It may seem something of a truism, but many smaller businesses often make do without any real financial data, let alone a full financial plan. Now, that will hopefully be alarming to many but, in our experience, it’s a situation we all too frequently come across.
You can imagine the likely consequences, of course, which begs the question, why do businesses still fail to plan? After all, as the saying goes, failing to plan is actually planning to fail.
In fact, every business can benefit from having a workable, up to date Financial Plan. A document that can be – and should be – amended and updated on a regular basis. Something that isn’t just there in case of a crisis, like a fire extinguisher, but is more likely resembles a business workshop manual – an easily accessible document that will help you keep on the straight and narrow.
So, what does a Financial Plan look like, and how can it help your business toward success?
To answer the second question first, imagine for a moment what it would be like if you didn’t have a household budget. You would have no idea when and how much money was coming into your home and, equally, what your bills were each month.
The consequences would be almost unthinkable. Some weeks and months you might – if you’re lucky – have a surplus, and the temptation could well be to squander it, rather than putting some extra away for a rainy day. Other months you’d have a deficit, and the inevitable result would be you being unable to pay your essential household bills. Your mortgage or rent, your council tax, your gas, electricity and other utilities & services would all be at risk. And, probably most alarming, you and your family could well be unable to eat.
So, translate that analogy into your business, and you’ll see that having a proper Financial Plan means you’ll be able to keep track of your invoices and sales targets, as well as knowing where your rent and staff expenses are coming from and, crucially, whether you can afford to expand your business. You’ll also be in a far better position to know whether you need a temporary overdraft or other financial facility, or whether the business is able to survive, given its current trajectory.
But, what does a Financial Plan look like, and would you recognise one if it landed on your desk? The answer, not surprisingly, is that they take a number of forms, but all have several things in common.
Firstly, a Financial Plan should have a Cashflow Forecast. In essence, this is an estimate of the amount of money you expect to flow in and out of your business and includes all your projected income and expenses. A forecast usually covers the following 12 months, but it can also cover a short-term period such as a week, month or quarter.
Secondly, your Financial Plan needs to contain a Balance Sheet. Basically, this is statement of the assets, liabilities, and capital of your business at a particular point in time. As such, it will detail the balance of income and expenditure over a specific period in the past.
Lastly, but certainly not of any lesser importance, your plan will contain a Profit and Loss Account. This is the section to which incomes and gains are credited and expenses and losses debited, showing the net profit or loss over a given period. In practice, this is the section that enables you to determine whether your business has been profitable over the last year and, if not, where the problem lies.
Once you and your business advisers are equipped with these essential tools, you will be able to work out what adjustments your business needs to keep it profitable and, indeed, to turn it into a more successful venture.
Like a barometer, your Financial Plan will help you and your support team to make provisions for the future, dressing your business accordingly to weather any storms, as well as identifying and taking advantage of any sunny spells. And as we all know, no matter what the climate, it always pays to wear an outfit that’s appropriate for the prevailing conditions.
True financial planning is an essential part of running a strong business – cashflow, balance sheets and profit & loss records might seem complicated but these documents provide you with stable metrics to measure. Seek expert help to guide you through the process of creating these management accounts and then using them regularly to monitor your business.
Now you’ve read our article on growing a business and having a financial plan – have you any more questions?