Developing a financial plan enables you to visualize the success of your business.
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Why You Need To Create a Financial Plan for Your Business
Without following a financial plan, you are preparing your business to fail. Without this vision, business decisions become riskier, and you could end up missing out on great opportunities. Financial planning has many tangible rewards.
Liquidity
Keeping an eye on cash will help you avoid the situation where you run out of it and are unable to meet your obligations. Liquidity is also the first thing lenders and venture capitalists look at.
Reduced risk
Ideally, business owners should diversify and reduce the risk by dividing it across different industries, which will reduce the chance and extent of losses. Financial planning helps you estimate how much risk your business can handle and the insurance you need to protect it.
Succession planning
A a good exit strategy is required to ensure the leadership transition does not cause any disruptions. With a wisely chosen successor, you will know your business is in good hands. You can enjoy retirement while still retaining oversight and if you are not staying on board, you will ensure your business and your legacy stays alive.
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How To Create a Business Financial Plan
A financial plan is simply a snapshot of your current business financials which portray the health of your company. All business plans, whether you’re just starting a business or building an expansion plan for an existing one include:
Profit and loss statement
Your sales and how much it costs you to make them which result in your profitability.
Cash flow statement
Your cash flow is just as important as your net income because businesses run on cash.
Balance sheet
Your balance sheet tells you how your business is standing at a specific point in time. It consists of assets, liabilities and equities. It’s called a balance sheet because assets need to equal the sum of liabilities and equity.
Sales forecast
Your projections of the future that investors will be most interested in.
Business ratios
Once you have the above figures, you can calculate useful ratios that will tell you more about your business such as return on equity. You can check if your ratios are in the green and worsening ratios will also give you a red flag to warn you before you step in the red.
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Tips
The best thing you can do for your finances is implement cost-saving strategies.
With some financial planning, it is possible to change corporate spending habits.
Go lean
Institute a lean methodology. In business, lean refers to the degree in which a company trims excessive waste, just like we trim “fats” from a diet, to reduce overhead and eliminate unnecessary expenses. The term was coined by Toyota Motors and is considered as the secret of its success.
Cost leadership
The concept aims to reduce internal expenses to save money on operational, production, manufacturing and marketing costs which will increase the profit margin. For example, you can switch from billboard advertising to social media platforms.
Strategic alliances
By partnering with other companies, you get the power of synergy which is that one plus one not only equal more than two but together, they also make more than 11. You will be able to access expensive technology, benefit from someone’s expertise or their network.
Use any opportunity to save
Track your expenses to identify areas where you can make spending cuts such as making an electricity switch to a more affordable utility rate or getting a better internet deal from a different provider.
Takeaway
Financial planning supports the health of your business and give you a guide map to where you want your business to go. The only way to grow a business is by knowing your finances inside and out.
