or become profitable. This is an important thing to know for potential investors and it’s also important for you as a business owner, to understand what to expect until you start earning profits.
The Benefits of Having a Financial Plan
So, if you take the time to plan properly, what do you get? Here are just a few of the biggest perks to consider.
Correctly Managed Cash Flow: A solid financial plan means that your cash flow will be managed properly and that your business won’t be hemorrhaging cash as a result of poor planning. Not only will you know what’s coming and going, but you’ll know where it is supposed to be going or coming from.
Clear Goals and Financial Milestones: Just like the rest of your business plan, taking the time to properly plan the financials will give you the chance to set real, clear goals and milestones that you are going to achieve. These touchpoints will be integral to your success and need to be properly defined. You can’t just say you want to be successful within three years — what does “successful” even mean?
Reduced Risks: Better planning means less risk, in business and life in general. When it comes to your finances, this means you’ll risk losing less money or making poor financial choices because you took the time to plan things out. Businesses with a solid financial plan are exponentially more likely to succeed than businesses without them.
Long-Range Views: While you can’t see the future, you can definitely do a lot in the way of planning for any possible outcome with the right business plan. Financial planning gives you the chance to look out over the course of years and forecast what your business can expect, with the obvious exceptions and considerations for variables that could change over the years, of course. Still, however, you’ll be able to see further into the future of your business’ profitability and success with a solid plan.
Easier Progress Tracking: When you have a plan with clear milestones and goals, you’ll have a much easier time tracking your progress. It’s not going to be easy to follow your success when you’re “winging it” or you don’t have clearly defined goals. Sure, it’s nice to get into the black, but putting actual dollar signs on it will make it that much better and that much more attainable. You’re building a business, and that requires careful progress reporting and planning.
Smarter Budget Allocation: How can you properly allocate your budget when you don’t even know what you need? A proper financial plan will ensure that you have all of the facts in line and know where your money needs to go, no matter what business you’re in. When you’re just starting, money will be tight. The sooner you can get control of your budget, the sooner you’ll be making a profit. Without a plan, the time could disappear faster than you realize. Before you know it, you’re six months in, out of cash, and not sure where to turn. A plan could have changed all of that.
The Bottom Line: Use Financial Planning to Your Advantage
Too often, business owners come into planning and see it as a hassle. They feel like it’s just “one more thing” to cross off their list and that’s already a mile long — it’s natural to be frustrated about all the planning involved here. However, that doesn’t mean you can skip it. If you take a minute to step back, you’ll see all the benefits, including those listed above, that comes from having a solid financial plan in place.
This is all for your benefit, whether you’re doing it for investors, for your business, or any other reason. It still works in your favor because it gives your business a much better chance of success. So, start developing your business and financial plans today.
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