Running a successful small-to-medium-sized business (SME) requires in-depth, consistent planning from the get-go. Having an established business plan helps you to set goals and objectives for the business, identify limitations and roadblocks and mitigate risks proactively and a financial plan forms a crucial part of this planning and management process.
A financial plan is more than a document or report that contains business estimates and performance projections. It’s an invaluable growth tool that acts as a roadmap for success that uses financial results to assess current business performance and identify best practices for better cash flow management.
For most businesses, seasonal performance impacts their monthly and quarterly revenue, resulting in periods where there’s surplus cash flow and times where cash flow deficits can occur, which can impact a business’s ability to purchase stock, pay salaries and operate.
This is where a financial plan becomes invaluable to securing business longevity through optimal planning and decision-making. Find out how a financial plan can set your SME up for ongoing success.
What is a Financial Plan?
A financial plan is a document containing a comprehensive overview of your business’s current financial performance and projections for growth. It uses current performance data and combines it with educated forecasting to project your business performance over a period (this could be a month, a quarter or even a year).
It generally consists of three financial documents – the income statement, the cash flow statement and the balance sheet.
Income statement
The income statement presents what your business has lost and earned. It outlines revenue and expenses, such as cost of sales, cost of stock procurement, operational expenses, and salaries as well as revenue. After adding your expenses and subtracting them from your revenue, you’ll be left with a figure that represents your profit or loss over that time.
Cash flow statement
A cash flow statement tracks and records cash flow within your business to determine how much cash or cash equivalents you have during a certain period. It records all financial transactions from a business’s purchases, investments and expenses.
Balance sheet
A balance sheet is a statement of a business’s assets, liabilities and owner’s equity at a certain point in time. It represents the financial health of your business and can be used as motivation to encourage investors to invest. It can also help you to determine if you need to adjust your operational strategy and processes.
Why is Financial Planning Essential for SMEs?
Financial planning is the crux of essential business planning. It allows business owners to plan for the future, predict and prevent possible problems and make better day-to-day business decisions. Here are a few reasons why financial planning for your SME should be one of your top priorities:
Set clearer business goals
Business growth and scaling can’t be achieved without defining clear, actionable goals first. A financial plan helps you to set goals more easily by providing the insight necessary to identify opportunities and limitations and accurately plan around them.
Optimise your cash flow management
A good financial plan will give you a high-level overview of where all of your revenue and expenditure are going, allowing you to adjust and optimise your cash flow management. Financial planning can identify your “high” and “low” performance seasons and plan accordingly so you don’t struggle with cash flow during your quieter months.
Identify positive and negative performance trends
Business trends have a direct impact on your performance. Having a financial plan in place allows you to identify what trends are contributing to revenue gain and what trends are simply costing you money. This will enable you to redirect funds and cash flow into areas and processes that are more profitable for your business.
Position your business for growth and investment
A financial plan records all transactions, expenses, assets and liabilities, containing them in one accessible resource, which positions your business more favourably to creditors and potential investors.
By keeping up with your financial planning and regularly updating your records, you can easily build confidence in investors and stakeholders who might be interested in your business.
Conclusion
Good financial planning is one of the most important strategies to undertake from the beginning when starting a business. Equally important is ensuring that you select the right growth and funding partner who sees the inherent value and potential of your business.
At Sourcefin, we specialise in assisting SMEs unlock growth and profitability through dedicated business funding and business process scaling and advisory services. Find out how we can help you meet your goals and objectives through seamless, accessible business funding and development and contact us today.
