Do you use your financial plan as your business’s early warning system?
What am I talking about? Well, I am certainly not talking about preparing or interpreting your periodic financial statements.
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Don’t get me wrong, those are essential tools to show you where you’ve been. But, looking at what’s already happened isn’t going to prepare you for future changes.
You need to make projections for the coming months. Forecast revenue and expenses, as well as the impact of anticipated changes in the business – the market – the environment.
Your projections will help you to:
- plan for cash flow fluctuations
- identify financing needs
- suggest preferred timing for projects.
Where will I find the time?
I know that your day is already full of important tasks. Activities that directly revolve around acquiring new customers and keeping existing ones happy.
You know, all the stuff that actually matters and makes a real, tangible difference.
Financial forecasting is seen as time-consuming and difficult. Not to mention stressful too. All the while taking you away from the stuff that really matters.
But believe me, this stuff really matters too. You can’t drive your car by looking in the rearview mirror any more than you can manage your business on financial statements.
Need guidance for creating your own financial plan?
Here are seven steps to lead you.
1. Drill down into your 12-month strategic plans
Always start with your overall strategy as the financial plan must be aligned with it.
Here are the most vital questions that your strategy needs to answer to create a successful financial strategy:
- Do I need to expand or diversify?
- Will I need more equipment, technology or premises?
- Is my staff compliment going to have to grow?
- What other new or extra resources will I need?
- How will my plan affect my cash flow?
- Will I need financing? If yes, how much?
Bear in mind: – if you’re projecting a substantial increase in sales, you may need to raise capital to buy more assets; such as inventory and equipment.
Next, identify specific costs of acquisition, employment, etc.
Specify whether they’re once-off purchases or ongoing expenses.
Then, determine the financial impact in the next 12 months, including all expenditure for special projects.
2. Convert projections into a financial plan
Using a simple spreadsheet, record your anticipated sales forecasts and other revenue expectations. This will give you a total projected monthly income.
Then document your anticipated monthly expenses for labour, supplies, and overheads. [all regular ongoing expenses].
Once that’s done, plug in the costs for the special projects you identified in step 1.
Be sure to record the sales in the period you expect to get paid, not when you plan to make the sales. Also, be sure to capture all expenses in the periods you expect the cash to be actually leaving your bank account. This will ensure that your financial and cash flow projections are one and the same.
NB: If your cash flow is very tight then you should consider doing weekly projections for the first 3 to 6 months.
By calculating your expected net profit/loss for each period you will see your actual cash position at that time.
I would recommend that you create more than one plan to include various scenarios, such as:
- Including/excluding special growth initiatives
- Optimistic economic outlook
- Pessimistic economic outlook
If you need help putting the plan together, it may be a good idea to get an accountant involved. Or you can bounce your ideas off me and I’ll help guide you through the process.
Be sure to understand the plan yourself as you will be the one implementing it. You will also be the one explaining the plan to your banker or investor for finance; assuming you have the opportunity.
3. Conduct a break-even analysis
Your break-even analysis is a calculation of how much you need to sell to cover all your expenses.
This analysis is a vital tool for financial planning. It predicts what gross sales volume the business must achieve to cover its expenses. All sales beyond this point are profits.
In determining your break-even point, you’ll need to figure out the contribution margin of what you’re selling. This is the money left over from sales after paying all variable expenses associated with producing a product/service.
Using this model you can determine how high your sales revenue needs to be in order for you to not lose money.
4. Plan for emergencies
Will your business survive if your finances suddenly deteriorated?
Do you have access to emergency funds in the event you need them?
Here are some suggestions to build protection against unforeseen challenges:
- Retain a small percentage of nett contribution to build and maintain a cash reserve
- Organise a larger overdraft on your accounts/credit cards that you don’t need – do this when you don’t need it.
- Put agreements in place with suppliers so that they will offer you an extra 30, 60, or 90-day terms on your account. This is generally done for a fee – usually, about 1% of the amount owed for every 30 days the credit is extended.
NB: It is critical that you set specific triggers that prompt you to access any of these options. Discipline is necessary to not use any of them as an easy way out of normal operational challenges.
5. Borrowing money
Use your financial projections to determine your financing needs.
Most entrepreneurs and small business start-ups are not able to secure financing. Not without offering the family home or a vital body part as collateral anyway.
But if you are fortunate enough to have financial partners or investors, then a well-prepared plan will help reassure them.
Whatever you do, DO NOT sign any sureties.
6. Tracking, evaluation and correction
After every period, compare your actual results with your projections. Do this as soon as possible after the completion of the financial period. You need to see if you’re on target or need to adjust.
Monitoring helps you spot financial problems before they get out of hand. Make sure that your sources of actual information are 100% accurate and reliable.
Once you have quantified and validated any deviations, evaluate them and identify the reasons behind them.
Corrective action may involve:
- Addressing and improving actual performance to get your sales or expenses back in line.
- Revising your strategy to achieve the standards set.
- As a last resort, changing the plan to take into account the unanticipated conditions.
7. Ask for help
Most of us small business types are not experts in financial matters. The solution is not trying to become one overnight, it’s the ability to ask for help from when we need it.
If you lack expertise, consider asking an expert to help you put together your financial plan. Your business’s survival and growth may depend on it.
Good luck out there.
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