Profitability is the most important and desirable financial goal in business planning. You can achieve it by generating more revenue and correctly managing expenses.
What Is the Concept of Financial Planning in Business?
Financial planning process in business can be confusing, especially with the variables you need to consider. However, in the long run, you can positively influence your financial situation by focusing on areas that need attention.
Here is a detailed overview about what is financial planning in business, its importance, and other relevant factors that you need to know about.
What Is Financial Planning in Business?
The process of financial planning in business predicts the outcomes of future financial scenarios. Moreover, it helps you determine how to use a company’s resources to achieve its long- and short-term objectives. Financial business planning is a highly creative and analytical process since it involves predicting the future of financial situations.
The financial plan of a business is likely to include goals such as hiring staff, diversifying into new products, purchasing additional inventory, expanding to a new location, etc.
What are the Benefits of Financial Planning in Business?
A good financial plan for business keeps you focused and helps your company grow. During a time of crisis, it aids you in properly communicating with your staff and investors. This makes the business process transparent.
Apart from the ones mentioned above, there are several other benefits of the financial planning process in business.
- Sets Clear Goals For the Company: What the company is supposed to achieve in the next quarter, next year or year is the whole point of creating a financial plan. It is ideal to recognise what your company needs to prosper and to fulfil those needs, which is also known as product/market fit. Several start-up companies who spend the first few years establishing a product or market fit can establish this as their chief 1or 2-year goal.
- Maintains Sensible Cash Flow Management: A financial plan should set expectations for cash flow which means the cash coming in and going out of the company. This plan will help determine how you will stay on track with your company’s expenses. A successful business plan will also teach you to easily measure cash flow. If you do not have seasoned financial experts on your team, through this plan you will be able to keep track of where your money is going. Through this plan, you will be able to both anticipate and overcome challenges related to receiving and spending money.
- Facilitates Smart Budget Allocation: A company has a specific budget allocated for each quarter or year. You can break this down and allocate them to different teams according to their specific needs and importance. Having a budget gives your team the constraints from within which they can build. When they know what resources they have at their disposal, it helps them to plan out campaigns, product developments, etc. Keeping track of the spending of a project or a team will be easier to track than monitoring it as a whole on a company level.
- Helps Perform Necessary Cost Reductions: A business plan not only keeps track of the spending but also helps you figure out ways to save money way ahead of time. When you are creating budgets for the future, take a look at your previous and current costs to map out instances of unnecessary spending. With conscious efforts, you will be able to align the company's spending with your expectations. You can do this with the help of a quarterly or yearly review of the budget which will indicate the problem areas.
- Aids in Mitigating Risks: An essential part of a business plan is helping companies to anticipate and avoid risks like economic crises, financial fraud, etc. Although certain risks are hard to predetermine and nullify, there is plenty that you can see coming. A good financial plan makes room for business expenses, losses, and also unexpected expenditures. It lets you determine the risky areas of your business and frame your responses beforehand.
- Helps Manage Crisis: The first step in managing a company crisis is reviewing and reframing plans and policies. Due to the worldwide pandemic in 2020, companies are creating business plans on a short-term basis like a month or a quarter. Dealing with a crisis will be easy for an organisation that has an effective business plan in place since they already have a list of anticipated lists and their response to them.
- Assists in Smooth Fundraising: A financial business plan is the first thing that a prospective investor and bank will ask to see when you are looking to raise capital. This is because they want to assess your ideas for the growth of your business, any possible risks, etc. Moreover, they will also check if you are doing anything worthwhile with their invested sum. Thus, an efficient business plan is vital to raising funds for your organisation since it will make the investors trust your projections.
- Provides a Roadmap for Growth: If you want to analyse your current business situation and predict how the business will perform in the future, then a financial plan is the way to go. With the help of a business plan, you can do this on a broader level.
- Maintains Transparency With the Staff and Investors: When you create a financial plan and fill it with valid information and statistics, it proves to the employees of your organisation that the company is in good hands which builds a relationship of trust. If the employees can see key figures such as costs, revenue, etc. it motivates them and helps them see where the company stands in terms of profitability. Here is a structure of a basic financial plan that you can use for your business.
What are the Essential Components of Financial Planning in Business?
Certain components are crucial to a financial business plan. It generally includes the following data:
- Cash flow statement
- Profit and loss statement
- Sales forecast
- Balance sheet
- Personnel plan
- Business ratios and break-even analysis
You can include the above-mentioned components in your financial plan for business and add business specific data to personalise it. Financial planning for business also has certain features and aspects that you should know about.
What are the Aspects of Financial Planning in Business?
Here are 5 positive features of planning finances:
- It gives you a glimpse into the future of your business.
- Gives you an idea about where to allocate resources.
- Shows the seriousness of your business idea to your clients and investors.
- Brings everyone on the same page.
- Provides you with an easy way to identify the core demographics.
Although a financial plan is vital to a business, there are some setbacks associated with it. Here are 5 of them.
What are the Drawbacks of Financial Planning in Business?
- There is a scope for inaccuracy.
- Analysis may require too much time.
- It lacks accountability
- May create an environment of false security.
- There exist no guarantees.
Although there are certain minor flaws associated with a business plan, you can implement checks to ensure you are receiving the positive aspects.
How to Track the Benefit of Financial Planning in Business?
- You can be sure that your financial plan is working if it is helping with the following 3 things.
- There is financial stability even during turbulent situations.
- Your business has good profit margins and bottom-line earnings.
- You are getting good returns on your investments.
- Although there are set rules and regulations for financial planning, only you can determine what works best for your business. Moreover, exercise extra caution when you are researching what financial planning in business is since there are certain risk factors associated with it.
FAQs About Financial Planning in Business
A business manager or anyone in an organisation who understands its financial goals can create a financial plan. Many times, the CEO of the company makes the financial plan. However, some businesses hire professional financial planners for this purpose.
Creating a financial plan is important for a small business because along with the other benefits, it will give you an idea about profitability which is even more crucial in the case of small businesses.
The charges of a professional planner in India can be anywhere between Rs. 6,000 to Rs. 40,000. However, it may vary depending upon several factors such as their location, experience, credentials etc.
Important Articles About Financial Planing
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