These days, we are living in a highly digitalized world where business resources are widely available and the playing field looks as level as you can possibly hope. This favorable situation can give a lot of entrepreneurs a false sense of security where they are allowed to take shortcuts and use advanced tech to find solutions for eventual deficiencies.
The truth, however, remains that all successful companies are built on solid foundations. Setting up these critical cornerstones is just as important as every strategy or tool you utilize after the launch.
Today, we are going to take a detailed look at one of these cornerstones and see what you can do to write a successful business plan that will guide your company through future challenges.
Understand the main components of a financial plan
Much like any other corporate document in common use, the financial plans are also built around a certain template you can use as a reference. So, regardless of the type of company you are starting, your financial plan should roughly cover the following topics:
- Profit and loss statement – Estimated revenue, cost of sale, gross margin
- Cash flow statement – The detailed explanation of how much your company is bringing in and much is paying out
- Balance sheet – This is a snapshot of your company’s current financial position that includes the overview of your assets, liabilities (loan repayments, credit card balance, etc.), and equity
- Sales forecast – This entry can be best described as your informed assessment of what you are going to sell in some specific covered period
- Personnel plan – Financial justification of every employee’s necessity to the company
- Break-even analysis – Using all the previous data you have gathered, this final entry describes how much revenue you need to generate in order to stay in the green
These main items will help your company in engaging in any kind of meaningful forecasts, setting up the relevant performance indicators, and breaking down overall long-term goals into meaningful immediate tasks.
Plan for contingencies
In other words, you need to always keep in mind the worst-case scenario, make sure you are able to cover your losses in the case of cash flow disruption or some kind of disaster, and factor in these figures into projections. Fortunately, the options you have at your disposal are plentiful. If we, for example, take the consumer insurance market we will see the growing popularity of Consumer Credit Insurance Refund plans that allow clients to financially protect the clients in the case of different unfortunate events. You should ensure your business is secured with similar contingencies and able to keep a stable cash flow.
Create multiple financial projections
We already mentioned this as one of the entries in your future financial plan, but we would like to use this opportunity to point out that singular financial projection won’t serve the intended purpose in any meaningful capacity. The business world finds itself in a constant state of shift. That is why you always need to take into consideration different criteria and market scenarios and run your model through these simulations. The insights you get at the end should be used for new forecasts and new financial projections. This job doesn’t have any set finish line so be read to facelift the plan on a regular basis.
Write a detailed strategic plan
Ideally, your company should have a fully developed business plan that should cover this and similar topics. But, even with a more limited set of goals in mind, you should always have a strategic plan as a companion piece to your overall financial proposal. As for the very document, the strategic plan should outline the organization’s mission, vision, focus areas, overall objectives, future projects, and values. Of course, all these figures should be accompanied by relevant KPIs you are going to use to measure the progress. Cross-referencing financial and strategic plans can help you with countless valuable insights.
Try to monitor and compare goals
Last but not least, we would like to mention that as much as your strategic goals need a relevant set of indicators you will use to measure the fulfillment of your goals, you need to set up the same indexing values for financial performance as well. But, what are the KPIs we can use to monitor and compare our financial goals? The full list is too extensive to cover in this article but we will give you some of the most important mentions:
- Gross and net profit margin
- Operating cash flow ratio
- Return of sales
- Working capital
- Current accounts receivable
- Average invoice processing cost
- Gross burn rate
- Inventory turnover
- Cash conversion cycle
We hope these few considerations gave you a general idea about the importance of financial planning and presented you with a couple of strategies you implement to use this asset to the greatest benefit of your company. The modern business world is formed by countless different forces. The only way to make sure our companies are able to survive these challenges is to put them on rock-solid foundations. Writing down a thorough financial plan does seem an excellent way to start this labor.