Financial Planning for Small Business Owners

Introduction

Imagine two business owners in the same industry. They both offer high-quality products. They both have loyal patrons. Their monthly sales numbers are about the same.

Fast forward five years. One owner has opened multiple locations. The other is struggling to pay his vendors.

What made the difference?

• It wasn't a gamble.
• It wasn't a hidden investment.
• It was the use of a financial plan.

A lot of entrepreneurs think turning a profit means their business will thrive. The truth is profit without a plan often vanishes due to unnecessary spending, bad placements, unexpected liabilities, and taxes.

No matter the type of business you operate, financial planning is the key to sustainable success.

What is Financial Planning?

Financial planning is the process of structuring the finances of your business so every single rupee has a target.

It encompasses:

• Budgeting
• Cash management
• Savings
• Investments
• Risk
• Taxes
• Expansion
• Retirement

To put it differently, financial planning gives your finances a target destination instead of leaving them to wander.

Why Financial Planning Matters

Many small businesses don't have customers. They have lost their business. Many of them run out of money.

Businesses without a plan have:

• Late payments to vendors
• Delayed employee payments
• High debt
• Poor inventories
• Tax penalties
• Bad investments

A financial plan empowers business owners to proactively address the myriad of potentially negative situations that can plague their business.

1. Separate Personal and Business Finances

To avoid this issue:

• Establish a separate business bank account.
• Pay yourself a regular salary.
• Reserve business funds for business related expenses.

This will assist you with keeping your business finances systematic.

2. Create a Business Budget

Creating a budget lets you plan the finances for your business.

What your budget should detail:

Fixed business expenses

• Rent for your business location (if applicable)
• Salary costs for hired employees
• Business related internet
• Business related insurance
• Business software

Variable business expenses

• Business inventory
• Business utility costs
• Business advertising
• Business travel
• Business shipping/packaging costs

Business growth expenses

• Business equipment
• Business technology
• Business employee training
• Business related marketing

Review your budget at the end of each month to reflect the actual applicable figures and modify when necessary.

3. Master Cash Flow Management

It is possible that a business may be making a profit and still be considered a failure because of poorly managed cash flow.

Cash Flow refers to money leaving and entering your business.

Cash Flow can be improved by:

• Collecting customer payments as soon as possible
• Providing multiple options for speedy payment to your business
• Negotiating with business suppliers for longer periods to pay business expenses
• Keeping a minimal amount of inventory on hand
• Tracking daily business expenses
• Keeping a cash flow forecast

4. Build an Emergency Business Fund

You never know how the economy can shift and affect your business. It is common for machinery to breakdown and your business to experience a medical crisis. You may have to deal with a natural disaster.

Experts say that you should have an emergency fund for at least three to six months of normal business operations. This reserve allows firms to keep functioning around the clock even during economic downturns.

5. Monitor Key Financial Reports

Business decisions must always be backed up with numbers. Reports must be assessed on the regular.

These Reports include:

• The Income Statement
• The Balance Sheet
• The Cash Flow Statement

The Income statement must include all revenues and expenses. The balance sheet must include all assets and liabilities. The cash flow statement must include all cash inflows and cash outflows. Managing these reports will help make better financial decisions.

6. Control Business Debt

Debt can help grow a business. However, too much debt can be detrimental.

In the case of a business loan, consider the following:

• Will it generate business income?
• Will the loan be repaid easily?
• What is the ROI? (return on investment)
• Debt should be used strategically.

7. Invest in Business Growth

Capital should be reinvested to grow the business further. Some areas to consider include:

• Marketing
• Staff Training
• New Business Lines
• Branch Expansion
• New Systems (Automation, ERP, CRM)

These systems help facilitate business growth.

8. Plan for Taxes Throughout the Year

Year-end tax planning is common. However to facilitate better cash flow and reduce tax planning stress consider the following:

• Keep all your records organized.
• Digitally save all invoices.
• Track expenses.
• Review taxes quarterly.
• Seek help from tax planning professionals.

9. Protect Your Business Against Risks

There is an element of uncertainty in all businesses.

Risk Management Could Involve:

• Fire insurance
• Property insurance
• Business interruption insurance
• Health insurance for key team members
• Cyber-security
• Life insurance for business continuity

The above is a good way to protect the business and the owner's family.

10. Prepare for Business Expansion

Growth is something that should be planned, not something that occurs by accident. Consider the following before taking the leap.

• Profitability
• Excess Working Capital
• Demand
• Capacity
• Personnel
• Funding

The success of the expansion is primarily reliant on the analysis of the financials.

Financial Planning Checklist

• Personal and Business Finance Separation
• Monthly Budgets
• Cash Flow Tracking
• Financial Statement Review
• Emergency Reserves
• Taxes Paid
• Debt Decrease
• Profits Reinvested
• Business Assets Protection
• Financial Goals Quarterly Review

Common Financial Mistakes Small Business Owners Make

• Rapid Spending of Profits
• Book-keeping Neglect
• Product Under-pricing
• Excessive Loans
• Poor Inventory Control
• Tax Planning Delay
• Lack of Emergency Funds
• Personal and Business Finance Mixing
• Financial Goal Neglect

Awareness of the above avoidable financial mistakes can lead to better management of finances.

How Technology Supports Financial Planning

Office productivity with the aid of technology and financial management tools is the result of the following.

• Accounting Automation
• Invoice Generation
• Inventory Management
• Payroll Processing
• Expense Management
• Financial Report Generation
• Cash Flow Forecasting

ERP and CRM technology bring real time business data to owners for productivity and informed decisions.

Financial Planning and Personal Wealth

As a business owner, your personal financial security is intertwined with your business.

Consider the following:

• Establish savings.
• Save and invest for retirement.
• Invest in various avenues.
• Have ample insurance.
• Have an estate plan.

An owner should be financially secure if the business is financially healthy.

A Short Story: The Shop That Survived

Ahmed owned a shop that sold electric supplies. In busy months, he sold a lot, and assumed everything was good. However, Ahmed sustained no profits, savings for the future were lacking, and he had no personal business income. When business slowed, and funds dried, Ahmed had to borrow at a very high interest just to remain operating.

A fellow business owner, advised Ahmed to develop proper financial planning. Separate business and personal finances, prepare a monthly budget, track cash flows, and create an emergency fund. He also bought an accounting system and began controlling how much he bought to sell. Ahmed improved his financial security, and became less worried about monthly expenses. He was able to open a second location due to his confidence. Ahmed knew that to have a financially secure business, he had to do proper planning, and not rely on sales to do so.

Strengthen Long-Term Financial Planning and Cash Flow

A financial planner or qualified financial advisers can help small business owners set realistic financial goals, assess each financial product and review the financial services guide before making commitments. They can also compare business loan options, loan terms, credit cards, super funds and other products and services while explaining important information about fees and risks. Using accounting software to monitor accounts receivable, cash flow statements and the total amount of cash available can help improve your cash flow. It also allows owners to identify negative cash flow early, maintain positive cash flow and prepare more reliable future cash flow forecasts for long-term business stability.

Final Thoughts

Financial planning is an excellent tool for small business owners, and there is no restriction for business size.

It doesn't matter what stage your business is in, great financial planning will enable you to:

• Maintain a healthy cash flow
• Be prepared for unexpected situations which may arise
• Be logical with your decisions
• Self sustain your business growth
• Protect your family's financial security
• Build your financial legacy

The distinction of the best business owners is not that they earn the highest income, but that they earn the highest income from the best financial decisions. Where there is clear financial planning, the unknowns can be seen in the light of the opportunity and an excellent business can be made out of it.

SUMMARY

Every business must start with a dream or a goal. The difference is made by the financial planning that is put in place. Budgeting, cash flow monitoring, risk management, and strategic investments, all help the small business owner to help their business survive and prosper where other businesses fail. The financial planning you choose today will affect the trajectory of your business in the many years to come.