The importance of financial planning in small business

Blog post courtesy of NSW Business Chamber

Great financial planning can help businesses achieve their growth targets faster, but the opposite is also true: a lack of financial planning can put hurdles in your way.

For many small businesses, the idea of financial planning sounds like a luxury: moving from one contract to the next is tough enough.

However, accurately planning for expenses, taxes, and other financial hurdles can help solve cash flow problems before they start (given 60% of small businesses fail within their first three years).

According to one survey, 25% say this was due in part to a lack of planning, so it’s crucial to put some financial guidelines in place. Additionally, 14% say they didn’t understand finance, or relied on someone else to assess the financial health of their company.

What should a solid financial plan do for your business?

A financial plan doesn’t have to be complicated. All it tells you is this: what are you going to do with your money, and when?

By taking a longer term view through a financial year, businesses can start to understand when expenses are likely to occur, how much cash they will have at that time, and then make decisions as a result.

For instance, businesses keen to expand may not be so ready for new equipment if they know tax expenses are coming in the next few months.

A good plan should also reveal solid long-term and short-term trends.

For instance, businesses might identify they have a slow period coming over a particular season. That should inspire action now, and put a stop to certain purchases. It allows SMEs to put more money in areas that achieve results, and less in areas that are causing losses.

For instance, noting a regular low period should entice more business owners to place funds in marketing for that period of time, or spend more time on key client relationships.

Four key points to keep in mind when creating your financial plan:

1. Keep your personal and finances separate

As a small business owner finances are personal, but the more you keep these two apart the easier it will be to avoid financial catastrophe.

2. Save as much money as you can

Any business should keep retained earnings. Don’t be tempted to take more money out than you need. Keep the funds in there for a rainy day or when sales are slow.

3. Take a long term view

Look 12 to 24 months out, and plan when your expenses will hit. It’ll be much easier to plan when you need to drum up business, or when you can take a breather and work more long-term, strategic plans (good for when things are quiet)

4. Try to cut as many costs as possible, or at least, time them well

The fewer financial obligations you have month-to-month, the more you’re able to steer through uncertain financial times.

It’ll also make your financial plans far more effective in the long-term. You’ll simply be able to spot trends before they happen, and the amount of work you’ll require to make up the difference won’t be nearly as much.