8 reasons to build a Financial Plan

19/01/202210 Minutes

Why Financial Planning is important for your business

Pulling a financial plan together is one of the most important things you can do for your business.

I really can’t stress this enough.

As with any plan, things won’t turn out exactly as you anticipate, but that is not the point. The point is that it gives you something to hold on to as you go, and something to measure against and adapt.

If you need any more convincing, below are the 8 benefits that a good plan will give you. 8 reasons why your business needs a financial plan:

  1. Take stock and think
  2. Find the opportunities
  3. Take decisions
  4. Communicate
  5. Get moving
  6. Stay on the front foot
  7. Secure funding
  8. Survive

1. Take stock and think

Things can move incredibly quickly in your business environment – so much so that you might no longer understand your business as well as you once did. Jumping in to decisions under these conditions can be a costly mistake.

Preparing a plan gives you the chance to pause and look at everything. The chance to reflect on what it is that you need to achieve, rather than what you want to achieve. By working out what is most important right now, you will simplify the situation and gain the focus that you need.

In taking some time to truly understand your business from the bottom up, you will greatly improve the quality of your decisions.

2. Find the opportunities

Unlikely as it may seem sometimes, there are always opportunities if you look hard enough – and in the right places.

The rigour and detail involved in pulling together a plan mean that you can find new ideas amongst the noise

As you plan, think about alternative revenue sources – no matter how small. Can you focus on fewer lines or pack sizes? Offer something that is in demand and similar to your normal offering? Develop new sales channels, such as an online shop? Nothing should be off the table in the early stages of formulating a plan.

Look in detail at your costs. In greater detail than ever. Now is the time to know where every penny is going. Opportunities here are twofold: eliminating, deferring, or reducing wherever you can; and maximising the return on the spend that remains. Again, rigorous planning will help you find specific actions to take quickly.

You should always come at your planning process objectively. Treat this exercise as looking at your business with fresh eyes, and be honest about what you find. When you come across inefficiencies – or anything that you just don’t like – cut it out. Work out what you want to leave behind as much as what you want to protect about your business.

3. Take decisions

There is nothing more damaging to the ability to take a decision than uncertainty. When things are changing quickly and the consequences are huge, the outcome can be to freeze.

Unfortunately, that is exactly the scenario under which decisions need to be taken quickly and decisively.

A good plan gives you information. It allows you to base your critical decisions on as much data as possible. Your plan will contain the best information that you have at this time all in one place, and will give you the confidence that you are making the right decision for the circumstance.

It doesn’t have to stop there either. As the world changes, and your assumptions change, you can flex your plan. This will allow you to review decisions already taken and adjust them if necessary.

4. Communicate

It is important to be consistent in everything you do. That goes for every part of your business, and everyone in your business.

If you are finding it hard to keep up with the pace of change and the actions you need to take, think how other people linked to your business must feel.

A good plan gives you the chance to set everything out and make sure that every action you take is consistent with your overall strategy. You can then break the plan down in to smaller actions relevant for each department and make sure that they too are aligned with it.

You don’t need to share your plan in its entirety. Instead, you share the simple messages and assumptions that you are using to make sure everyone understands what you are doing.

Whether it’s your customers, suppliers, employees, or investors – you will be able to keep them all informed at all times. Patient when you need them to be, and ready to go when you are – communication is the key.

5. Get Moving

Feeling overwhelmed can come from having no discernible options, or from having too many to choose from. Either way, the result is to freeze and not know what to do.

Where a plan helps is to force you to take that first step. To a certain extent, it doesn’t matter if that first step is wrong – it will get you moving and restart your momentum. You can always adjust and update as you go.

What the plan gives you is a reason to take that step – and a point in the future to aim for. It will also give you a map to check against to make sure you are on course for that spot on the horizon, and to adjust if not.

6. Stay on the Front Foot

A good plan should be many things, but above all it should be flexible. You should be able to quickly and easily update for changes to your initial assumptions.

Establishing a process and a rhythm to regularly update and review your plan will keep you in control as the situation evolves.

The plan is not a one-off event, it is an ongoing process that will continually guide you and your decisions.

7. Secure Funding

A good plan will help you to identify all those areas where you can release ‘Internal Funding’. That is, cost savings and sales boosts as a direct result of your actions.

A plan will also show you your future cash requirements and any gaps while it is early enough to do something about it.

It will help you build a compelling story for ‘External Investment’, and demonstrate your credibility. It will give confidence to potential investors, and it will help to show both you and them how you can repay debt or reward equity in the future.

8. Survive

The first priority of any business – before considerations of growth and expansion – is to survive. Survive then thrive.

A plan will help you ensure you have sufficient cash every month to be able to continue trading. It is not enough to look at the end of the year – you need to look along the way to make sure you are solvent at every point.

A plan will help your business be fit and ready for the future, and to bounce back from any challenges.

It will help you maintain enough headroom to cope with unexpected shocks.

Finally, a plan will help you ensure that the business can support any new debt that you take on. It will show what you can afford to pay out of future profits to avoid stresses further down the road.

There you have it. 8 compelling reasons to get started on your financial plan.

It’s a process that will repay your effort many times over if you approach it the right way:

Do it once. Do it well. Keep it live.

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