4 Reasons Why Your Business Needs A Financial Plan

By Yhordan Serpentini | May 15, 2022

Starting a business requires a lot of time, patience, and money. The money you spend to build your new company is extremely important to be kept on a financial track, either through a plan or a budget, as it will determine how much income your business will make before, during, and after the necessary expenses. If you don’t have one already, here are four reasons why your business is in serious need of a financial plan.

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Positive Cash Flow

One of the most important aspects of a company is of course making money, regardless if it is through a profit or non-profit system. Every business has a certain amount of money coming in, and as a result of monthly expenses, has a good chunk of that profit coming out. Financial plans use statistics from your company’s financial history in order to determine the best, and most affordable, budgeting plan needed to have a positive cash flow before and after these expenses are paid.

For example, if your business sells, distributes, and/or manufactures products, then you will likely need to pay for either shipping fees, employees, and manufacturing fees—as well as taxes. No fee will ever remain constant, as some situations may result in higher or lower demands, so it is important that you identify the average monthly expense of these said fees. Using your company’s financial history, you are able to calculate an average monthly expense, which you can use as a financial plan to determine exactly where your money will be going—how much will you lose and how much will you gain.

Identify Necessary Reductions

Another benefit of having a financial plan is that it works as a friendly budget for you to see exactly how your small business’ income is being distributed. As every company has and will do, you’ll inevitably reach a point where you will need to reduce the costs of one or more areas in your business. In order to identify those necessary cost reductions, a financial plan can review your spending history to determine which expenses are meeting your expectations and which ones are not.

Cost reductions aren’t solely done to save money, as sometimes they are made to accommodate other fields in your business that grew bigger expenses in a shorter period than you may have initially expected. Other times it may be due to a lack of spending control or underestimations. Financial plans help keep the balance of spending to reduce the amount of cost reductions you’ll have to do, but they ultimately cannot prevent it.

Financial Transparency

Another wonderful benefit of having a financial plan is that it creates financial transparency for you, your employees, and your investors. Why is this transparency important? Well, most employees don’t want to work for a company that is effectively going bankrupt, and investors also don’t want to pour millions of dollars into a sinking ship. Having a financial plan transparently shows your staff and your investors that your small business is growing financially, either at a slow, normal, or fast pace.

Risk Prevention

Financial plans are great tools to mitigate risk. On top of your calculated expenses, financial plans can also prepare your business for unexpected expenses as a means of preventing financial risks, such as insurance for any damages, a loss of resources or equipment, low employment, inefficiencies, or a rough period of income. Setting aside a reasonable percentage of your quarterly or annual profit in preparation for these unexpected risks can significantly help in reducing or preventing your business from entering a financial crisis.

4 Reasons Why Your Business Needs A Financial Plan