Starting a business may sound exciting but, in reality, it requires a decent amount of hard work, dedication, and consistency. If you are one of those ready to put an unwavering commitment to achieving your business goals, then there is a need for financial planning and analysis. It may interest you to know that financial planning and analysis is one of those things worth considering before starting up a business. Experts believe this as the success determining factor of any business. In this article, we will introduce 9 business tips for financial planning and analysis.
What is Financial Planning and Analysis
A business financial plan is a comprehensive evaluation of how a person out to control and manage his/her business expenses efficiently. In this document, an entrepreneur notes his current financial situations, goals and how to achieve them. The business financial plan covers aspects such as budgeting, investment strategies, insurance, retirement planning, estate planning, as well as other financial protection. If you want to succeed in your business endeavors, then creating a financial plan is a must. With this document, your business can get directions on how to manage finance-related issues. A financial plan for small business may be created independently or with the assistance of a certified business financial planner. An expert financial planner should optimize the financial process deeply and follow it keenly in such a way that it will facilitate building, maintaining, and maximizing the net profit of the company.
9 Business Tips for Financial Planning and Analysis
Financial planning and analysis is an important part of your business plan that cannot be neglected. Before writing a business financial plan, you should already have a business plan and write down your financial goals. If yes, below are nine business tips for financial planning and analysis.
1. Create an expenses budget
The budget is vital in any business. You first need to differentiate between fixed costs and variable costs. Fixed costs are constant business costs on the number of goods produced; e.g. rent and payroll while variable costs vary with the level of output e.g. advertising and promotional expenses. Reducing fixed costs can minimize risks in the long run so you have to estimate things like interest and taxes. A mathematical approach to estimate taxes, according to Tim Berry, president and founder of Palo Alto Software, is to multiply estimated profits by your best-guess tax percentage rate. Then to estimate interest, multiply your estimated debts balance by an estimated interest rate.
2. Explore borrowing options
Deciding which type of finance is right for you is very important. At some time you are going to need massive capital or/and investment. Firstly, you need to understand the two main categories of finance – equity finance and debt finance. Equity finance is the capital that a business raises through the sale of shares and pays it back in capital growth or dividends. Debt finance is when your company borrows money and then pays it back with interest over time. Once you've decided on equity or debt finance, you can start to look up for which borrowing option is ideal for your business. There are different options to explore including start-up finance, personal savings, secured/unsecured business loans, invoice finance, equity funding, etc. Personal savings and self-funding are ideal if your business is scalable, else, you may consider external sources of finance. Just ensure to strategize your financial business planning accordingly.
3. Monitor cash flow and cost control
Having explored your borrowing options, you need to be strict on cash control. If you mismanage cash and your company runs out of cash, then you cannot pay employees, suppliers, or manage inventories. You should have a clear picture of costs, sales, and product demand so you take advantage of growth opportunities and ensure that you are well-positioned to make a profit. Controlling your accounts payable and strictly monitoring creditors and debtors is crucial to ensure your cash flow stays intact and keeps flowing.
4. Develop business plan financial projections
One of the most important things to do for your business is to create and develop your company's financial projections each year. Developing income projections will help you estimate the financial performance of your business. You can use simple spreadsheet software for this task. Your accountant can be of help when developing your business plan financial projections – he/she knows best how to explain the plan to your banker and investor. Income projections can be created by recording your anticipated income (based on sales forecasts from experience – not mere assumptions) and anticipated expenses for labor, overhead, supplies, etc. This can be done weekly or monthly depending on cash flow. Now, use the numbers to create your income projection.
5. Plan for taxes
Understanding your tax liabilities can be the difference between serious financial trouble and successful business activities. Always ensure to carry your accountant along so he can help you monitor income tax, VAT, PAYE, and corporation tax. The last thing you need is an unexpected VAT bill.
6. Workplace pension
An important part of financial planning and analysis is a workplace pension. If you have employees, you will need to plan a workplace pension for them. Find a workplace pension scheme; learn their demands and regulations before registering with them.
7. Inheritance
Nobody wants to build an enterprise for somebody else (other than family members) to inherit. Hopefully, your business will have proved a success after many years of hard work and dedication. So, a major plan of your financial business plan would be to document who your personal asset will be transferred to when you die.
8. Have contingency plans
In the event of an unforeseen circumstance, do you have a backup plan? It is a wise idea to have contingency plans should in case your finances suddenly deteriorated. Never wait for ill health, economic change, divorce, or death to show up before you create an emergency plan. Any of these unexpected events can change the direction of your business and put your company at risk. Having plans like maintaining cash reserves and reliable lending sources can ensure the future security of your business.
9. Get help
If you lack expertise or find creating a financial plan difficult, then you may consider hiring an expert to help you with a financial advisor business plan. They have numerous business plan financial templates to help you achieve your goals.
Conclusion
Creating and developing a financial plan for a small business is crucial for the health of your business. Having a business plan and financial goals are the foundation for your financial success. However, the aforementioned tips will allow you to efficiently explore the financial strength of your business. A well-written financial plan in business plan will ensure that you have the best chance of securing funding from lenders and investors when the need arises.
