Do Small Businesses Need Financial Planning
Most business owners find themselves asking three questions;
- How much money do I need to run my business?
- When will I need it?
- Where will it come from?
The answers to these questions are easier if there is some financial planning in the business. It also allows the business owner to monitor the financial progress of the business from month to month.
So what is involved in financial planning?
- A 12 month cash flow forecast. Some business owners know they are making a profit, but can’t understand why there isn’t money in the bank. Profit does not always equal cashflow. There are items that affect cash flow that don’t appear on a profit and loss statement so a cash flow forecast allows you to see where the money is going.
- Plan for profit. A 12 month profit plan involves completing a budget, because a profit doesn’t happen by accident. This involves looking ahead at expected income, expenses, and gross profit. If this is not the business owner’s expertise, then they should get it outsourced, because it is important to have an idea of what is happening over the next 12 months.
- Monthly financial statements. It is no good waiting until the end of the financial year to find out how the business performed. After 12 months of trading, you collate your information, send it to your accountant, and then it’s usually several months before they are completed. So it may be 15-18 months later before you find out the details of how your business performed. You need a reliable system in place to accurately measure what is happening in your business. If you are a small business, the best way is to contract that out, as small business owners usually struggle to find the time to carry out this task.
- Asset management programme. For most small businesses, the assets of interest are accounts receivable [money owed to you by customers] and inventory. It is important to ensure that these assets don’t swallow up the lifeblood of a business – cash!
Having all the above in place is great, however is of no value if they are not monitored regularly. Actual results need to be constantly compared to budgeted amounts, and reasons for variances investigated. The 12 month plans need to be constantly extended every month so you always have a 12 month plan in front of you.
The key to financial planning is ensuring you have a way of capturing the information, and reviewing it regularly. If you don't like doing it, haven’t got time for it, or don’t know how to do it, contract it out. Your success depends on it.