A Guest Post by Lilly Miller
The business world, much like any other aspect of human society, is riddled with fairy tales we like to repeat to make ourselves feel better. In this case, those would be the stories about entrepreneurs that had one good idea and enough grit to turn their hopes into overnight business empires.
And, while these cases do exist, albeit, in a very small proportion, the vast majority of the business world is built on hard work and careful financial planning. According to a recent survey, as much as 65% need to close their doors within 10 years of existence and poor financial handling and cash flow issues have been cited as one of the most important issues.
Let us take a look then at a couple of steps you can take to avoid this problem and make sure your new company sets off with a rock-solid financial plan.
Review or set up the strategic plan
If you are not familiar with the term, a strategic plan is a document that outlines the strategies companies can use to meet their long-term goals. Therefore, in order to get to these specifics that will have greater implications on the financial planning, try answering the questions like:
- Are you planning to expand
- Will you need to hire more employees
- How your strategic goals influence the cash flow
- Do you need additional financing
- Do you need additional equipment
- How these investments impact daily operations
Start performing financial projections
Now that you have a clear idea of where your company will be heading for the next 12 months you can use the insights like expected labor costs, overheads, supply costs, and other cash-flow elements to start making financial projections that will make the backbone of your future financial plan. While you are doing that, be sure to make projections for several different scenarios, one of which has to be the most pessimistic outcome your company can face over the next 12 months. This knowledge will help you to use your financial plan to make contingencies or set up the plan for growth in case of a positive outcome.
Keep an eye on personal finances
Startups are very dependent on their owners, especially if they are funded directly by their owners. That is why failing to keep your personal finances in order will inevitably spill over to your professional life and potentially cause some very ill-advised financial decisions. So, while crafting your future financial plan make sure that your personal finances and sources of revenue are absolutely protected. Also, in case that is impossible, you should explore the options of low-interest personal loans, rather than trying to ramp up the income through hasty business decisions. These two worlds should always be separate.
Cover all important financial plan components
Every successful financial plan broadly covers the same relevant topics. So, if you really want to make this document worthwhile be sure to give due attention to all these important components. Here is a short breakdown:
- Profit and loss statement – A short explanation of how your company has made a profit over a specific period of time, usually three months. You can look at it at the list of all revenue streams intersected with all expenses.
- Cash flow statement – This document is very similar to P&L but it puts a greater focus on how much cash you have at disposal at any given moment. That is why, although it uses the same factors, a cash flow statement usually narrows the time frame to one month.
- Balance sheet – Essentially, a balance sheet represents a snapshot of your company’s finances at any given moment. It includes three important components – assets (receivables, money in the bank, etc.), liabilities (loan repayment, credit card balance, etc.), and equity (shares, stock proceeds, retained earnings, etc.)
- Sales forecast – The projection of what you think you are going to earn in some specific period.
- Personnel plan – This component can be best described as the justification of each employee and its associated costs to the business.
- Break-even analysis – As the name suggests, this is the final projection of how well you need to operate in order to keep your company viable.
Monitor the progress and make necessary tweaks
Last but not least, we would like to remind you that your financial plan will be worth only as much as your ability to monitor your finances, compare them to financial projections and assess if you are on target. Of course, if you are experiencing any kind of noticeable lag, you should go back to square one and start making your plans and strategies from scratch. This job will be made considerably easier if you narrow down your focus to the most relevant financial KPIs like gross profit margin, net profit, net profit margin, current ratio, customer acquisition ratio, return on equity, and accounts receivables turnover ratio.
We hope these few suggestions will help you craft a financial plan that will be truly able to pull your company through the next 12 months as well as setting up contingencies and KPIs that will make this document even more worthwhile. In any case, you need to remember that business success can be achieved only through hard work and careful and thorough planning. We can’t help you with the first mention, but now you will be able to make the most of the second.