Create a Financial Plan for Business: Approaching any business in the right way requires establishing a financial plan at the beginning. Having a structured financial plan is key not only in operating daily activities but also in ensuring that there is a strong future presence in the market. This guide seeks to take you through the steps of coming up with an all-encompassing financial plan for your business.
Define Your Business Goals
Short-Term Objectives
Short-term objectives typically are those which are to be achieved in 1-2 years period. These are important in establishing immediate focus. They could be:
- Revenue Objectives: These specify the amount of sales for the next twelve months within range: for instance, it may be possible to set a sales increase of no less than 20% or plan to obtain 500,000 dollars.
- Cost Reduction: Present ways in which costs may be lessened. For instance, better terms with suppliers or reduce non-revenue generating overhead.
- Liquidity Management: Make sure there is liquidity to take care of routine schedules and unplanned events. It’s good to formulate a cash buffer that you’d like to keep.
Long-Term Objectives
Long-term objectives typically take 3-5 years or more to complete. Broad goals envisaged about the development of the business unit would involve revenue increase covering five or more objectives within related time frames. These may include:
- Strategic Objectives: Person states how new places will be opened, new products offered, new markets accessed.
- Feasibility Targets: Achieve the targeted level of profits in terms of revenue, costs, or the net income margin or net income level by putting a number out there. To illustrate, the profit margin should be reached by fifteenth year i.e. 15% a profit margin by the end of the fifth year.
- Market Positioning: Set an aim above your competitors on which position your organization intends to occupy in the market. This could involve becoming the dominant player in your particular market or achieving a substantial share of the market.
Financial Analysis
Review Historical Financial Data
Knowing how you have been doing is important when going forward. Below are the documents you will access:
- Income Statements: Consider the older income statements to evaluate the extent of revenue generation, fixed and variable costs, and net profit. Search for trends in revenue increase or expense increment.
- Balance Sheets: Revisit the earlier balance sheets to establish the amount of assets, liabilities and equity capital that the business has. This assists in evaluating the state and structure of the finances.
- Cash Flow Statements: Investigate the previous notes on cash flows for patterns of cash inflow and outflow. This is important for estimating future requirements of cash.
Analyze Current Financial Position
Today’s financial position is examined in terms of the:
- Current Assets and Current Liabilities: Write out all your current assets including cash, receivables, and inventories; current liabilities including payables and short-term borrowings. This is useful for working out how liquid you are.
- Cash Flow: Look into your existing cash flow position to determine whether the available cash is enough to keep day-to-day activities going and any other future cash outflows.
- Profit Margins: Work out current margins of profits that define how profitable the business is; these include gross profit margin, operating profit margin and net profit margin.
Prepare a Budget
Revenue Projections
Project expected revenue based on:
- Sales Forecast: Obtain estimates of future sales using past sales figures, use of potential markets and trends of the industry. Also consider seasonal changes and effect of the economy.
- Pricing Strategy: This involves setting prices that will help in meeting the expected revenue targets as well as improving one’s position in the market. This may require price analysis and competitor analysis.
Expense Budget
Break down all identified expenses into:
- Fixed Costs: These are the costs that are constant and recurrent irrespective of the production volume. Such include rent, salaries, insurance and loan repayment.
- Variable Costs: Cost that change with the change in level of production or sales of products and services such as raw materials, utilities and commission.
Cash Flow Projections
Draft cash flow forecasts for liquidity management:
- Inflow Projections: Outline funds anticipated to be available by way of cash sales made, investments done or any other sources.
- Outflow Projections: Outline funds expected to be spent on cash expenses, cash investments and loan repayments.
Preparation of Financial Reports
Statement of Earnings
Prepare, on an annual basis, a pro forma income statement to:
- Project Revenue and Expenses: Estimate the increase or decrease in revenues and expenses to arrive at projected profit/loss for the business.
- Ability to Make Profits: Evaluate the degree of profitability you hope to achieve and areas in which costs should be minimized.
Asset Liability Equity Statement
Prepare a pro forma balance sheet to:
- Render a Picture of the Status of Finances: Describe anticipated assets, debt, and capital in one specific date in the future.
- Evaluate Capital Composition: Examine your capital mix to ensure that the proportion between debt and equity is optimal.
Statement of Cash Flows
Prepare a statement of cash flows in order to:
- Maintain Inventory Levels: Manage expenditure plus any unforeseen revenue streams especially by maintaining a safe cash reserve.
- Prepare for Excesses or Reservoirs: Explain for extending periods of in-surplus or in-risk periods of being in likely deficit.
Analyze Financing Needs
Establish Financing Schedule
Fill the capital gaps by addressing:
- Costs of Beginning Operating: Any and all money going down to the costs necessary to start your company including but not limited to equipment costs, inventory setup costs and legal costs.
- Funding Growth: How much more money will you need in order to give the business all necessary growth e.g. opening more stores or introducing more products and many more.
- Net Working Capital: Amount of money required to conduct the business on daily normal sticker prices and emergencies.
Explore Funding Sources
Assess the features and characteristics of different funding sources:
- Equity Financing: Raising funds by giving up a fraction of shares of the business. Give consideration to the consequence of loss of ownership and control.
- Debt Financing: Obtaining cash flow or assets through loans or credits with specific financial bodies. Investigate the interest rates, terms and repayment schedule.
- Grants and Subsidies: Investigate other external assistance such as financing offered by the government and other such institutions. Know the prerequisites and application procedures.
Implement Financial Controls
Establish Financial Policies
Create procedures for coping with and controlling finances in an organization:
- Expense Approval Procedures: Develop a framework for approving and monitoring the associated costs. Policies that ensure that every expense is supported and is accounted for.
- Cash Handling Procedures: Formulate guidelines for cash management including, stores against loss, as well as cash reconciliation guidelines.
Monitor Financial Performance
Assessment of financial performance should be done on a periodic basis:
- Financial Reporting: Provide periodical financial statements on a monthly and quarterly basis based on the functions reports that are in accordance too, or that were intended for the budgetary estimates.
- Variance Analysis: All specific projections that were made should always be compared with the actual results, with some possible inquiries into the evidence obtained of the reasons for the addressing gaps. Re-examine the strategies and make revisions where necessary.
Review and Revise Your Plan
Regular Updates
Financial plans should not be static:
- Adapt to Changes: Changes made in the external environment factors affecting the business, internal and external performance of the business, financial status expected for the business. Make changes as necessary.
- Adjust Projections: Update projected revenue and cost ratios with regards to revenue and expense performance against the ratios previously reported.
Gain Quantifiable Assets
You should think about going to specialists of a financial nature, for instance, to accountants:
- Expert Insights: Professional consultation about your plan’s viability will surely be a wise investment.
- Refinement: Often, it is necessary to even revise some previously developed financial approaches.
Conclusion
The way to effective management and growth of the economic stability of your company lies in developing a well-defined and organized financial structure. By setting the objectives, performing well-planned financial analysis, preparing the cash flow forecast and control, you will have a well-rounded blueprint of managing the business. In addition, it does not hurt to revise your plan as well as its components periodically. Consider preparing your financial plan now so you can change the course any time heading for the right direction.