Any business plan should include financial planning. Here we tell you how to make such a plan and how Soldo can help your business thrive.
Introduction to financial planning
You've heard the term "financial planning" if you're a small business owner wanting to protect your company's future. It's a hazy concept, but what is it exactly? What's more, how can you make a corporate financial plan? This article provides a thorough examination of financial planning in the sector and the best methods for approaching it.
What is Financial Planning?
In its most basic definition, financial planning is about using the data you have to make reasonable projections and plans for the economic future of your business.
In a way, financial planning is the opposite of accounting. In accounting, you see what you have already spent and analyze it. Planning involves setting financial goals and forecasting future cash flows. That's why it's much less numbers-driven than accounting. But, of course, you don't pull the numbers out of thin air; rather, you make educated guesses.
A financial plan is the practical backbone of your business plan. Your overall strategies and expectations for the business may sound good, but they don't mean much if they're not backed up with numbers.
When you make a financial plan, it is good to define your objectives and goals exactly to refer to them to analyze the investments and expenses necessary to achieve them.
This is particularly important if you seek external funding, whether a bank loan or financial support from an individual such as an angel investor. If potential investors can see that you have a complete and realistic financial plan, it will increase their likelihood of investing money in your business.
On the other hand, a financial plan is not a static document that will guide your business decisions indefinitely. Instead, it is a set of fluid projections that you should think about and change as needed as your goals or profits change.
What should a financial plan contain?
Don't worry if you haven't developed a financial plan yet. But likewise, if your business doesn't yet have a financial plan, the best time to start is to create one now.
When it comes to making a financial plan, one of the most important things to check is that your projections are realistic. Creating a plan that inflates or hides future earnings may seem appealing in the short term, but when those predictions never come true, you'll regret it. So always double-check your projections to ensure they aren't too low or too high.
As for what a financial plan should contain, there are several common characteristics, which we will now examine one by one.
Income statement
This is an essential component of any financial strategy, which analyzes your future profitability. This table consists mostly of three categories: sales, cost of goods sold (also known as COGS, or cost of goods sold, a figure that covers the materials and labor that go into the composition of your product or service), and gross margin, which is sales minus COGS.
Cash flow
is especially important if you've just set up a start-up, as the first few months of new business can be extremely stressful, and it's important to keep an eye on cash coming in and spending. The cash flow statement can cover both fixed and variable costs. Financial plans generally cover three years. If you and your team make realistic predictions about your cash flow over this period, it will help your business grow.
Soldo's prepaid cards and accompanying intuitive app offer real-time cash flow analysis if you want to keep a close eye on your money. This data can help you modify your financial plan as your business grows.
Sales Projections
This is a projection of how your sales will increase as your company expands. Setting up numerous strategies based on different degrees of growth can be a smart idea, so you always have a plan to follow, even if your sales aren't growing as quickly as you'd want.
Contingency Planning
You can't forecast what might go wrong in life, as you can't predict anything else. However, looking at potential issues, your business might face and how you would address them is good practice for both yourself and potential investors.
Break-Even Analysis
It would help to consider how far your company will break even over the following three years. Because investors want to profit from their investment, they'll want to know when they can expect to see a return on their investment. Of course, revenue will take some time to exceed expenses in many businesses, but that is expected. On the other hand, if your company will lose money in the long run, you should reassess your pricing or strategy.
Team Structure
Not all financial plans include this section, but you might decide it's beneficial for your business. For example, a team structure would be a breakdown of all the people you need to help your business achieve its goals.
Financial Planning for Small Business Owners
We've discussed the importance of financial strategies for investors a lot. But it stands to reason that the project should also benefit you, especially if you're a small business owner. Considerations to make for small business financial planning.
Ascertain that you have a company bank account that meets your requirements. There are numerous options available. However, some banks provide better discounts than others, so pick the best suits your needs.
Once you've chosen a bank, it's good to establish a comprehensive spending policy to ensure that Your team and you are on the same page. And the spending doesn't get out of hand. And if you're still using payment methods like cash to manage your spending, it might be time to switch to something else, like prepaid cards, to make it easier to stick to your financial plan.
Also, choosing a financial advisor specializing in financial planning is one of the best decisions. Of course, it will come in handy at tax time. Still, it can also help you separate your business finances from your finances, make plans for the future, and ensure that your assets and investments are well managed and diversified. At the same time, you continue to focus on growing your business.
It's important to remember that earning a salary is essential. And as the owner of your own business, of course, you set the amount. This salary does not need to be high when using company capital in the early stages of growth. Many small business owners pay sufficient wages to cover their national insurance threshold, so their salaries are tax-free.
Other considerations to make while developing a financial plan
When creating a financial plan, there are a few additional factors you can keep in mind depending on your situation.
You might want to start planning for retirement or your estate now. Many business owners dream that selling their business will be enough to fund their retirement years, but that's never certain. A business finance plan can help achieve this goal, but anticipating and mitigating a more modest outcome is essential. Regularly, retirement savings should be factored into financial planning.
If you expect the company to continue in business after you retire, a good exit strategy is needed to ensure a smooth leadership transition. You can enjoy your retirement with a wisely chosen successor while retaining oversight, strategic input, and potentially significant income.
Finally, an unfortunate reality that you may face is that your business goes bankrupt. Although your financial plan should prove that your business is filling a necessary void, several unforeseen problems can prove fatal to a company (look at the past two years). Therefore, always think about how you will personally cope if the worst happens and your business becomes unviable.
The benefits of financial planning
The benefits of financial planning are numerous. First, a well-designed plan shows investors that you take your business seriously and know what you're talking about, but it also gives you direction as the business owner.
It enables you to create goals and devise strategies for achieving them, giving you and anybody else who uses this plan clear objectives. Everyone is on the same page as a consequence. Things are moving along smoothly. Can work together effectively. We are focused on the same goal.
Also, by reviewing your plan every month, you'll get a consistent picture of how your financial situation is changing. As a result, you'll be more confident in your business' overall position. With this information, you can change how you manage expenses or your salary.
No matter where you are in your business journey, taking the time to create a detailed financial plan can only help you in your growth and development.
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