Financial planning determines how a business will afford to achieve its strategic goals. Strangely, many businesses lack a full financial plan, yet evidence has shown that they are essential to the long-term success and growth of a business.
What is a financial plan?
A financial plan is an overview of current business figures and projections for growth. In financial terms it describes the activities, resources, equipment, and materials needed to achieve the business goals, as well as the timeframes involved. It helps to keep the financial health of a business on track as the business grows.
Why is a financial plan important for a business?
A financial plan provides greater confidence for making important business decisions as the business finances are known inside and out. It helps businesses to spend more wisely and find and allocate resources when needed. Furthermore, it helps business owners set realistic and timely targets.
The components of a business’s financial plan
Regardless of whether a business is starting out or planning for growth, a financial plan should include:
• Profit and loss statement – a financial report which shows how much a business has spent and earned over a specified time.
• Cash flow statement – this estimates the amount of cash coming in and out of a business over a specified time.
• Balance sheet – a business’s assets, liabilities, and shareholders’ equity over a specified time.
• Personnel plan – the process to determine the need for employees in a business, including who to recruit and when, and what for what purpose.
• Business ratios –using the figures from financial statements, they provide meaningful information about a business, for example on efficient and profitability.
• Break-even analysis – determines what level of sales is required to cover the total costs of the business.
Creating a financial plan can take a bit of work as it must be based on reliable numbers and careful calculations, but the end results are worth it. It can put business owners on the path to greater financial health and a better future.