Why Financial Planning is So Important for Your Company and How to Plan Effectively

Financial planning is crucial for any business to succeed and thrive. Entrepreneurs need to have a good handle on their finances in order to take their businesses to the next level as well as to ride out more difficult economic times.

Here are a few ways they can plan their financials effectively:

1. Come up with a strategic plan

An effective strategic plan involves taking a good look at your business and understanding what has worked in the past and what hasn’t. Identifying quickly what steps help your business to grow and eliminating what is weighing down or slowing down the company is valuable in creating a strategic financial plan for the next quarter or even year.

There are two elements to a financial plan you’ll need to determine - a timeframe and the goals you want to achieve by then. Perhaps you want to open up a few more branches by the end of the year, or you want to move to a new location, or you want to hire a few more staff before year-end. These are the factors your company’s finances will revolve around for the next year or quarter.

2. Develop realistic forecasts or projections

Based on your goals for the year, the next step is to create optimistic and pessimistic projections for the upcoming quarters. This helps you aim towards a more optimistic higher projection, while at the same time understanding that a lower projection will be more achievable and is still acceptable, if not ideal.

Use an accounting spreadsheet to build your forecasts where you factor in all expenses and costs and then use the company’s past income to estimate future profits. Make sure to also factor in delays in payments as large companies are notorious for late payments.

3. Arrange financing 

Based on your financial projections, you will be able to arrange for more financing if necessary. When presenting your financials to investors, for example, you will have a solid case to back up your reasons for requesting additional funding. This also casts your company’s financial management in the best light possible to investors.

4. Plan for contingencies 

Always factor in worst case scenarios, within reason. The economy goes through ups and downs and if you have a product or service that’s popular during certain seasons, such as travel related services, you’ll want to create a budget that’s realistic and forecast a cash flow dip during off-peak seasons.

There’s no need to be overly optimistic or idealistic in financial planning, it’s about knowing your business and projecting what’s possible. Cash reserves or emergency funds are something to consider when your business needs to weather a bad economy or an off season.

5. Monitor 

Keep track of your financials at regular intervals during the quarter to monitor the developments of your financials. There’s a fine balance here that needs to be found, between checking in just the right amount, not too obsessively and often and not too infrequently to the point of missing an important development.

6. Get Help 

Should you be ill-equipped either because of time or maybe you’re not the best with finances and your strengths lie elsewhere, you will need to get help in the form of an accountant or a business partner.

There’s no shame in seeking external help, especially if numbers, projections and keeping to a budget are not your forte. However, it always helps to understand the basics of finances and budgeting so you can make more effective financial decisions for your business.