Financial planning is vital to success in the long run. The only limiting factor to any business growth is cash. Without cash, you cannot hire the additional employees, buy new or additional goods and equipment, pay back monies previously borrowed or give a return to investors in the business. It determines how capital and income will be managed so that the company will remain financially solvent.
Creating a solid financial plan for your business requires a lot of foresight; you need to look to the future and make educated estimates of how much cash you will need and how much you expect to bring in, and then allocate funds appropriately.
A good financial plan will be based on monthly activity for sixty months (five years) and will include a forecast of the Balance Sheet and Cash Flow Statement, not just Profit and Loss. This is vital, because as previously stated it is total cash flow forecasting that is paramount to success.
The real key is updating the plan continuously (monthly). Updating the plan on a regular basis has many benefits:
- Replaces the annual budget process as the budget will already be done for the next year
- Eliminates “Budget Indifference” in years where the annual budget is well off kilter for good or bad reasons early in the year
- Reminds management that there is more than a short term goal – there is planning for the future and the good of the Company.
- In situations where long term contracts/projects are involved (such as real estate construction projects or Government Contracts) a good plan will show the effects of the end of the contract and thus be a constant reminder to replace that work in advance of the expiring contract/project, or in a worst case scenario – start the planning process for cost cutting needs.
Putting the initial plan together is a straightforward process, even if the details can be complex
Start with Previous Experience
Before you can begin creating a financial plan for the future, it’s important to have information available about the past. Your previous financial records provide vital clues to areas where you might be struggling, past trends in cash flow, and what to expect from the coming months.
Set Your Goals
Determine what your goals are for the coming five years in terms of company growth, income, and expansion. Setting realistic goals allows you to then detail what sort of expenses will be required, what level of income you will need to accomplish them, and what needs to be done to get there. Pay the most attention to the next 24 months and get into as much detail as possible for this period of time. Years 3-5 can be more of a general budget, but should include “known detail” such as expiring contracts.
In extreme cases you may want to do two forecasts “side by side”. The first would include only existing contracts/projects (including their end dates) and the second the effects of any proposals outstanding or results of more nebulas plans (i.e. the desire to make an acquisition in somewhere around year 3)
Using the information gathered about past performance, you can create a general forecast of what the coming months will look like on a financial level and see where there might be cash-flow shortfalls, allowing you to prepare a plan for avoiding those problems. You can also determine timelines for large business expenditures such as equipment purchases, or for expansion, based on when it will be most financially feasible.
Plan for Growth
Part of the purpose of financial planning is to see your business grow and increase your profit margins. As you prepare your financial plan for the coming year, you should be building in ways to accomplish those things. Unless you have the ability to bill on retainer, you will require an outlay of cash in order to create more income for the future. Forecasting these cash shortfalls in advance is one of the key benefits of doing the forecast.
Setting up the correct line of credit and working with the bank in advance of needing the money yields a much better banking relationship. In fact, going to the bank when already needing the money is often a disaster when the bank says no or does not fund what you need. Having enough time to adjust the forecast based on the banks reaction is extremely beneficial.
Outlining how much additional income you can reasonably expect to see as a result of that investment is a major part of your financial plan. Because you will rely on greater profits to cover the cost of large expenditures over time, this part of the financial planning process needs to be meticulous.
Plan for Tracking Finances
Part of financial planning is creating a system by which you will track all of your finances and make sure that you are staying on course. Accounting software can help you to enter all of your data in a timely fashion and keep an eye on how you are succeeding in your goals.
A good financial plan will have short-term and long-term goals, and often the long‐term goals depend greatly on making sure you are meeting the shorter-term milestones. In order to ensure that happens, you need to build in accountability with your financial plan. That means assigning tasks and tracking them to make certain everyone is holding up their end and everything is moving forward as planned. Tracking will help you catch any deviations from the financial plan or any unexpected changes that may require re‐analyzing your plan.
Creating an Individualized Financial Plan
The process for creating a plan is similar for most companies, but the details that go into it will be completely personal to your business. Failure to plan properly is a common reason many businesses don’t make it. This is one area of business management that often calls for the assistance of a professional.
A CFO’s job is to create the right financial plan for your company, and make sure that it’s financially sound, realistic, and matches your company’s goals. You can hire an outsourced CFO to come in as needed – to work with you on reviewing past performance and updating the plan for the future that will capitalize on all of your company’s strengths, while shoring up areas that need more support. A professional CFO brings experience and connections in the financial services industry to the table to be leveraged in your favor.
Your financial plan is your company’s blueprint for future success. Creating a solid plan and following it throughout the year will help you grow faster, see more profit, prepare for challenges, and avoid financial pitfalls. For more information, Contact Your CFO Solutions.