An effective business begins with an effective financial plan. It is what your business is all about because you are able to operate, invest, and develop. It should begin with a clear understanding of objectives and conclude with close tracking and monitoring, with many activities in between.
There is a financial plan that can steer your business and help you make prudent decisions that will see you grow. Money is the only thing that can make your business operational and successful. A plan will give your business a long term sustainability, strategic goals, minimize risks, and then give you a map to how you can become successful.
These are broad tips to start with in order to assist you in compiling a good financial strategy for a successful business.
Get to know your Financial Situation
It can all begin in whatever location you have your business, be it in a start-up or if you have been in business a long time. Gather all the financial data to have a look at. This must involve your expenses, outgoings, debt, revenue, and reserves, among other financial things. Apply key performance indicators (KPI) to enable you to see your present health, review your cash flow, and examine your balance sheet.
The knowledge of your financial position is like a health check-up of your business. You must know what you are before you can map a course out. Start with the compilation of statements of all the bank accounts, credit facilities, and investment accounts. Look at your profit and loss statements of the last year, or whichever time you have been in operation.
Especially watch trends, but not individual numbers- are you increasing or decreasing in revenues? Are some of the costs getting out of control?
Your cash flow statement is a statement that should be given special consideration, as it shows the lifeblood of your business. Most business ventures fail due to a lack of cash, although they may have healthy income statements on paper. Look at the actual money inflow as compared to the outflow. This rhythm will be understood at the time when you need to know that there will be a cash crunch before it becomes critical.
Taxation and Legal Organization
You will also have to get acquainted with taxes and what is going to hit you, like sales tax. The first thing to keep in mind is what type of business you are doing, and what the tax regulations are in your country and state. This will affect the decision-making process and goal-setting.
Sole ownership, partnership, LLC, S-corporation, or C-corporation are very different forms of business that have very different tax implications.
Both structures have implications on the way you are taxed, the deductions you are allowed to take, and the distribution of profits. It may be wise to seek the services of a tax specialist or an accountant who knows your business. They can assist you in their professional capacities by finding deductions that you may not have claimed, complying with the evolving regulations, and possibly saving thousands of dollars per year.
Define Your Financial Goals
Goals are really important. Even though you may have broader business objectives that are connected to your finances, you must set extremely specific objectives and milestones for your finances. These must be in accordance with SMART goals: specific, measurable, attainable, relevant, and time-bound.
Instead of having a general goal such as to increase profits, a SMART financial goal would be to increase net profit margin by 12 percent to 18 percent in the next 18 months by cutting operational expenses and by improving the pricing strategy. This is a specific, measurable, attainable, relevant, and time-bound goal.
Examples of your financial goals may be to have an emergency fund amounting to six months operating expenses, to cut business debt by a certain percentage, to raise working capital, or to obtain a target return on investment of new projects once you have an idea of what these are supposed to be then you ought to align them with the bigger business goals so that all business departments and activities are co-ordinated.
Strike the right balance between short-term and long-term financial plans. Short-term objectives (in 1 year) could involve achieving monthly sales objectives or positive cash flow. One to three-year objectives may include the extension of your product range or the establishment of a new store. The long-term objectives (three to five years and others) may include a specific company value or exit strategy preparation.
Develop a Detailed Budget and Plan
All this information will have to be combined to come up with a realistic and effective budget for your business. A budget is a guide to financial areas that direct your money as to where you want it to be, rather than asking yourself where it has gone.
The way in which the funds can be distributed to various departments in your business, like marketing, human resources, training and development, customer service, hardware and equipment, software, product development, should be carefully thought out. The allocation of each department must be based on the strategic value and the possible payback given by the department.
Make a distinction between capital expenditures (CapEx) and operating expenses (OpEx) in your budget. Operating expenses include the daily cost of doing business, such as rent, utility, supplies, salary, and marketing. CAPM Capital expenditure is an asset investment that will have value over more than a year- equipment, vehicles, or major software systems.
Financial Forecasting
You should use your budget to develop future projections of your business in terms of revenue and money available. Financial forecasting is a factual projection of your financial status in the future based on the past and future market trends and activities. Prepare by developing various scenarios which include best case, worst case, and most likely case.
The most important forecast that you might make is cash flow forecasting. David (2011) advises that you should plan when the cash will actually flow in and out of your business, not necessarily when you make a sale or cover an expense. With net-30 terms, when you invoice your customers and pay your suppliers instantly, you will have a gap in cash flow, although you might be making a profit on paper.
Establish Risk Management Protocols
The full financial plan should deal with possible risks that may doom your business. Risk management is not about removing all risks but rather about identifying, evaluating, and reducing risks to reasonable levels.
Insurance is your initial defense against most the business risks. It can be the general liability insurance, professional liability insurance, property insurance, and business interruption insurance. Cyber liability insurance is required in case you deal with customer information. Although insurance premiums are a fixed cost, it is much cheaper than the losses they cover.
Diversification can deal with numerous risks. Several suppliers can be relied upon in case one of them fails. The variety of customers implies that the choices of one type of customer cannot drag your business down. There are other sources of revenue that would help to mitigate the impact in case one of the market segments falters.
Monitor, Track, and Adjust
You must also make sure that you have provided a clear procedure to help track and monitor your finances and forecast. Financial strategy is not like a document that you write once and keep away, it is a dynamic structure that will change with your business and market environment.
Create a consistent review pace for your financial performance. A review of the weekly cash position and urgent matters. Budget variances and achievement of goals should be reviewed monthly. Strategic review and corrections of the courses can be done quarterly. Doing annual reviews means that there is a chance to do a complete overhaul of the strategy.
Easy tracking with the help of modern accounting software and financial dashboards. Applications such as QuickBooks, Xero, or FreshBooks also have the ability to automatically sort transactions, create financial statements in real-time, and offer graphical dashboards revealing key metrics at a glance.
Determine the KPIs that are the most important in your particular business and monitor them strictly. The typical KPIs in finances are gross profit margin, net profit margin, operating cash flow, current ratio, and accounts receivable turnover. Develop a basic dashboard that will show your most vital KPIs to ensure that you can keep track of the health of the business at a glance.
Assemble a Powerful Financial Staff
As your business expands, you will require the knowledge of someone other than you who is financially savvy. An experienced accountant or bookkeeper makes sure that your financial records are up to date and accurate. They are able to manage the routine, such as accounts reconciliation, payroll processing, and financial statement preparation, to give you time to concentrate on the key strategic decisions.
Financial advice is given by a financial advisor or CFO (full-time, part-time, or outsourced). To emerging businesses that are not yet in a position to afford a full-time CFO, fractional CFO services offer the opportunity to gain access to quality financial leadership at a fraction of the price.
Banking relationships are more important than most business owners may know. A banker who has a good relationship with the organization can result in access to credit lines, business loans, and merchant services at good terms. You do not need to wait until you are facing a desperate need to finance such relationships.
Plan for Growth and Scaling
How you are going to finance and manage growth should be clearly set out in your financial strategy. The fact that the growth will be fast, though exciting, may even be hazardous without proper funding. This is one of the growth traps that arises when selling more inventory, equipment, and manpower; more customers have to pay cash, which will cause cash flow crises.
Identify how you are going to finance growth. Will you bootstrap, all on revenues and retained earnings? Will you obtain debt financing by bank loans or lines of credit? Are you receptive to equity funding, either by angel investors or venture capital? The two methods both have benefits and disadvantages that influence control, flexibility, and financial requirements.
Conclusion
Any business is founded on money. Ensure that you have an elaborate plan in place that will deal with your current state and future aspirations and plans, budgeting and planning, risk management, monitoring procedures, and expansion.
An effective financial plan gives you an accurate idea of what to do, a sense of confidence in the future of your business, and reassurance for stakeholders. It changes financial management into a response scramble to a proactive and strategic benefit.
It is important to keep in mind that financial strategy development is a continuous process rather than a one-time event. Markets evolve, opportunities arise, challenges also develop, and your strategy should change as well. Having a sound financial plan to make every decision by, you will be in a better position not only to survive, but also to prosper, growing a long-lasting, profitable business that attends to your objectives and adds to long-term value.
Frequently Asked Questions
What do I need to budget for my emergency fund?
The majority of financial analysts advise that in case of an emergency, three to six months of operating expenses should be saved in an emergency fund. But this will be determined by the type of business, the stability of your income, and your risk-taking capacity. Six months or more might be an appropriate goal for a business whose revenue streams are highly predictable, whereas three months can be appropriate in a business with seasonal or fluctuating revenues.
At which point do I employ a professional accountant or bookkeeper?
Hiring accounting assistance should be considered in case financial activities are taking up excessively long periods of your time, you lack confidence in making financial choices, or when there is rapid growth. Most entrepreneurs begin with simple bookkeeping, where they do the bookkeeping by themselves through computer programs, but hire a professional to reconcile and prepare taxes on a monthly basis.
At what frequency do I need to revise and update my financial strategy?
An annual review of a financial strategy is recommended, but key indicators should be observed much more often. Review of cash flow every week will help you avoid short-term crunches. Regular accounting of the income and budget variances monthly keeps you updated with regard to operational performance. The quarterly reviews are the time when the progress in achieving the goals is evaluated, and strategic adjustments are possible.
What is the distinction between profit and cash flow, and why is it important?
The difference between the revenue and the expenses in your books, irrespective of the time when money is received or paid out. Cash flow is the reality of money flow in and out of your business accounts. You can be profitable on paper, but have negative cash flow, where the customers have yet to make their payment in terms of paying the invoices. Cash flow is important as it is the real cash that you require to pay bills, employees, and suppliers.
Is it advisable to separate business and personal finances?
Absolutely. Segregation of personal and business finances also makes accounting and tax filing simpler, preserves personal assets, gives more precise data of the actual business performance, and it also builds credibility among lending parties and investors. Open a business bank account and get a business credit card. You should give yourself a regular salary or owner draw instead of taking money as and when you want to.
What financial software or tools do I need for my business?
The optimal financial application is based on your industry, business, and requirements. The most popular one is QuickBooks, which has versions corresponding to different sizes of businesses. Xero offers accounting in the cloud with good bank reconciliation. FreshBooks is beneficial for service-based companies and freelancers. Wave provides free basic accounting to very small businesses. It is best to select the software that you will make use of always, and not the software with the most features.
How do I know whether I am pricing my products or services at the right price?
The pricing needs to be done correctly by knowing your costs, positioning in the market, and value proposition. Work out your total costs, which are direct costs and indirect costs. Include the amount of profit you wish to gain, so as to establish a point of reference price. Competitive price research to know what the market rates are. Think about your value proposition- if you have high-quality or special features, then you will be able to charge high prices. Try the varying price points and keep a check on the impacts on the level of sales and profits.
What can I do if my enterprise is continuously failing to meet its finances?
First, understand the reason behind your missing targets. Check your assumptions. Were your original projections realistic? Identify areas of problems: is there something wrong with certain merchandise, or certain costs running out of control? After establishing root causes, come up with action plans. This may include the change of marketing policies, the renegotiation of the supplier contracts, minimizing unnecessary costs, or reestimating impractical targets.
To what extent do I reinvest in my business as opposed to taking it as personal income?
This is a balance that is based on your business level, expansion expectations, and your own financial requirements. Start-up businesses normally need heavy reinvestment. As your business grows and is profitable, you have an opportunity to earn more as a person and still reinvest enough. One method is to spend 50-70 percent of profits on reinvestment in the growth stages and then 30-50 percent as the business levels off.
What are the red flags of financial distress I need to look out for?
The warning signs are to be taken seriously when the cash flow is negatively increasing, the accounts receivable aging is increasing, the profit margins are decreasing, their debt is increasing, and their inability to meet their payrolls, use of cash, and their increasing dependency on credit to finance their operations. When you see several red flags at once, act now- get together with your accountant, analyze expenditure to make immediate reductions, and prepare an exit strategy.
