It is not easy to develop a business plan as many elements need to be included and considered. Financial planning is a major part of preparing a feasible business plan. If you have never done financial planning for businesses before but want to learn about it, you have come to the right place. In this post, we will discuss the importance of financial planning for almost all businesses. In your first attempt, you might hit a few roadblocks. But with the right guidance and practice, you can learn how to prepare a practical and effective financial plan for starting and working on your business initiative.
What is Financial Planning?
Financial planning refers to building a brief about funding sources, expected cash inflows and outflows, and reinvestment strategies into the company for business growth. It also includes the budget allocated for different purposes and explains how and why it is divided.
A business needs to split and allocate a budget for production, human resources, marketing, and unexpected crises. When all of this is written down and compiled in a document, it helps the company focus on its operations in the right manner.
A financial plan also helps the business owners communicate clearly to the staff and investors why the company is moving in the right direction.
Financial planning is highly essential for building and growing a modern and transparent business. That’s why the financial plan is included as one of the major sections in a business plan. It tells the business how to carry out its financial management. It applies real financial projections and data and must put all business operations in context.
A financial plan is typically forward-looking. Although the accounting figures used to compute the data are the existing ones, most of the plan is about forecasted estimates and future projections. That’s why it requires a little bit of experience to do financial planning. You cannot just copy and paste figures to prepare a financial plan. You need to know and analyze your business goals and describe how your budget allocation matches your strategy to achieve those goals. In other words, you need to explain the level of investment that you plan to make for achieving your business goals.
Remember that this does not mean your financial plan has to be ‘made up’. This section of a business plan is actually the most grounded in reality. In fact, a business plan is only conceptual until you include your financial planning numbers in it. The other sections, such as the marketing plan, are interesting to read but don’t mean anything unless you justify them with the figures computed in the financial plan.
When you approach investors or other funding sources for your business, it is your financial plan that you need to show. Even if your business does not require external sources of financing, you still need to compile a financial budget and forecast to successfully execute your business marketing strategy.
8 Benefits of Financial Planning
Here are eight benefits of financial planning, particularly if you are starting a new business.
1. Clarity of Company Goals
Financial planning helps you clarify your company goals and communicate them to your employees and other stakeholders. This means a financial plan is actually the starting point of running your business operations. You can steer your efforts in the right direction only when you know what you need to achieve by the end of the quarter. At the beginning of your startup, your financial plan would need to establish grounds for the existence of your business. Thus your plan would have to define your product/market fit. Some companies have to spend years justifying their product/market fit before moving on to further business growth. When a business is in this phase, it doesn’t make sense to set lofty sales targets and huge marketing KPIs. Hence, financial planning at this phase mainly involves allocating a sufficient budget for product development and small marketing campaigns to build brand awareness.
2. Sensible Cash Flow Management
Financial planning allows you to set clear expectations regarding your cash flow. It does make sense for a business to spend more money in its earlier days, as that’s the time you need to invest all the capital budget required to build your brand. But you need to refer to your financial plan to determine the acceptable level of expense you spend as your capital expenditure. Your financial document also needs to determine how you plan to stay on track after spending the initial funds.
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Another thing that financial planning allows you to figure out is measuring your cash flow on a daily and monthly basis. Some companies hire seasoned finance experts for this purpose, while others keep referring to their initial financial plan to efficiently keep track of where the money is going.
3. Smart Budget Allocation
Financial planning for businesses ensures smart budget allocation. This is closely related to proper cash flow management, as mentioned above. When all your staff clearly understands how the funds have to be spent, they can efficiently manage the cash through sales. The financial plan helps you figure out how you should be spending all the cash that comes in.
4. Necessary Cost Reductions
Financial planning also allows a business to spot saving opportunities early, apart from identifying how much and where the money needs to be spent. Building a financial plan always involves looking back at your past expenses and analyzing how you can cut costs by changing how you handle your present and future operations. These cost reductions need to be implemented according to your business expansion strategy. If you plan to grow your business fast, you might have to actually spend more in the present than you did in the past.
You may still be able to identify any unnecessary or over-inflated costs that you incurred in the past. When you have all the figures computed in front of you and all the matters of your business sorted out, it is easier to spot events where you can save your budget. When it is time to prepare your next year’s budget, you can make the necessary adjustments again.
5. Risk Mitigation
A critical role of financial planning is to help a business mitigate risks. One of the purposes of a financial plan is to help the company avoid and navigate risks to be protected from financial fraud. Many types of risks are hard to predict, but some can be seen coming and avoided through careful financial planning.
A financial plan must have room for business insurance expenses, resources for unexpected costs, and losses incurred through risky inefficiencies. When the business goes through turbulent times, the financial forecasts really help show different outcomes the business might face if it implements different strategies. This, in turn, helps the business avoid making financial mistakes.
6. Crisis Management
When a company goes through a crisis, the management first reviews and reconstructs the plans. This, of course, means you need to have a solid business plan, to begin with. If you do not have a proper business and financial plan, your response to any crisis would just be to improvise.
The current pandemic has forced many organizations worldwide to strategize and rebuild their financial plans. But in doing that, the original financial planning measures have definitely come in handy.
7. Smooth Fundraising
Whether it’s a small business, a brand new startup, or a large and established organization, it will need some cash injection at some point in time. That’s when you need to start looking for investors. If your financial planning is all well sorted out, you can attract better-quality investors and fundraisers in a shorter period.
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8. A Roadmap for Growth
Financial planning helps a business build a roadmap for its growth and expansion. It provides estimates on what will be affordable for the company in the foreseeable future and what will not. This makes it easier for the business owner and top management to make more informed decisions about their expansion strategies. They might, for instance, be able to foresee that they can afford to grow into a global business within the next five years.
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Concluding Remarks
Now that you know the importance of financial planning, you can build one. In this day and age, you definitely need to budget for your business to build a solid online presence for your brand. The best way to do this is to create a professional website to showcase your products or services and represent your overall business.
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But the good news is that you do not need to allocate a large budget for this purpose. By building your website on Strikingly, you will be spending (if any) a minimal amount on your web development because you wouldn’t need to hire a web designer or developer. All you need to do is select from among our ready-to-use website templates and key in your website content all by yourself. We promise you wouldn’t need to write a single line of code in the process.
Effective financial planning opens doors for businesses to capitalize on such fantastic and cost-effective opportunities.
