The benefits of financial planning far outweigh its costs. Financial planning is extremely important for businesses to utilize their resources efficiently.
It’s even more crucial for startups as they face more financial risks, especially at the beginning. Due to minimal experience in their industries, mitigating risks gets hard, more so the ones that involve financial losses.
Therefore, small business owners often find themselves dipping into personal accounts to offset business expenditures.
Having a financial plan may not necessarily mean the future success of your business is guaranteed. However, without one, you’ll certainly be blindsided.
You don’t want to wade the murky waters of growing a business without a financial plan. So here is a list of the benefits of financial planning. Hopefully, they’ll inspire you to take a deeper look into your monetary situation.
Here we go.
Top 9 Benefits of Financial Planning
All the major functions of a business heavily rely on financing. It’s by planning your finances that you get to:
- Set a budget
- Allocate resources
- Track your cash flows
Therefore, without a financial plan, a lot is at stake. Here is a deeper look at the benefits of financial planning and what it can help you do.
1. Set Clear Business Goals
One of the benefits of financial planning is that it helps you set clear goals. In the early stages of business, a company’s main goals and objectives determine where most of its financial expenditure goes.
These goals vary by business. For instance, in the beginning, a business’s main goals could be:
- Establishing a product-market fit
- Spreading brand awareness
- Developing their product, e.g. designing software, making upgrades, and fixing bugs
- Increasing productivity and operational efficiency
Having a financial plan adds more clarity to your objectives and goals. It shows you if your finances can sustain your daily operations and your major expenses.
With a financial plan, you can direct your financial resources toward these objectives. You can also make projections about these allocations in the next quarter, year, five years, and so on.
For example, if your main goal is to establish a product-market fit, most of your resources would go towards market research.
To track its benefits, you’d need to set KPIs, such as sales targets or conversion rates, and so on. All these need careful financial planning.
Another example would be investing in expert services if your goal is to develop your product. Or buying next-lever machinery if you aim to increase productivity.
Therefore, this is one of the most important benefits of financial planning. Any company that is clear about its objectives has a sense of direction.
2. Manage Cash Flow
This involves prioritizing major expenses and tracking the minor ones. A lot of small businesses fail to realize just how expensive day-to-day operations can get and need to sort their financial priorities.
While it is the major expenses that take up a major share of your finances, daily operations can be the reason you incur losses over time.
Small businesses often face financial constraints as their revenue may not always offset their expenses. Therefore, whenever money can be saved, it’s important to do so.
So how does financial planning help manage your cash flow and ultimately save money?
First, it helps you allocate your financial resources. This is another one of the benefits of financial planning.
A financial plan helps you keep track of your cash inflow and outflow, and manage your spending.
You’ll identify where money is getting wasted, and redirect it elsewhere. You’ll also see which areas of the business bring in more revenue, and channel more resources towards them.
Therefore, financial planning helps you:
- Track operational expenses
- Prioritize core expenses
- Reallocate resources appropriately
3. Manage Investments
One of the important benefits of financial planning is that it helps you better manage your investment portfolio. Most investments take up large sums of a business’s finances.
Take a major capital investment for example, like buying heavy machinery. If you have a financial plan, you can set resources aside for these big investments and even for contingencies.
Investments can also be a source of constant, long-term cash inflow if you do it right. This is another benefit of financial planning.
With a financial plan, you’ll also track your return on investments.
Did your investments yield income as projected? How significant are the yields? Or, are the investments incurring losses? Is it time to back out?
This way, you’ll terminate unprofitable investments whenever required. Clearly, the benefits of financial planning are worth the time and effort.
4. Mitigate Risks
There are many risks associated with running a small business. Being able to minimize these risks is one of the benefits of financial planning.
Some of the common business risks include:
- A business losing its employees
- Having unforeseen expenses
- Legal risks
- Irregular revenue
- Insurance risks
- Risk due to external environmental factors like economic risks
Most startups invest only in essential personnel who take up core business responsibilities and often perform multiple tasks. Losing a single crucial employee, in such instances, could interrupt your business, at least in the short run.
A financial plan consists of a personnel plan section that outlines a course of action for such situations.
Also, small businesses can have irregular revenue streams. They need contingency plans to keep day-to-day operations running even when there’s no revenue coming in. That’s where the benefits of financial planning come through.
One of the benefits of financial planning is that it sets aside an emergency fund to deal with unexpected costs, economic risks, legal risks, etc.
With a financial plan, such risks do not end up having massive negative implications that would set the business back. One of the benefits of financial planning is you can make pessimistic financial projections and plan for contingencies.
5. Prepare a Blueprint for Future Operations
One of the benefits of financial planning is that a financial plan gives you a roadmap on how to handle your business in the future.
How so?
By observing, recording, and tracking your financial progress, you’re better placed to make future predictions. You could already have non-financial goals for different departments, but a financial plan adds more detail to those.
For instance, if your sales team has “units sold” as their key performance indicator, a financial plan adds monetary value to that. Therefore you’ll have revenue projections as well as net profit projections.
Making growth predictions also becomes much easier. You’ll have a point of reference to base your estimates on. For instance, you can project a 10X growth in revenue over the next 5 years based on what your business makes this year.
With a financial plan, you’ll always re-evaluate everything on the go. This is one of the benefits of financial planning that help you manage your operations better.
Of course, projections aren’t always accurate. However, as long as you’re tracking your finances, you can always make adjustments.
6. Stay Motivated and Committed
Running a business could be hectic and oftentimes, you’ll need the motivation to keep going. One of the benefits of financial planning is that it keeps you motivated by showing you what to expect.
Here’s how.
Say in a quarter, you were able to track your finances and cut down costs by a huge margin, thanks to proper financial planning.
Wouldn’t that make you want to work even harder, and save more?
Also, when you have a financial plan, your uncertainties are minimized. If you’re facing a crisis, you’ll already have a counter-strategy. That keeps you motivated.
Now about commitment.
You’ll have your goals clearly stated, which we’ve discussed as one of the many benefits of financial planning. Goals keep you grounded because you’re working towards something specific.
With that, both you and your employees will remain committed to that course. At least until you achieve it and set other goals. Objectives also remind you of your short-term course, just in case you lose sight of your goals that may seem far away.
7. Raise Funds for Your Business
As discussed earlier, businesses sometimes end up spending more than they earn. For this reason and many more, such as expansion, your business will need funding at some point.
This could be in the form of:
- Long-term debt
- Equity
You’ll need financial projections and estimations to raise debt funding. Banks ask for your financial statements to determine how creditworthy your business is. This is one of the other benefits of financial planning.
That’s not all, if you opt to approach investors, your financial plan will be your proof of sustainability. Investors will want to know your turnover, your market share and projections, your profits, and more.
So your financial plan will help you quickly raise adequate funds for your business.
Also, once you’ve found investors, you’ll need to keep them in the loop about your business’ performance. So you’ll need your financial plan for that as well.
8. Track and Measure Business Performance
Another of the many benefits of financial planning for small businesses is that it allows you to accurately measure your business performance.
By simply tracking your finances, you can tell how your business is performing.
You can compare your financial projections to your actual performance. You can also determine whether or not you met your goals using your financial plan.
With this, you’re better placed to change your strategies to something more effective.
The more regularly you reassess your financial plan and readjust your goals, the more beneficial it becomes.
9. Set a Budget
The last, but not least, benefit of financial planning is that it helps you with budgeting.
Knowing what funds go where and reallocating them isn’t enough. You need to set a strict budget for each department according to their relevance to the business.
This builds a structure around your cash outflow. Each function needs to have a limited financial scale within which to operate. And this can only be altered if a reasonable case is presented.
This breakdown is easier than monitoring company resources as a whole. It’s also more effective.
Now that you understand the benefits of financial planning, let’s discuss exactly what a financial plan should have, in the next section.
Components of a Financial Plan
To help you better understand the benefits of financial planning, here’s a summary of what goes into a financial plan.
Image via SmallBusinessHQ
- Income statement: Includes records and forecasts of your income and expenses.
- Cashflow statement: This is a statement showing your cash inflows and outflows.
- Statement of financial position: This is a statement showing a business’s assets, equity, and liabilities.
- Sales forecast: Shows projections of your sales and how that is set to grow in the future.
- Personnel plan: Outlines your employment plan and the costs that go towards that.
- Break-even analysis: This shows your costs against their benefits, and helps your business reach a break-even point.
- Ratio analysis: These gauge your business’s profitability, efficiency, stability, and liquidity.
- Exit strategy: This plans for the scenario where a business fails and needs to cut its losses and exit.
FAQs
1. Why is the financial planning process important for small businesses?
Every small business needs a financial plan as it provides numerous benefits. This is because financial planning provides direction, helps a business understand its goals, and enables it to track its performance.
2. What are the benefits of financial planning?
The benefits of financial planning can be summarized as:
- It provides clarity on goals and objectives
- Helps manage company cashflow
- Helps manage investments
- Mitigates risks
- Provides a blueprint for the business
- Helps you raise funds
- Helps you measure performance
- Makes budgeting easy
3. What is financial planning for a small business?
Financial planning refers to the process where businesses track their current monetary situation and use that to make future financial projections. It helps assess a business’s financial health and provides a roadmap to its financial future.
4. What are the 7 components of a financial plan?
The components of a financial plan are:
- Income statement
- Cashflow statement
- Statement of financial position
- Sales forecast
- Personnel plan
- Break-even analysis
- Ratio analysis
5. What does financial planning include?
Financial planning includes setting goals, having a budget, and keeping track of all your monetary transactions. It also involves making future estimates depending on current and historical trends.
6. How do I write a good financial plan?
Writing a good financial plan involves including every detail about:
- Cashflow
- Investments
- Debt
- Insurance
- Income
- Assets
- Expenses
- Liabilities
7. Can I do my own financial planning?
Yes, you can. It requires vigilance, but you don’t necessarily need to hire a financial advisor or financial planner to create a financial plan for your business.
8. What are the types of financial planning?
Some types of financial planning include:
- Investment management
- Cashflow management
- Tax management
- Debt management
9. What is the most important element in financial planning for a small business?
Every element of a financial plan is important. However, a sales forecast focuses on the core operation of the business. It helps you estimate your revenue and determines how your business is performing. It also helps you raise funding.
10. What does a financial plan provide for achieving your financial goals?
A financial plan provides you with clarity on your goals and objectives and a roadmap for future operations.
Ready to Realize the Benefits of Financial Planning?
Hopefully, by now, you’d be clear on the benefits of financial planning and why you need a financial plan for your small business/
It’s time to start taking financial planning seriously, especially if you’re a small business. It may seem unnecessary, but as you can already see, there’s so much to gain in the long run.
You’ll be clear about your goals, manage your funds better, acquire funding easily, and enhance your commitment. All this is integral to every business that intends to constantly grow.
And the time to make a financial plan is now. All the best for getting your finances in order.
