Running a business is a work of responsibility. There are many essentials for running a business successfully. One of the pre-requisite of business management is writing an efficient financial plan. Let’s first look at what is a financial plan.
What is a Financial Plan?
A financial plan refers to a method for estimating the fund requirements of a business. It also includes the expected sources for the funds. Thus we can call it a financial blueprint of the company’s future activities. It is a comprehensive plan, and long term decisions and investments are taken into account. So it is often for 3-5 years.
Example: If you start a business of, say, Sugar production, you will not begin producing directly. You will first plan what machineries you will need, the task force you will require etc., then according to that, you will plan how much funds you need and how you will arrange for funds. That is how planning would help in your business.
Now after knowing the meaning of a financial plan, let’s understand the objectives of financial planning.
Objectives of Financial Plan
- Ensuring the availability of funds The first objective of financial planning is to ensure the availability of funds. Since financial planning is concerned with estimating fund sources, you know the long-term assets you can use when you feel the need for funds.
- You can estimate the time of funds Another benefit of Financial planning is that you know the likely timing of funds. For example, if you have lent some money and you know that you will get that money, say next week, you are likely to make a better choice in allocating those funds. Since time is the essence of any business, estimating the time of funds in a business is crucial.
- Helps avoid unnecessary funds when you do financial planning, you are more likely to avoid unnecessary expenditure because you know that you have limited resources and have already decided their allocation.
- Helps in optimization Financial planning helps to optimize a company’s targets, techniques, policies, and budget plans. This will help you to create stability because you can create a balance between assets and liabilities.
- Helps in diminishing vulnerabilities It is said that when you are prepared for something, the negative impact from it is less likely. Similarly, if you planned from where you will get funds in case of needs, you are more likely to sustain vulnerabilities. In this way, you can secure your organization.
- Helps in deciding the viability of your business A financial plan also allows you to determine if your business is viable or not. You will know if your business is earning more revenue or more costs for you from the elements included in financial planning. Accordingly, you can decide if you want to continue it or not.
After understanding the meaning and need of financial planning, the next step is to write a financial plan. Since it is the heart and soul of efficient business management, you need to note many vital points. So now, let’s move on to the tips of writing an efficient business plan.
Tips for Writing an Efficient Financial Plan:
- Prepare your income statement Income statement refers to the description of your company’s expenses, profits and revenues. This is one of the crucial elements of a business plan. It gives you and your investors clarity on the working of a company. You will get a financial picture and view the gap between what your business is earning for you and what you are losing. In this way, your following strategies will get streamlined. Although most companies like to maintain a quarterly or a yearly income statement, it is recommended that you retain it month wise.
Making an income statement:
In an income statement, there are two major categories, revenue and expenditure. Under the revenue section, you will include all the products and services your company is producing, and beside it, you will write the revenue from each product/ service. You can also have any other income like bank interest etc. In the end, you will just add it to get total revenue.
Under the expenses category, you will include direct cost, general and administration cost (like bad debts, bank charges, depreciation, insurance, etc.) After that, you will get net income by subtracting Expenditure from Revenue. Lastly, net income is calculated after deducting taxes.
- Cash flow projection Cash flow projections, as the name suggests, describes the inflow and outflow of cash. It will help you to understand when you need to invest (if you have a cash surplus) and when you need to raise funds (if you are falling short of funds). It is different from a cash flow statement because a cash flow statement shows past flows while cash flow projections show anticipated cash flows over a period.
Making a cash flow projection:
Cash flow projections include three parts:
- Anticipated Cash Revenues Anticipated cash revenue means your estimated sales that will generate cash for you.
- Cash disbursements Disbursements means the cash expenditure that is due next month. These include cash payments to trade suppliers, salaries and wages, rent, insurance etc.
- Reconciliation of cash revenues to cash Disbursements In this section, you have an opening balance (it refers to that cash that is left from previous operations) and a closing balance. Net revenue (Revenue-Expenditure) is then carried to next month, after adding to the opening balance.
- Balance Sheet A balance sheet is a statement of a business’s net worth. It includes assets (tangible objects owned by your company), liabilities (Debts), and Equity (Total assets-total liabilities). The balance sheet is prepared annually.
- Analysis of the three statements Once you are done with an income statement, cash flow projections and Balance sheet, the next step is to analyze it briefly. This analysis will help you to get a holistic picture of the success/lacunas of your business. You can evaluate the need for external aid and streamline the money spending.
Financial planning is an integral part of any business. So it is crucial to include all the points mentioned above in your financial plan. These tips will help you to stay updated regarding your business growth and decide your future strategies accordingly.