Many business owners believe they are so involved with their business, they know every intricate detail, and the last thing they need to spend their time on is a financial plan. They can keep track of all the financial issues their business faces in their head. Others believe that as long as their top line revenue number is growing, they will be fine. “What does a financial plan do for my business?” they say, “it’s outdated as soon as it’s finished”.
What many of these business owners don’t realize is that what may have worked for them when they started their business, may not work for them as their business grows. Their business becomes more complex, involves more employees and requires capital equipment and outside financing. There are many issues businesses face on a daily basis that can be resolved or minimized by a solid financial plan. Here are just a few to think about:
Financial Plans help business owners anticipate cash flow problems.
Many businesses complain of never having enough cash in the bank to make payroll, pay their suppliers or buy needed supplies for their business. Their business is generating more revenue each month; however, they never seem to have enough cash to pay their bills. What they do not realize is that many times as a business grows, it uses more working capital. If they do not plan for these increased working capital needs by establishing other sources of financing, they will continue to face these cash shortages.
A financial plan can provide business owners with a look into the future and enable them to anticipate increased cash flow needs today, secure necessary financing needed in the years to come, and avoid cash shortfalls and business interruptions down the road.
Financial Plans help business owners stay in compliance with bank loan or credit requirements.
Many businesses work with banks to get the capital needed to finance their growth. Oftentimes they do not realize that the bank has certain reporting requirements that accompany its loans. Many of those reporting requirements include such things as: monthly or quarterly financial statements, financial plans as well as maintaining certain financial ratios (i.e. debt coverage, profitability, liquidity, solvency) on an ongoing basis. The banks, as well as other business partners, want assurance that the business owner is mining the store on a regular basis. They need to know that their loan or the credit they extend is in good standing and the company is still in a position to pay it back.
A financial plan helps a company to more effectively manage its financial performance, to achieve its financial goals and required performance ratios. It also enables it to make commitments to its business partners and meet those commitments even in challenging times.
Financial Plans help business owners take advantage of opportunities to grow their business.
Opportunities for new business come along every day. However, many business owners do not have a good process for comparing those new business opportunities to their current business opportunities. Instead, they make a gut feel decision to take on the new business opportunity or pass. This oftentimes results in a suboptimal decision and in some cases can bankrupt the business.
A business with a financial plan will be able to compare those opportunities to its existing plans, financially evaluate the benefits and risks of the opportunity, and calculate the projected return on investment for the opportunity. As a result, the business will be better able to take on those opportunities that improve its overall financial performance and pass on those opportunities that worsen it.
Financial Plans give business owners something to measure their progress against.
Studies have shown time and time again, the more a business measures its performance against established goals, the more likely it is to improve its performance.
By establishing performance goals, business owners set achievement levels to work toward and a method of measurement to evaluate actual performance. Business owners can translate those goals into detailed individual goals for their employees, such goals might include: sales/month, bids/month, projects completed/month, output/month, designs/month etc. Performance toward these goals can then be reviewed on a weekly or monthly basis to identify success or failure.
Financial Plans allow business owners to get in front of their business and plan for softness in the market.
Many companies get surprised by softness in their market; they have not adequately planned for the downturn. Furthermore, they have not built up the necessary reserves and/ or established the necessary financing that their business will need when revenues decrease. As a result, softness in the market can put them out of business.
A financial plan enables a company to plan for the future and understand how their business will perform in an up or down market. Financial plans enable a business owner to look at various market scenarios and see how they impact their business before they happen. Armed with this information, they will be better able to establish a financial structure that can weather an upturn or downturn. They will also be better able to establish the necessary outside financing they need to support them during these soft periods.
A financial plan allows business owners to properly plan for growth.
Many businesses see revenues rising and immediately begin hiring more employees and buying expensive capital equipment, only to let those employees go and fire-sale their equipment a short time later to preserve cash flow. This approach can be very costly and time consuming, not to mention the devastating impact it can have on employees and company moral.
Utilizing a financial plan can help business owners plan for the market upturns and downturns and can help business owners smooth out those peaks and troughs in their business. It can also help business owners explore different options for supporting a significant increase in revenues such as subcontracting. A financial plan can help business owners: establish cash reserves to be used in a downturn instead of laying off staff or help business owners identify softness in certain months throughout the year that can be supported by additional sales in other markets. Planning for the future can also enable their company to negotiate volume discounts with its suppliers, thus lowering their costs and improving the company’s overall profitability.
There are many issues businesses face on a daily basis that can be resolved or minimized by a good financial plan. Financial plans help business owners anticipate cash flow problems, stay in compliance with bank loan or credit requirements, take advantage of opportunities, give them something to measure their progress against, allow them to get in front of their business and plan for softness in market, and enable them to properly plan for growth. Now is a good time to prepare your financial plan for 2020 and beyond. Please give us a call today at (480) 980-3977 to get started!
Note: The information contained in this material represents a general overview of finance and should not be relied upon without an independent, professional analysis of how any of these provisions apply to a specific situation.