Financial Planning: How it can help you achieve your business growth goals
Smart marketing and in-demand products are key to your online store‘s success. However, the most successful business owners understand that if the math isn’t working, then their business will fail. A solid financial plan is essential to building a business that can last.
Our data shows that high-growth businesses, which are those with significant year-over-year growth rates, are more likely to have a financial plan than their peers. This foresight is valuable in the future, but it can also be very helpful during times of economic uncertainty. Every business owner should have a financial plan in place to help them grow their business.
A detailed financial plan not only can help you see opportunities that others might miss, but it also can highlight any potential problems that could hinder your business’ growth.
We’ll be discussing what financial planning is and how it can benefit your online business. We will discuss what financial planning is and how it can be done.
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What is financial planning?
Financial planning involves the documentation of a person’s financial situation, identifying financial goals, and how they will be achieved.
A financial plan is a document that provides a roadmap to financial growth for an individual or company. It shows where a company or person is at the moment, what they want to do, and how they plan to get there.
People mistakenly confuse financial plans with budgets. The terms financial plans and budgets are not interchangeable. While financial plans contain budgets, they also include important information such as cashflow, income forecasts, typical expenses, and other data that provide a complete picture of an individual or company’s financial health.
Financial plans often include long-term goals such as growth goals and potential obstacles to reach those goals.
Financial plans for individuals versus businesses
While most financial plans contain the same information, it is worth noting that there are many differences between financial planning for individuals and businesses. This is because individuals’ financial goals are likely to be very different from the needs of growing companies.
An example of a financial plan for an individual is a retirement plan, strategy for investing, and an estate plan. A person’s financial goals will likely include a minimum income, reducing tax liabilities and protecting their estate for their kids.
A business’s financial plan will likely include goals like hiring more staff, buying additional inventory, diversifying into other product lines, expanding to brick-and-mortar locations, and so on. These goals are very different from the ones of the hypothetical person above. This means that a completely different strategy and financial plan will be required to achieve these objectives.
Is my business in need of a financial plan
While not every business requires a financial plan, every business can benefit from one.
A financial plan will force you to think about not only where you are now, but also where you want it to go and how you intend to get there. Growth is not something that happens by accident. You can work hard but not achieve your goals if you don’t have specific goals. Your efforts might be diverted from the things that will help your business grow.
Many online retailers dream of opening a brick and mortar store. However, your dreams will only take you so far. You can create a solid financial plan that includes a tangible goal, such as opening a physical store. This will allow you to calculate the amount of money you’ll need in order to fulfill your financial obligations and provide the funds to open that location.
This principle can be applied to any online merchant’s growth goals. A detailed plan of action will help you visualize and reach your goals, whether it’s hiring new staff or expanding into new product lines.
How can I make a financial plan to help my business succeed?
The lender will expect you to present a detailed financial plan to them if you are applying for business financing. Before you submit any loan paperwork, consult a licensed financial professional if this is applicable to you. You can prepare your own financial plan as a guide to success.
No matter what type of business you are in (or how you plan to start one), there are three main components that you will need to make a financial plan.
- A balance sheet
- Cash flow projection
- A income statement
Let’s look at each one individually.
The balance sheet, which is an overview of all assets and liabilities for a business, is part of a financial plan.
Assets are typically divided into two types for most business owners and merchants: current and fixed. Current assets are the cash available to a business as well as the money owed to it, such as outstanding invoices. Also known as accounts receivable. Fixed assets refer to tangible items that a company owns such as land, property and equipment. The third type of asset, known as intangible assets refers to copyrights and patents.
A business’s liabilities are the debts it owes. This includes money owed to suppliers and vendors, employee pay, and unpaid taxes.
After subtracting your liabilities, equity is the business’s value. Shares and stock options are also part of business equity, but this is unlikely to apply to most merchants.
Cash flow projections
A cash flow projection, as the name suggests, is a projection of how much money will flow into and out of your company. A cash flow projection is a reliable indicator of your company’s ability to repay a loan. They are a crucial part of any financial plan.
This is not to be confused with a cashflow statement. Cash flow projections only focus on the expected amount of money that will come into your business in the future. Cash flow statements, on the other hand, focus only on how much money has actually been moved into or out of your business over a specific time period.
Three main elements are usually the focus of cash flow projections:
- Cash revenues
- Cash disbursements
- Reconciliation of cash revenue and cash disbursements
Cash revenues is what your business makes on a monthly basis. This is the definition most merchants use. Cash revenues, despite the misleading name, should include any payments made to your company by debit or credit card. However, only if these card payments are likely be processed and deposited into your bank account within the time frame.
Your monthly expenses are cash disbursements. These should be recurring monthly expenses that you pay every month, and not one-off payments. This covers everything, from lunches purchased with petty cash or office supplies to payroll costs for employees and commercial rent (if applicable).
Cash disbursements and cash revenues can be reconciled by subtracting cash payments from cash revenues. This should include any balances from the previous month. Add this to your total cash revenues.
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