What Is a Financial Plan?
In the past, the only time people would talk about ‘cash’ was when they wanted to buy something or to borrow money. But now, money and spending are more complex, as there are so many options for payment plans and credit, that it is much easier to ‘spend’ or give credit without really having visibility of the longer term consequence.
A Financial Plan is a detailed focus on how you manage your overall profit and cash. I often find businesses have some form of plan when I start to work with them, this will entail things such as ‘who’ their customer is, ‘where’ they might find them, ‘what’ their USP and ‘how’ they differ to their competitors BUT a financial plan goes one step further as it considers more detail about how they manage their trading and look at key areas such as ‘how’ will the customers pay, ‘what’ payment terms you will offer, how many customers do you need and what mix of sales, will you need deposits to secure work, how will you pay your overheads and does cash come in before you pay it out etc.
Essentially a Financial plan is a document that helps business owners or managers organize and analyze their business finances. These plans are used to track the financial status of your business, show a picture of its health, and help you get a grip on the things that matter. Once you have a good financial plan, you can take that information and use it as the foundation for further growth.
Understanding Financial Plans
When it comes to finance, there’s no shortage of advice out there on how to manage your money, but knowing ‘why’ you should manage is different to really understanding ‘how’
So what exactly is a financial plan? It is comprehensive look at your businesses financial situation and how your income, expenses, assets and debts all come together to form your financial picture. It outlines all the relevant data, and then provides a framework for how you can create a well-rounded financial strategy that can help you achieve your goals.
Running a business is difficult as there are so many things to juggle but you need to make sure your business is profitable and that cash flows are in place so you can meet your goals, therefore generating revenue is only the first step. After that, it’s important to strategize how to grow your business and what your financial plan should look like.
Focus on Profit and not sales
As a business owner it is easy to focus solely on sales as establishing more customers means a growing business right BUT one thing to consider is are those customers actually profitable? As if you lose money then it is better to review how you currently service your customers and streamline your operations, so you are confident in your plans when you take on new customers?
It can be difficult to accept that some part of your business loses money, but the harsh reality is that 95% of business I have worked with have always found opportunities within lower margin customers or products after developing their plans, this is why they are so powerful, as it gives you a clear focus on where to spend your time and energy. It showcases ‘what’ is working but also ‘what can improve’ as once you fully understand this it you can take action!
Determining Cash Flow
Once you are clear that your sales and customers are generating positive margins you then need to build a cash flow. This is often used in conjunction with a balance sheet as timing of income and payments is key to making sure the cash is accurate.
For example if you pay rent quarterly in advance, the cash will got out but you would prepay the invoice and release equally across the periods they relate too. If you do not you would see a large balance in month 1, then no costs in month 2 and 3. You could say it doesn’t matter as the payment is still correct but when you have multiple transactions, having clear trends is the key to plan the future.
Cash is essentially the money going in and out of your business, however we know in real life it is not quite a simplistic and making sure you know expected cashflow is very important to make sure you have enough money to meet your liabilities.
Plan for the future
I would always recommend a plan looks at least 12 months ahead, so you have visibility of potential shortfalls and seasonality’s, this enables you to plan ahead and put things in place for potential risk areas, whilst also seeing where you have opportunities to invest more cash
Why is a financial plan important for your business?
An important part of running a business is having a plan for the financial side of things, Businesses can get caught up in growth and expansion, and this can lead to cash being spent needlessly on items that are not a part of the business.
You should always plan for the long term, and it’s important to have a financial plan in place for your business before it takes off. Your plan will help you understand how your business is performing and help you make the best decisions regarding your goals and budgets.
A good financial plan helps businesses stay focused on their core competencies while also managing risks effectively. It provides a road map for success by helping entrepreneurs avoid costly mistakes and staying ahead of potential problems. A solid financial plan allows you to take advantage of opportunities when they arise and prepare for challenges down the line.
Frequently Asked Questions
What Is a Financial Plan?
A financial plan outlines the goals that you have for your business, and helps you to create plans to achieve those goals.
What Are Your Net Worth?
Assets minus liabilities equals net worth
How do I create a financial plan?
To create a financial plan for your business, you will need to know your business’ objectives, calculate how many customers and sales you need to grow, identify your business’ resources, set measurable goals, and implement a plan that can be supported with your resources.
What are the elements of a financial plan?
This includes an understanding of your overall profits, financial statements, cash flows, financial projections, and any specific advice for your individual business.