How you plan to do business

A financial plan is basically all the components of the business expressed as numbers. It is looking at your business goals and define the level of investment you are willing to make to achieve the goals. A good plan keeps you focused and on track as the business grows and challenges and crisis arise. Financiers and investors see the business as less risky because the business is operated with a strategy to achieve financial sustainability.

A financial plan enables you to know your business inside out. It is a snapshot of the current state of the business. The projections are based on the short and long-term goals and are the starting point of developing a plan.

To achieve financial sustainability the following questions must be answered:

• How much funds do the business need, over the short and long term?
• Where will the funds come from, e.g., own savings, investors, or loans?
• How will the funds be used?

These questions can be answered by using historical financial information or a best guess estimate. If using the estimate, it is advisable to be as realistic as possible.

The Statement of Income, Statement of Financial Position (balance sheet), and Statement of Cash Flows are used to evaluate financial sustainability.

The Statement of Incomes shows the amount of profit or loss that the business will make over a period. The Statement of Financial Position contains the assets and liabilities at a certain point in time, it is the picture of the business’ finances. The Cash Flow Statement shows how much money is expected to be made and invested in the business in a specified time. The cash flow predicts how much money will be made from the predicted sales, the loans received, money from other sources, how much expenses will be incurred, and how much will be recovered.

The information contained in the various statements is used to calculate the Key Performance Indications (KPI) that apply to your business in terms of solvency, profitability, and liquidity. Gross Profit indicates how much money is available to pay for expenses after cost of sales has been paid. Businesses struggling with cash flow normally have a high average number of days before debtors pay the outstanding accounts and a low average number of days before the supplier accounts are settled. The net operating cycle indicates ability to generate working capital. The quick ratio indicates the ability to pay current liabilities out of assets that are either cash or convertible to cash. The net interest-bearing debt to EBITDA indicates the ability to repay debt from current Earnings Before Interest, Tax, Depreciation, and amortization.

Developing a financial plan is a logical six-step procedure.

Determine where the business is now by analysing the income, expenses, receivables, liabilities, and loans. Then decide where you want to take the business, the goals. Identify the factors that will affect sustainability, the future growth and consider alternative solutions. Consider the current business conditions, as well economic conditions, the risks involved, and the information needed to make relevant decisions. Now you can create and implement the financial master plan. The plan is dynamic, meaning the plan must be re-evaluated and revised when circumstances change.

A financial plan will assist you in having clarity on the business’ goals. You will be able to manage the challenges both in receiving and spending money. A budget will enable you to monitor the expenditure, highlight areas where to save cost and put resources to better use. Even though plenty of risks are unavoidable or unpredictable, some can be managed through planning. Crisis management will be so much easier with a robust and well-thought-out financial plan. Investors and financiers will trust the projections even more if it is substantiated by history.

A financial plan, the backbone, will ultimately enable you to plan on how to run a successful business.