If there's one essential tool for the health of your business, it's undoubtedly financial planning. Mastering this tool can make all the difference in the long term by providing, at all times, a clear view of your cash flow situation, and what can or cannot be undertaken to ensure your development.
Let’s be honest: managing a financial plan is perhaps one of the most crucial aspects of any business, regardless of its nature. It’s likely that many companies that were once successful, like the British Amstrad or the Japanese Sega, and then experienced steep declines, had to abandon entire sections of their business, and sometimes even bite the dust, due to negligence in financial planning.
The thousands of start-ups that fail to survive beyond a year or two primarily faltered on one point: they lacked the advice of a financial advisor capable of evaluating the financial situation of the start-up at any moment and clearly indicating what could be accomplished or not, taking into account:
- the company’s net worth,
- cash flow,
- living expenses
Without mastering this tool, they couldn’t predict that the viability of the start-up was at risk within a specific horizon, for example, seven to eight months, and thus failed to take the necessary precautionary measures in advance.
What is a financial plan?
But what is this formidable tool that can make all the difference? Let’s admit it: it’s an unglamorous spreadsheet, which many entrepreneurs will be tempted to neglect since they are primarily motivated by the prospect of realizing a brilliant idea.
The financial plan is often managed through software such as Microsoft Excel, Google Sheets, or others, and provides a comprehensive picture of your finances in the present, recent past, and near future. It reveals incoming and outgoing cash flows, reserves, but also debts, ongoing investments, insurance, and other elements detailing each aspect of the financial situation.
Why is financial planning essential?
Establishing a financial plan is a continuous process that can significantly reduce money-related stress. It reveals the entire current and future financial situation. Month after month, it shows inevitable cash outflows, but also predictable inflows based on obtained contracts or investors supplementing your cash flow. Once equipped with such a table, it becomes possible to develop short and long-term strategies. Their impact on cash flow becomes clear, providing a measure of “risk tolerance”, or the risks one can take with relative peace of mind.
The key points of financial planning & analysis
Tracking finances
A financial plan provides a clear idea of monthly cash flows—including revenues and expenses, notably those that are inevitable such as rent, electricity, transportation, and other recurring payments.
The precise image derived from such a table can reveal ways to direct more money towards investment, debt repayment, savings…
Setting financial goals
A good financial plan is guided by objectives. Any business must be profitable, and this profit can come from various sources: product sales, real estate exploitation, investment returns… It then becomes possible to project into the future and define profitability goals.
Preparing for the unexpected
One of the essential points of any financial plan is to set aside money for unforeseen events. This way, it becomes possible to react soundly when an undesirable event occurs: losing a major contract, a client unable to pay…
Managing continuous tax planning
Continuous tax planning helps eliminate the stress that could be associated with the annual tax declaration. Ideally, a portion of the income should be allocated monthly to this item so that the final tax bill is as painless as possible.
Eradicating debts
Another major point of financial planning & analysis is to stagger the repayment of debts, starting with those with high-interest rates, to eliminate them in the long term.
Investing in research & development
A business can only survive in the long run if it continues to innovate in one way or another. The financial plan thus allows a regular amount to be allocated to R&D, even if it means going in search of investors to finance certain projects.
