The importance of having a business financial plan
Written By Melissa Houston
If you have been following me for any time, you have heard me speak about the importance of having a financial plan for your business. I love financial plans in the business, and business financial plans are also known as operating forecasts.
Business financial plans are essential because they allow you to forecast or project your business activity 12 months ahead and help you plan accordingly. If your revenue is projected to increase over 12 months, you can expect your cost of goods sold (COGS) and your business expenses. But your profit margin must stay tight or increase along with those changes in revenue to ensure you are growing and scaling profitably.
When creating a business financial plan, you can plan for strategic growth, understand what kind of cash outlay to expect, and plan your cash management strategy.
Not all growth in a business is created equally, and some growth, high-speed growth, can come with risks that you need to mitigate.
Having a financial plan provides a financial roadmap for your business that you can follow and monitor your actual progress against your planned progress and analyze any deviations.
When you stay on top of your finances, you can stay ahead of the game. Ensure that all parts of financial management are moving together. It would help if you stayed as profitable as possible, but your cash flow is managed to ensure you have the cash in the bank to cover your financial obligations.
How having a financial plan will keep your business profitable:
1. It gives you direction for your business to reach its goals
Knowing what you need to produce each month and how much revenue you need to generate to reach your fiscal goals is helpful to ensure you stay on plan. Having that plan mapped out will offer guidance and help you reach your goals.
2. It offers you a roadmap on how to get there
Each month you will know the minimum requirements to reach your goals. Having the ability to monitor your progress against those goals is valuable to assess what went well and what you need to improve for the following month.
3. Plans for the unexpected
Creating a financial plan allows you to map out the expenses that accompany increased sales and plan for growth in terms of hiring new team members. Knowing if you can afford to take on new team members is vital in the hiring process.
4. Mitigates risk
When you have the correct financial information at your disposal, you can make informed business decisions. You’ll know if you can afford to bring on new team members, plan for expansion, and grow your business.
5. Helps with cash management
When you can anticipate increased costs, it allows you to plan for an increased outlay of cash. Cash management is a vital exercise for businesses.
6. It helps keep profit margins tight as you grow
Not all growth is created equal. Your profit margins are the key performance metric you should monitor to ensure your profit increases and the sales increase. If profit margins are declining as you grow, you know that you have an urgent issue that needs attention.
The bottom line is that growth in your business needs to be managed to ensure that you are making profitable business decisions. Not all business growth is good, especially when not managed correctly, so be sure to grow your business sustainably with an innovative and profitable business plan.
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