Most financially minded people would agree that planning for your financial future is extremely important – and it absolutely is. What sometimes gets overlooked, though, is planning for your business’s financial future. Many business owners have personal and family financial plans, but may have forgone, or put off, financial plans for their businesses. There are many reasons for this, as business owners have much to do and wear many hats. And having a financial plan might not be the most pressing issue at hand, so it falls to the wayside. Therefore, in this article we want to encourage you not to let business financial planning fall to the wayside anymore. Below, we will provide a brief overview about what financial planning is, and how you can get started on it if you haven’t already.
What is Financial Planning?
The definition of financial planning is self explanatory: it is the process of managing your finances (personal and/or business). This will allow you to set and achieve short and long term goals and measure your progress.
First, let’s take a brief look at the steps that go into creating a personal financial plan. The first step should always be to take stock of your present financial situation. This can be quite involved. You’ll want to review your tax returns, assets, liabilities, will, trusts, investments, insurance policies, and any other contributing factors to your financial situation. This should also involve enumerating all of your current debts. And finally, it includes compiling a list of your personal income sources versus expenses.
Setting Financial Goals
After assessing your current financial data, it’s time to set financial goals. This is where it is oftentimes helpful to employ a financial planning professional. They can provide an objective perspective on attainable goals and help you devise a realistic plan to prioritize and achieve them.
Common personal financial goals include:
- paying off debts
- buying a home or a second home
- saving for retirement
- creating a college fund or legacy fund for your children or grandchildren
Unfortunately, after setting your goals it’s time to come back to reality and review the barriers that stand in the way of achieving your personal and financial goals. This is another facet of your financial plan that a CFP professional can provide support with. They are trained in analyzing financial information and understanding potential problems, such as bad investments, lack of cash flow, disproportionate tax burdens and more.
Once you have both identified barriers and how you can make them less daunting, you can put together the actual plan. It is then your responsibility to stay on track and put your plan into action. And, like all other financial documents, you want to be sure to periodically review and, if need be, revise, your financial plan.
What about Business Financial Planning?
The process of creating a business financial plan is quite similar in structure to the process of creating a personal financial plan. The steps are essentially the same. However, instead of applying them to your personal life you are applying them to your business.
In a nutshell, creating a business financial plan involves evaluating all of your business’ financial data. Afterwards, you would create a plan to ensure that the raw numbers will work cohesively with your business’ short and long term goals and objectives.
Let’s go into more detail about some of the aspects of a financial plan especially pertinent for business owners undergoing the process. Generally, business financial plans should have three distinct financial statements: an income statement, a cash flow projections, and a balance sheet.
The income statement should list revenues, expenses, and profit, the data from which you can use to create a profit and loss statement. The cash flow projection denotes how much cash you expect to come in and out of the business during a pre-determined time frame. And the balance sheet shows the business’ net worth (at the time the statement was created). This will include an overview of your assets and liabilities, the difference of which gives you the business’ equity.
Business expense analysis
Evaluating and analyzing business expenses can sometimes be a challenging piece of creating a financial plan for businesses. There are two main categories of business expenses for consideration. These are the start up expenses and operating expenses.
The start up expenses are, of course, the expenses incurred in opening your business’ doors. These could include business licenses and permits, registration fees, rent or mortgage on an office space, down payments, and any other sort of initial sunken cost.
The operating expenses are made up of the costs of keeping your business up and running.
And these usually include things like:
- office supplies
- promotional and marketing costs
- telecommunication costs (especially if you have recently transitioned everyone to work remotely)
Understanding and clearly acknowledging the differences in these two types of expenses is crucial to being able to effectively analyze past financial statements and predict future ones.
Why create a financial plan for your business?
There are two overarching reasons to create a financial plan for your business. The first is that it is generally necessary if you are seeking investors. People considering investing in your business want to see organization and forward thinking with finances to sustain a solid business plan. They also want to see the numbers so that they know exactly what to expect for growth.
The other – and even more important – reason to create a business financial plan is for you. Every owner wants to run a successful and sustainable business. Hence, it is crucial to understand your current financial health (and how you got there) and what that means for your business’ future.
Financial plans are an excellent way to keep track of and measure the progress your business is making in achieving its goals. And remember that these documents are are not set in stone: they should be frequently reviewed. There is always room for revising them if your financial situation shifts.
Will Your Business Be Ready? Seek Financial Planning Help
Decision-making is really what being a business owner is all about. Making the right decisions at the right time is what separates underperforming companies from those that excel. The financial decisions made on behalf of your company are some of the most crucial.
What’s the most effective way to make great business financial decisions? To have the most thorough understanding of the business financial planning process. At the very least, this means using your financial statements and monitoring budgets to assess your current financial situation and plan for the future.
Whether you enlist outside help or go it on your own, an informed decision is a good decision. The goal is always to be as profitable as possible with the right financial decisions for your business.
At Saddock Advisory, we can help determine if your business is financially healthy. Get in touch with us here to find out more.