Whether you’re just starting out or have an established business, developing a sound financial plan is essential for long-term success. Proper business planning lays the groundwork for making smart short and long-term financial decisions. It helps reduce risk and ensures your company has the necessary funds to operate smoothly through different economic cycles.
Approaching business finances in an organised, strategic manner promotes stability and sustainability over time. Without a clear sense of your financial objectives and strategies to reach them, it’s easy to make reactive decisions that don’t align with your overall goals.
What is Financial Planning for a Business?
In its simplest terms, financial planning for a business involves carefully evaluating your company’s current financial standing and developing written strategies or “plans” to achieve fiscal objectives across multiple timeframes – annually, quarterly and even long-term 5-10 year projections.
A solid financial plan will account for projected income statements, cash flow statements, and balance sheets. It will also outline goals for growth, profitability, loan repayments and other key performance indicators. The process allows you to anticipate challenges and opportunities in advance so you can minimize risk and capitalize on new possibilities.
What is the First Step in Financial Planning?
The initial step is gathering relevant financial data from your accounting records over the past 2-3 years. This includes income statements, balance sheets, cash flow reports, bank statements and any other documentation providing insights into income sources and expenses. Thoroughly analyzing historical trends allows you to identify strengths, weaknesses and opportunities to build projections. It’s also important to note seasonal variations or one-time events impacting cash flow. Once you’ve assessed the past financial reality of your business, you have an informed starting point to project realistic assumptions and targets into the future planning cycle.
What Happens to Your Tax Liability with Proper Financial Planning?
Careful financial planning directly impacts your business tax burden in positive ways.
One is maximizing deductions and credits to reduce taxable income. For example, accelerating equipment purchases, prepaying expenses or making retirement plan contributions lowers tax liability in the current year. Planning also allows proactively taking advantage of breaks for operating as an S-Corp or LLC.
With visibility into cash requirements, businesses can time income and write-offs strategically. Entrepreneurs also benefit from setting aside profits tax-deferred into retirement accounts. Long-term, financial planning supporting growth enables increasing tax brackets gradually versus facing a sudden surge and higher rates. Overall, organizing business finances strategically minimizes taxes owed versus a more reactionary approach.
How to Start Financial Planning
Here are the basic steps to kickstarting a successful financial plan for your business:
- Define Your Goals – Spell out where you want your business to be in the next 1-5 years regarding income, assets, market share etc. Goals provide direction.
- Assess Your Starting Point – Gather past income statements, cash flows and balance sheets to benchmark current financial health.
- Forecast Revenue & Expenses – Project sales numbers realistically along with estimates for fixed, variable and one-off outlays.
- Create Pro Forma Statements – Build income statements, balance sheets and cash flow reports to visualize projected financial performance over time.
- Determine Capital Needs – Calculate funds required to achieve objectives including operating costs and growth initiatives.
- Plan Financing Strategy – Decide how to obtain needed capital via business loans, profit reinvestment or other debt/equity options.
- Identify Potential Risks – Anticipate issues that could derail targets to develop contingency measures.
- Establish Review Process – Note dates to revisit plan periodically to track progress and make adjustments as realities change.
- Document & Circulate Plan – Finalize paperwork to unite stakeholders and serve as a guide for strategic financial decision-making.
Ongoing Monitoring & Adjustments
The most effective financial plans don’t just sit on a shelf – they evolve with changing business conditions requiring regular reviews and tune-ups. Every quarter, compare actual results to projections and analyze variances. Note external factors influencing departures from plan. Make necessary modifications like cutting costs if profits fall short or scaling back faster if metrics exceed targets. An adaptable financial roadmap reflecting new realities keeps operations properly funded and on a path toward ultimate goals. Like any business function, planning deserves ongoing commitment and optimization to maximize benefit.
Importance of Outsourcing for Smaller Businesses
While financial planning is crucial, the process demands expertise that some entrepreneur’s lack time or skills to handle internally on top of daily operations. Outsourcing planning to accounting professionals presents many advantages. Consultants deeply understand key considerations like taxes and compliance issues that owners may miss. They bring industry experience recognizing signals worth further examination. For a reasonable fee, outsourcing transfers specialist planning duties while freeing limited staff to focus core roles. It instills confidence that fiscal strategies align with compliance standards. Overall, outsourcing enables even small businesses to apply a level of planning rigor typically reserved for larger corporations.
