Business financial planning combines strategic goals with the necessary funding to achieve those goals. Whether you are seeking loans or investment from investors, the proper planning process can help ensure that set objectives are financially achievable.
Efficient financial planning also gives you improved visibility into resource allocation. This can benefit leadership and management teams in making more informed decisions.
Strategic Planning
Strategic planning lays the foundation for a company’s long and short-term goals. It sets tasks and determines who will be responsible for completing them, including what resources they need. It also identifies any risks involved in pursuing these goals, allowing companies to make better decisions about upcoming opportunities and challenges.
For example, a company’s strategic plan may involve expanding sales to a new sector that requires investment in research and development or additional personnel. A financial plan shows the projected revenues from this growth and the costs of the investment, so management can decide whether it is a good idea.
Effective strategic planning requires proficiency with spreadsheet software, as the models created to predict future revenues require a high degree of accuracy. In addition, senior management and marketing and operations employees must work closely with finance staff to ensure that the financial plans align with the strategic plans. This collaboration helps managers understand how their projects will impact the company’s overall finances and allow them to better meet cost reduction and cash flow management goals.
Cash Flow Management
Cash flow management is the process of forecasting and monitoring cash inflows and outflows. This includes identifying and managing the timing of expenses and ensuring that invoices are paid promptly. It also involves tracking the creditworthiness of clients and suppliers to ensure they are financially healthy – tools like Experian Business Express can help identify warning signs and prevent potential bad debts.
Effective cash flow management strategies allow companies to avoid paying for things they cannot afford and maintain healthy reserves of working capital. These include accelerating cash collection, reducing unnecessary expenses, renegotiating payment terms with suppliers, and exploring financing options.
If a company doesn’t have enough cash to cover its expenses, it can’t afford to grow. This can be a huge problem for small and medium businesses, where growing too quickly can be costly. This is because growth requires money to purchase stock, pay for employees, rent buildings and buy equipment. This is why it is so important for businesses to have good cash flow management strategies in place.
Financial Statement Analysis
Financial statement analysis involves reviewing a company’s performance and value through its balance sheet, income statement and cash flow statement. This process allows a business owner to glean useful information on areas of weakness and strength in its current financial position.
A commonly used method is horizontal analysis, which focuses on comparing specific line items across different reporting periods. This helps a financier identify trends in the data and compare growth rates among sector competitors.
Another common technique is vertical analysis, which examines how a single line item on the financial statement relates to another item. For example, on the income statement, a line item such as revenue is analyzed in relation to total expenses and overall net profit. A new or startup business can also undertake a break-even analysis by projecting its expenses, including interest, against overall revenues over the next three years. This will help determine whether overall revenues are likely to exceed expenses, and therefore allow the business to turn a profit.
Budgeting
The budgeting process helps businesses plan for future expenses, such as upgrading equipment, adding new products or hiring new employees. It can also be used to establish a financial cushion for lean months or when a business experience an unexpected expense, such as replacing damaged inventory.
To create a budget, a business owner must first collect historical information on sales and costs. These figures, combined with the company’s business plans and any changes in the competitive environment are used to estimate the projected income and expenses for a specific period.
To help with this, a budget worksheet can be used to record each individual revenue source and calculate how much is expected to come in monthly. This can then be compared to the total expenses of the business to see where money is being spent. Many small-business accounting software systems offer basic budgeting reports. It’s helpful to get staff with financial responsibilities involved in the budgeting process, as they can provide more realistic estimates and be held accountable for meeting their goals.