Article provided by The Alternative Board
Owning a business entails both daunting challenges and exciting opportunities – but that’s what makes it so fulfilling. You get to create a business plan, conceptualize new products and services, and make a great marketing strategy. While these are all interesting endeavours, it doesn’t mean a thing if you can’t back it up with good sales figures.
Entrepreneur South Africa points out that developing a financial plan is one of the most essential components of a business, as it states your long-term objectives and a detailed strategy on how to reach them. This is crucial in winning over investors or obtaining a bank loan. Even if you don’t need outside financing, having a financial plan is still key to steer your business to success. That said, here is a step-by-step guide to developing a smart financial plan.
First, you should identify where you want to be at the various stages of your life. For example, single, married, children, school, children out of the house, life-partner working/not working, to name a few. Think of this as your personal goals or vision.
Then you should identify where you want your business to be, as well as have a short-term and long-term goals. Think of this as your company goals or vision.
These will motivate you to work harder and set the direction for your operations while also helping you make sure you’re staying on the right track. Ask yourself questions like:
- Where do I personally want to be by next year?
- Where do I personally want to be in the next 5 to 10 years?
- Where do I want this business to be by next year?
- Where do I want this business to be in the next 5 to 10 years?
Make sure your goals are SMART: specific, measurable, achievable, realistic, and time-bound.
Identify where the capital will come from
Obtaining capital is one of the most difficult hurdles for business owners. You can receive help from family, find investors, or take out a personal or business loan. While business loans are the most appropriate, some may consider personal loans too as they are easier to obtain.
A guide by Marcus on how to get a personal loan discusses how lenders look at your credit history and capacity to pay which many experts suggest is an easier process than taking out a business loan. This is because business lenders will probably look at your credit and overall business plan, as well as your business’ accounting books and financial statements, all on top of your own personal credit. Not to mention that banks traditionally require collateral. This can be a challenge to gather for less established businesses, which is why some business owners turn to personal loans.
However, if you’re ready to take on the requirements above, then this article entitled ‘A Guide to Secure a Small Business Loan’ recommends organizing your financial statements to ensure an accurate and complete credit profile. Therefore, researching the best lender for your business’ needs is gravely important before borrowing. Overall, it’s best to stick to a capital level that is easy to attain and maintain.
Have a sales forecast
In a previous article I spoke about owning your cash flow forecast.
In order to do your cash flow forecasting, you should also have a goal-based sales forecast predicting revenue for the first 12 months. One way to establish this forecast is through the creation of a spreadsheet that shows just how much sales you predict you’ll get within a set period of time.
Ideally, your projections should include unit sales, pricing, costs, and cost of sales. This last one is to find the gross margin which is a useful number to compare with different industry-standard ratios. For new businesses, Business Insider recommends looking at historical data from similar products or services to have a good benchmark. You can also make an educated guess based on this data.
You also need to establish how much it’s going to cost for you to reach your forecasted sales. It may be helpful to make a list. This list should differentiate between fixed (e.g. rent and payroll) and variable (e.g. advertisements) costs. Additionally, this list should be similar to your sales forecast. This means that you should make educated guesses based on industry averages. To do so, calculate the number of years for your forecast and try to include anticipated charges like the cost of goods, production costs or upgrades.
Review your plan
Take a final look at your plan. Examine each month’s projected results for the first year. Are they low for certain months, or are you achieving your short-term and long-term goals? If not, try to shift expenditures where possible. Remember to look at the actual results in your financial reports each month and compare these results against the numbers in your forecast. This will give you information on what to do if your revenues fall substantially below your predictions.
This is only the beginning though.
Many business owners don’t own their finances, notwithstanding that all their goals will be impacted by the financial performance of their business.
A cash flow forecast done once is only a snapshot at a specific point in time of what you as the business owner believe is possible, given the information you have at that time. Anything after that is dependent on measurements against the original cash flow forecasting.
Cash flow forecasting shows you, given the reality – past/YTD + current + future, what is now possible. And “now” is at least every month.
Without cash flow forecasting, business owners have no idea of the impact of their decisions on their profits and profitability, and therefore on their personal and business goals.
No material decision should ever be made without testing its impact against cash flow forecasting. And to know if that decision is material – test it in your cash flow forecasting, and see its potential impact down the line.