The Necessity of Financial Planning

There is one simple reason to understand and observe financial planning in your business and that is to avoid failure. Eight of ten new businesses fail primarily because of the lack of good financial planning.

Financial planning affects how and on what terms you will be able to attract the funding required to establish, maintain, and expand your business.

Financial planning determines the raw materials you can afford to buy, the products you will be able to produce, and whether or not you will be able to market them efficiently. It affects the human and physical resources you will be able to acquire to operate your business. It will be a major determinant of whether or not you will be able to make your hard work profitable.

This content provides an overview of the essential components of financial planning and management. Used wisely, it will make the reader–the small business owner/manager–familiar enough with the fundamentals to have a fighting chance of success in today’s highly competitive business environment.

A clearly conceived, well documented financial plan, establishing goals and including the use of Pro Forma Statements and Budgets to ensure financial control, will demonstrate not only that you know what you want to do, but that you know how to accomplish it. This demonstration is essential to attract the capital required by your business from creditors and investors.

What Is Financial Management?

Very simply stated, financial management is the use of financial statements that reflect the financial condition of a business to identify its relative strengths and weaknesses. It enables you to plan, using projections, future financial performance for capital, asset, and personnel requirements to maximize the return on shareholders’ investment.

Tools of Financial Planning

Here are the tools required to prepare a financial plan for your business’s development. They include the following:

* Basic Financial Statements–the Balance Sheet and Statement of Income

* Ratio Analysis–a means by which individual business performance is compared to similar businesses in the same category

* The Pro Forma Statement of Income–a method used to forecast future profitability

* Break-Even Analysis–a method allowing the small business person to calculate the sales level at which a business recovers all its costs or
expenses

* The Cash Flow Statement–also known as the Budget identifies the flow of cash into and out of the business

* Pricing formulas and policies–used to calculate profitable selling prices for products and services

* Types and sources of capital available to finance business operations

* Short- and long-term planning considerations necessary to maximize profits

The business owner/manager who understands these concepts and uses them effectively to control the evolution of the business is practicing sound financial management thereby increasing the likelihood of success.

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