Creating a business plan is one of the first steps needed to get a new business financed and off the ground. It’s only the beginning of a continuous process of managing your money and resources.
Financial Planning & Analysis
Creating a business plan is one of the first steps needed to get a new business financed and off the ground. It’s only the beginning of a continuous process of managing your money and resources.
The basics of financial planning include an annual budget and a method for measuring
actual performance against the plan. It’s also helpful to plan as far into the future as possible,
especially if expansion is a long-term goal.
Developing your plan
This doesn’t have to be burdensome or complicated, and many small businesses do it on an Excel spreadsheet. A spending plan provides a time-phased baseline or budget for projected expenses throughout the year. This will allow you to track your actual expenses as they come in every month.
Expenses typically fall into two categories: fixed and variable. Fixed or overhead expenses don’t change much and include office rent, insurance, depreciation, utilities, maintenance, and equipment rental. Variable or operating expenses fluctuate depending on the growth rate of your business. Included in this category are materials, supplies, salaries, commissions, advertising, travel, shipping, and taxes.
In addition, you’ll need a revenue forecast based on your estimated product sales. It’s the total price of goods and services that you expect to sell. Spread the sales by month, allowing for changes in demand due to holidays and other events that affect your particular business.
Existing businesses have the advantage of historical data to use for forecasting future expenses and sales. New businesses must rely on experience and judgment to come up with the best estimates possible.
Measuring actual performance
Planning is important, but it’s equally important to track performance against the plan. This allows you to make changes in real time to correct problems before they escalate, or avoid them altogether.
Prepare a spreadsheet that compares your monthly expense plan to your actual expenses. The difference between the two is commonly called a variance. Do the same comparison between your sales forecast and actual sales. Determine why and how the variances occurred. Analysis of your financial data will help answer questions like these:
- Do I need to improve the way I develop my plan?
- Should I hire someone to help me, either as an employee or contract labor?
- Do I need more work space, and can I afford it?
- Is additional equipment needed to achieve sales goals?
- Am I managing inventory efficiently?
- Should more or less money be spent on marketing and advertising?
- Are there ways to cut expenses without hurting sales?
- Am I doing the right things to make a reasonable profit?
- What’s my breakeven point?
- What’s my return on investment?
- Are my prices optimized for the highest possible sales and profits?
- What is my cash flow and how can I improve it?
- Are new investments needed to sustain and grow the business?
- How should next year’s goals be modified based on this year’s results?
- Should I consider changes to my business model?
- Do I need more financing to make my business succeed, and can I afford it?
The keys to successful implementation of this strategy are discipline and attention to detail. While this does take some time, the rewards are high. Most problems end up costing money, so catching them early will give you time to come up with work-arounds to minimize the impact.
Analyzing your financial performance is a critical aspect of running your business. It minimizes risk because you’ll have warning signals when things aren’t going as planned. You’ll be able to adapt to changing economic conditions that affect consumer demand. You’ll be alerted when your financial goals aren’t being met, and the sales level needed to meet your targets.
Tools
There are tools available for every business to make this process as painless as possible, and some of them are free and simple to use. Their mention does not constitute an endorsement by the author or publisher of this article. Don’t limit yourself to what you see here. Do your own research to find the tools that are most compatible with your specific business and how you like to operate.
The Rolling Business Budget and Forecast is available from Microsoft Office (http://office.microsoft.com/en-us/templates/rolling-business-budget-and-forecast-TC001158956.aspx). Microsoft offers many other templates to help you organize and run your business effectively. More sophisticated financial software is available from Microsoft Dynamics (https://www.microsoft.com/en-us/dynamics/erp-small-midsize-business.aspx). Centage offers several tools for financial forecasting, budgeting, planning, and financial reporting (http://centage.com/Products/Products-Overview.asp).
One useful tool is the ability to make charts or graphs depicting your financial data. You can create charts in Excel that will automatically pull data from spreadsheets. Graphs are invaluable for analyzing current trends and extrapolating future performance.
Many small businesses can operate effectively with free templates available online. If you decide to buy your own software, most offer a free trial. Give it a test run to see if the features are a good fit for your business.
Bottom Line
All the plans in the world won’t do you any good if you don’t actively measure your performance against them. Sometimes you’ll find that your plan was inadequate or was based on bad assumptions. Use that experience to improve the plan the next time it’s updated.
Measuring performance will help install financial discipline, effectively allocate resources, improve inventory control, reduce expenses, avoid problems, and identify ways to increase sales. This is critical for small businesses because they don’t have the financial firepower to withstand big problems that go unsolved for very long. Routine analysis of your financial data gives you the heads-up you need to stay on course and helps you focus on doing the right things to be successful.
