The market is ripe for entrepreneurs looking to launch their businesses. Developments in digital technology have given these small businesses access to a platform that enables them to advertise and sell their product to over a billion people. Apps like Fiverr and Upwork, and a recent trend towards remote work, allow these businesses to access skilled workers and removes the need to provide comprehensive employee plans or office space.
While many pull factors may encourage entrepreneurs, becoming a successful business is challenging. Your venture is most at risk in its early stages when you are trying to penetrate the market and create a brand identity, working on a tight budget with little incoming revenue. A comprehensive financial plan can ensure the optimal use of these limited resources. While it alone cannot guarantee business success, not having one can contribute to the venture’s failure. Before discussing the many reasons why a financial plan is essential to your business, a brief description of what financial planning entails is crucial.
What Is Financial Planning
Financial planning is a strategy for managing and using a company’s finances to achieve its business objectives. It includes the following:
- Budgeting: An estimate of a company’s income and expenses over a set period, reevaluated monthly, quarterly, or yearly depending on the industry the business is operating in.
- Forecasting: This is a projection of the company’s future financial performance based on past company performance, market trends, and policy changes.
- Performance Measurement: This includes the creation of metrics to judge the company’s performance and tracking this data to evaluate its current position and areas of improvement.
Entrepreneurs interested in learning financial planning can enroll in an online MBA in finance which will provide them with the necessary skills and education in a flexible manner enabling them to fulfill their professional responsibilities simultaneously.
Now let’s look at why financial planning is so important for your business:
Financial Planning Helps Give Your Business Vision
Usually, small businesses work with tight budgets, and a lack of financial planning will mean that they are venturing into this endeavor with little idea about the long-term sustainability of their business. A financial plan will enable these entrepreneurs to track their business’s capital, expected income, and expenses and have a clearer idea of the direction the company should take to be sustainable. It can help with the business’s vision in the following ways:
- Better prioritization: A clearer idea of the resources you are working with allows you to allocate your budget more optimally. It allows for a reduction in expenditure from areas of lower priority to prevent overspending.
- Better decisions: Through tracking KPIs and a nuanced understanding of the market you are operating in, entrepreneurs can make data-driven decisions with some idea of their expected outcome.
Financial Planning Helps You Manage Risks
As a small business, unexpected changes pose more of an existential threat to your company than corporations. A dip in demand or supply, loss of an employee, or a general economic downturn can have a disastrous impact on businesses that don’t adapt to changes. Having financial planning can make your company more flexible to such sudden changes in the following ways:
- Better Anticipation: Businesses tuned into the health of their industry and the corporate market as a whole are more likely to be able to observe potentially alarming changes. From surges and dips in demand to the entry of a new competitor or an existing rival grabbing a greater level of market share, proper financial planning allows you to respond quickly to these changes to preserve the financial health of your business.
- Better Mitigation: Businesses involved in financial planning are likely to have more detailed and complex contingency plans than ones that are more ad-hoc in their approach. Strategies can include having a source of emergency funds, having a plan to maintain cash flows during trying times, and having adequate insurance coverage.
Financial Planning Is Crucial For Attracting Investors
Funders are unlikely to invest on a whim based solely on liking your business idea. They want more concrete evidence, like proof of concept and indications that your business is scalable. Moreover, a lack of financial planning makes any idea you pitch sound unprofessional, making it an unattractive investment venture. Good financial planning, on the other hand, can aid you in securing funds in the following ways:
- Clear display of your financial health: A financial plan gives investors the numbers they need to understand your business. It will help them gauge your business’s health and profitability and assures them of your ability to repay debts.
- Show growth potential through investment: A clear financial plan allows entrepreneurs to show investors how they plan to spend their money. From expanding into the market to diversifying into other sectors, entrepreneurs, backed up by data, can more clearly show funders the potential return on investment.
- Establish specific funding needs: A financial plan enables businesses to identify any gaps in funding and the level of investment needed to deal with this gap. Going into an investor meeting with a precise demand makes your company look more professional and creates an impression that the company and its decisions are data-driven.
Financial Planning Protects Your Personal Assets
It is common to see entrepreneurs operating in a less formal, more spontaneous fashion, having to eventually dip into their personal assets to keep the business running. Financial planning, on the other hand, can protect your assets in the following ways.
- Legal Distinction: A business with sound financial planning will assess what level of risk exposure is safe for the entrepreneur and choose a legal structure for the business accordingly. From a sole proprietorship to a limited liability company, entrepreneurs can select a structure that protects their personal assets from repaying business debts.
- Better Debt Management: Proper financial planning includes debt management, from not taking loans too difficult to repay to ensuring that all repayments are on time. It saves you from excessive debt burdens that you would, if taken on a personal guarantee, have to repay yourself.
Conclusion
Small businesses account for over 99 percent of all businesses in the United States and employ around half of the country’s workforce. It is projected to rise as the barriers to starting a business decrease and job security in traditional corporate markets also decrease. More businesses mean greater competition in every sector of the economy. Financial planning allows you to establish priorities, make better decisions, attract funding, and minimize risk exposure enabling you to optimize resource allocation and thrive in today’s increasingly competitive corporate world.
