Your Financial Plan doesn’t have to be painful

Your Financial Plan doesn’t have to be painful

The mere mention of a financial plan can send business owners into a tailspin. It doesn’t have to be this way, it can be as simplistic or as complicated as you make it. A financial plan will help you determine what revenues you can, will and/or need to achieve based on the expenses you will incur. They can be in the form of budgets, forecasts or cashflow forecasts depending on what you’re most comfortable with.

Perhaps one of your goals is to increase your client base by five clients a month. If this is achieved, this will increase your revenue figure for each month by say the average client monthly figure. However in order to achieve this, there would be certain expenses incurred, such as marketing campaigns, mailouts, advertising, prospect entertainment etc.

Therefore an estimate (budget) of these associated expenses would need to be taken into account as well. Will extra staff be required when these clients are onboard? Or are there other expenses such as extra travel costs to be incurred? You can see how looking at your goals and breaking them down will help you determine both the revenue and expenses they may generate and the impact they will have on your business. This brings us to the budget.

A budget can allow you to estimate what your revenues and expenses will be. Usually this requires quite a bit of detail, like a profit and loss statement. Often your existing profit and loss (say from the previous financial year) can be used as the basis of your budget. You’d need to adjust it for likely expenses to occur as well as any changes to revenue based on the goals you have set. Once you have determined your budget you can then track your budget to actual profit and loss, on a monthly basis.

Most accounting programs allow for budget figures to be input on a monthly basis to allow for this reporting to occur. These figures (or differences in budget vs actual) can really show you how you are tracking on the goals that you set for your business.

You need to be prepared for unexpected events such as losing a major client, which would have a substantial impact on your profit and loss and thus the budget vs actual report. I recommend that your budget is revolving so that you can alter the figure to take into account any unexpected events. I’m not saying you need to change everything but it is logical to adjust for major impacts.

Forecasts are useful for determining figures for your budget as well as sales projections. They are often a more detailed report that focuses on specifics such as sale per product or sales per program.

For instance you may have 100 products for sale in your business and historically you have sold a certain number of units over a certain period of time. It would be easy to determine your generated revenue based on historical figures.

However, if you’re introducing five new product lines, you need to account for the impact they will have on revenue and cost of goods sold. Perhaps one product is an update on an existing item? Once introduced, the obsolete items would need to be reduced in price to sell all stock. You could forecast sales of the new products while adjusting the existing products for the new lines if applicable. This is where forecasts by item are useful for determining the whole business sales figure for inclusion in the budget.

Cashflow forecasts are fantastic in assisting with managing that ever elusive beast, but they require a lot of work to maintain. Some accounting programs can do this for you but unless you utilise all aspects of the program the reports are not complete. Often Excel or specialised cashflow programs are best for this type of reporting, but again it requires maintenance and a complete picture on what is happening in your business financially. These can be tricky so I recommend working with a professional for these, but you need to make sure you stay involved as you know your business best.

Keep your goals in mind when creating these reports. They will provide the useful information you are looking for while keeping you on track and accountable.

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