Why Your Small Business Needs Financial Planning
Creating a financial plan can be overwhelming, especially for first-time small business owners. However, while it is challenging, it is one of the most important documents (second only to an LLC Operating Agreement) that can guide the direction of the business.
When I started One Nine Design in 2017, I took the time to create a financial plan for the business I wanted to grow. That document evolved as I added new services, opened the nonprofit template shop, and adjusted revenue goals.
A financial plan doesn't have to be formal or follow any specific template. Instead, it needs to work for you and your business and be structured in a way that's easy to follow and update as needed.
Still trying to figure out where to start? Let's cover the basics first – what is financial planning?
What is Financial Planning?
Managing finances early on in your business can be challenging, but financial planning can help make it easier.
In a nutshell, financial planning is "the process of looking at the current state of your finances and making a step-by-step plan to get them where you want to be." It analyzes current income and expenses for planning the best actions. It is all about having a proactive approach to reaching the goals of your small business, such as debt repayment and savings.
Why Your Small Business Needs Financial Planning
Handling business finances is challenging for some and thrilling for others. While some thrive on diving deep into profit and loss reports or comparing revenue with year-over-year reports, others are intimidated by the financial aspects of running a business.
Regardless of which camp you fall into, there are some clear benefits to having even a simplified financial plan to guide you. Let's look at a few of those benefits.
Clarifying Your Goals
Financial planning starts with goal identification. It is only possible to plan if you know what you want to happen. When setting financial goals, it's imperative to be as specific as possible. It can help to categorize your goals into three areas: short-term, medium-term, and long-term goals. You might want to consider adopting a Strategic Planning Process rather than starting with a blank sheet of paper.
For every goal, specify a dollar value and timeline. For example, you might have a short-term goal to achieve a specific revenue goal within the first year of your business, while a long-term goal would be more centered around creating passive revenue or diversifying your revenue streams.
Managing Cash Flow
Effective cash flow management can help your business operate smoothly and be less stressful. It is one of the most critical financial statements your business needs. As the name implies, cash flow management shows the cash coming in and out of the business, so you can have realistic expectations of your performance from a financial perspective. In addition, it can help determine your small business's future financial footing.
Managing Debt
Debt does not always have to be bad. In some cases, it is necessary for survival or growth. Other times, it can be the best solution to make a financial investment in your long-term future. You might need to take out a loan with CreditNinja.com or apply for traditional bank loans to finance business operations, such as social media marketing.
Through effective financial planning, you can identify debts you might need to take on and gather the resources you need to establish or sustain your small business.
Allocating Budget
A limited budget is one of the most common challenges confronting small business owners. It's even more difficult when you aren't sure of the right way to allocate your limited budget across your expense categories.
Should you spend more on advertising to increase exposure? Or, should you invest in a marketing agency to help you maximize your assets to build your business?
With financial planning, you can be more thoughtful about where to put the money by prioritizing the needs of your business. Consider which expenses can yield the best returns, so you will know how to maximize your financial resources.
Reducing Costs
Cost reduction strategies can also help your small business have more financial resources. Effective financial planning identifies the minimum amount of resources it takes to run your business effectively.
While many small business owners fall into the trap of spending more to make more or adding new products and services before they've been validated by their ideal audience, reducing costs is often less work and produces quicker results.
Minimizing Risks
Financial planning is vital for preparedness and crucial for risk management in small businesses. While every business owner hopes for smooth sailing without surprises, contingency planning is easier if you have a financial plan.
A financial plan can help you clarify the risks in your industry and prepare accordingly.
Developing a Tax Strategy
Financial planning can help you develop the right strategies to minimize your tax burden while still following the required tax laws.
As a responsible small business owner, it's incumbent upon you to know the tax laws in your state, how they apply to your business, and to ensure you have a trusted financial advisor to answer questions. Guides on how to fill out a W2 form and other tax-related forms are available online to get you started.
Attracting Investors
Are you looking for people to invest in your small business? Financial planning can help! Through a financial plan, you can present an overview of your financial performance, such as expected profit and loss. In turn, investors will have a realistic picture of where the small business is heading, helping them decide if it's a wise investment.
Final Thoughts
Do you have a financial plan for your business that extends beyond the balance you want to see in your bank account? If not, consider how you can create a simple financial plan to guide your business and help provide stability and sustainability in the years ahead.
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