A business plan needs to include a financial plan as an integral part of it. But what goes in your financial plan?
A financial plan should be made up of 3 things:
- Forecasting
- A budget
- Controls
Forecasting: You’ll want to create short term and long term forecasting to ensure that you’re prepared for next week and the next decade. Short term planning needs to take into account your industry’s outlook, your customer base and what spending patterns they’ll have in the near future, and other influences on expenses and income. Long term forecasting may be more difficult to do and end up sounding vague, but through constant adjusting you should be able to stay on top of the changes as they happen.
A budget: Your budget is actually made up of 3 budgets. The capital budget should outline your expected spending for assets (both fixed and capital) necessary to run your business. The cash flow budget should be based on your forecasted cash flow to anticipate income and spend it appropriately as it comes in. Your operating budget should anticipate expenses and income. A cash flow budget and an operating budget differ in that a cash flow budget anticipates the ebb and flow of money during a period of time while an operating budget looks at the expenses due on a regular basis.
Financial controls: Controls are necessary to make sure that spending doesn’t get out of hand and to minimize the potential for error and employee theft. Some basic controls include requiring 2 signatures on every check or limiting the number of people who have access to the cashbox or counting the money in the cash register every hour.
Although the idea of financial planning for business sounds daunting, these three things on their own don’t sound that bad, do they? One of the reasons these are avoided is because of the misconception that financial planning is all about number crunching. It’s not. It’s simply creative forecasting (which I know many entrepreneurs love to do) but just from a financial perspective.
Want to succeed at financial planning? Work at each one slowly and check with other people for their opinion on the matter. Look at industry statistics for your area of business to see what buying patterns are like. Look at who your customers are and ask them what their buying patterns are like at various times per year and as the result of various economic cycles. Brainstorm what your cash flow will be like. Will you experience ebbs and flows in income over the month? Can you match your bills to that cycle?
Lending institutions will want to see that you’ve worked through all three of these areas before they lend you money. Put in the effort and enjoy it.
Success and failure are often determined by a business’ financials. What are your financials pointing your business toward?
