Going through the process of constructing a financial plan is a valuable exercise for any business owner. The financial plan, or budget as it is also called, helps guide the day-to-day decision making of the business. Comparing forecast numbers to actual results yields important information about the overall financial health and efficiency of the business. Even a one-person company needs to have a financial plan in place.
Cash Management
Many businesses have monthly or seasonal variations in revenues, which translate into periods when cash is plentiful and times when cash shortages occur. In building the financial plan, the owner takes these cycles into account to keep a tight rein on expenditures during the forecast low revenue periods. Poor cash management can result in negative consequences such as not being able to make payroll. Having a financial plan that is structured so there is always a cash cushion helps the business owner sleep better at night. The cash cushion allows the business to take advantage of opportunities that arise, such as the chance to purchase inventory from a supplier at temporarily reduced prices.
Long-Range View
In business it is easy to become focused on the crises or issues that must be dealt with on a daily basis. The price for being too short-term oriented is that the owner may not spend enough time planning what needs to be done to grow the business long-term. The financial plan, with its forward looking focus, allows the business owner to better see what expenditures need to be made to keep the company on a growth track and to stay ahead of competitors.
Spotting Trends
A business owner makes so many decisions over the course of a month that it can be difficult to tell which decisions resulted in success and which ideas or strategies did not work. Preparing the financial plan involves setting quantifiable targets that can be compared to actual results during the year. The owner can see, for example, whether an increase in advertising expenditures led to the hoped-for jump in sales. Trends in the sales of individual products help the owner make decisions about how to allocate marketing dollars.
Prioritising Expenditures
Conserving financial resources in a small business is a critical element of success. The financial planning process helps a business owner identify the most important expenditures, those that bring about immediate improvements in productivity, efficiency, or market penetration, versus those that can be postponed until cash is more plentiful. Even the largest, most well-capitalised corporations go through this prioritisation process, comparing the cost to the benefits of each proposed expenditure.
Measuring Progress
Especially in the early stages of their ventures, small business owners work long hours and deal with numerous challenges. It can be difficult to tell whether progress is being made or whether the business is mired in mediocrity. Seeing that actual results are better than forecast provides the small business owner needed encouragement. A chart showing steady growth in revenues month by month, or a rising cash balance is a great motivating factor. The financial plan helps the owner see, with the clarity of hard data, that the business is on its way to being a success.
