9 key benefits of business financial planning
Building a business financial plan is never easy. It requires effort, good data, and a fair amount of imagination. And if you’ve never done this before, you’ll likely hit a few roadblocks along the way.
But this post will show you why it’s so valuable, nonetheless.
A good financial plan keeps you focused and on track as the company grows, when new challenges arise, and when unexpected crises hit. It helps you communicate clearly with staff and investors, and build a modern, transparent business.
And there are plenty of other advantages.
We’ll explore nine of our favorites shortly. But first, let’s define exactly what we’re talking about.
What is business financial planning?
Your company’s financial plan is essentially just the financial section of your overall business plan. It applies real financial data and projections to put the rest of your business plan in context.
And crucially, it is forward-looking. While you use existing accounting figures (if you have them already) and experience to create your plan, it’s not simply a copy/paste of your accounting data. Instead, you look at your business goals and define the level of investment you’re willing to make to achieve each of these.
But this doesn’t mean that financial plans are just “made up.” If anything, this section of your business plan is the most grounded in reality.
As Elizabeth Wasserman writes for Inc:
“A business plan is all conceptual until you start filling in the numbers and terms. The sections about your marketing plan and strategy are interesting to read, but they don’t mean a thing if you can’t justify your business with good figures on the bottom line.
The financial section of a business plan is one of the most essential components of the plan, as you will need it if you have any hope of winning over investors or obtaining a bank loan. Even if you don’t need financing, you should compile a financial forecast in order to simply be successful in steering your business.”
The importance of financial planning in business
This probably won’t come as a surprise to most readers, but financial planning is essential to building a successful business. Your business plan dictates how you plan to do business over the next month, quarter, year, or longer – depending on how far out you plan.
It includes an assessment of the business environment, your goals, resources needed to reach these goals, team and resource budgets, and highlights any risks you might face. While you can’t guarantee that everything will play out exactly as planned, this exercise prepares you for what’s to come.
We’ll look at the precise individual benefits next, but suffice it to say that, without a clear financial plan, you’re basically just hoping for the best.
9 benefits of financial planning for business
So what exactly can you hope to gain from business financial planning? The benefits of business planning are probably endless, but here are nine clear advantages.
- Clear company goals
This is really the starting point for your whole financial plan. What is the company supposed to achieve in the next quarter, year, three years, and so on?
Early on, you’ll want to establish that there is a real need for your business, and that your business fills this need. This is also known as “product/market fit.” For many startups, the first several years may be devoted to building a product and establishing that product/market fit. So this would be your chief one-to-two year goal, with smaller checkpoints along the way.
Crucially, if this is your key goal, you won’t set lofty sales targets or huge marketing KPIs. What’s the point of investing in sales and marketing for new customers, if the product isn’t ready to sell?
We’ll refer back to your company goals throughout this post, so it’s worth getting a handle on them from the start.
- Sensible cash flow management
Your financial plan should also set clear expectations for cash flow – the amount coming in and out of the company. In the beginning, you’ll of course spend more than you make. But what is an acceptable level of expense, and how will you stay on track?
As part of this plan, you also need to figure out how you’ll measure cash flow easily. You may not have seasoned finance experts in the team, so can you accurately and efficiently keep track of where your money’s going?
By making your plan now, you can anticipate challenges both in receiving money and spending it, and identify ways to do both more effectively.
- Smart budget allocation
This is obviously closely related to cash flow management (above) and cost reductions (below). Once you have a clear understanding of the amount of funding you have to spend – whether through sales income or investments – you need to figure out how you’ll actually spend it.
The company has its overall budget – essentially its “burn rate” for each quarter or year. Break this down into specific team budgets (product development, marketing, customer support, etc), and ensure that the amounts dedicated to each reflect their importance.
Budgets give each team their own constraints from within which to build. They know what resources are available to them, and can plan out campaigns and personal or product development accordingly.
At the company level, tracking project or team budgets is always going to be easier than monitoring spending as a whole. Once you break each budget down, it’s relatively straightforward to keep an eye on who’s spending what.
- Necessary cost reductions
Aside from setting out how much you can afford to spend (and on what), a financial plan also lets you spot savings ahead of time. If you’ve already been in business for some time, building your financial plan involves first looking back at what you’ve already spent and how fast you’re currently growing.
As you set out your budget(s) for next year, you’ll refer back to past spending and identify unnecessary or over-inflated costs along the way. And then for next year’s budget, you simply adjust accordingly.
This conscious effort is all part of spend control, the practice of keeping company spending in line with your expectations. Even better, a quarterly or annual review almost always unearths areas where you can save money and put your resources to better use.
- Risk mitigation
A crucial aspect of the finance team’s role is to help companies avoid and navigate risk – from financial fraud to economic crisis. And while plenty of risks are hard to predict or even avoid, there are plenty that you can see coming.
Your financial plan should make room for certain business insurance expenses, losses through risky inefficiencies, and perhaps set aside resources for unexpected expenses. Particularly during turbulent times, you may in fact create several financial forecasts which show different outcomes for the business: one where revenue is easy to come by, and one or two others where times are tougher.
Again, the point is to have contingency plans in place, and to attempt to determine how your roadmap changes if you grow only 20% next quarter instead of 30% (or 50%). There’s no reason to go overboard, but you can find risky areas within the business, and also consider your best responses if things go wrong.
- Crisis management
The first thing that tends to happen in any company crisis is you review and re-build your plans. Which of course means that you must have a clear business plan in the first place. Otherwise, your crisis response is simply to improvise.
As the 2020 financial crisis unfolds, the key refrain we’ve heard from finance leaders is the need to reforecast constantly. Nobody truly knows when the crisis will end, or how it will have impacted their business. So companies are creating new financial plans on a monthly or quarterly basis, at least.
And those with robust and well thought-out financial plans will find this process easier. They’re not starting from scratch over and over, and they’ve already identified obvious risks and the key levers to pull in response.
- Smooth fundraising
Let’s shift away from risk entirely now. Whether you’re a brand new startup, a sustainable company that needs a small cash injection, or looking for a significant series-level investment, at some point you’ll likely need funds.
And the first thing any prospective investor or bank will ask you for is your business plan. They want to see how you intend to grow the business, what risks and uncertainties are involved, and how you’ll put their money to good use.
A financial plan that speaks to investors is critical, and the better your history of planning is, the more likely they’ll trust your projections. So whether or not you’re looking for funds today, a business financial plan is an important tool in your chest.
- A growth roadmap
Finally, your financial plan helps you analyze your current situation, and project where you want the business to be in the future. Again, your wider business plan will do this on a broad level: the markets you’d like to be present in; the number of employees you’ll have; the products or services you hope to sell.
The financial section adds data to these goals, and plugs in your level of investment along the way. For example, if you wish to hire 100 new employees this year, your financial plan will likely need to include recruiters, and a specific budget to find new talent.
Take the time to set out how large you expect the company to be, your expenses with a larger company, and the amount of revenue coming in to compensate. If you’ve raised venture capital to help grow financially, you can probably expect to burn cash faster than you make it – this is normal.
But if you burn through money and can’t reach your growth targets, then you’ll need to re-evaluate your position. So set those growth targets out now, and you’ll be able to assess as you go.
- Transparency with staff and investors
We already mentioned how necessary your financial plan is for investors. So we won’t dive into them more here.
But the same is true for staff. It is now expected that company executives will be open and honest with staff. Some startups go so far as to publicize their salaries for the world to see.
At the very least, modern employees want to see that the company is in good hands and on the road to success. And when executives can share the financial plan in all-hands meetings, they bring real data to what would otherwise be a business plan lacking in details.
Employees love to see key figures like revenue coming in, costs, and where you are on the road to profitability.
What to include in a business financial plan
We won’t go into too much detail here, but it’s worth giving an idea of what belongs in the typical financial plan.
A three-year financial plan is most common. But whatever the period in question is, your plan should include:
Sales projections: Project your expected sales growth for the near future, as well as the cost of sales. You can break these down in different pricing groups, products, and other important factors.
Expenses & budgets: Most important here are costs – separated into fixed and variable expenses. (Lower fixed costs usually mean lower risk for the business).
Profit & loss statement: Alternatively, you can create a cash flow statement, which achieves a similar outcome. You essentially want to project money in and money out over the next three years.
Assets & liabilities: These will usually be separated from your P&L statement, and will certainly include startup costs and assets for new businesses.
Break-even analysis: Ideally, you’ll be able to identify your break-even point within the coming three years.
Hiring & team structure: This one is not essential, but it makes sense to add as part of your business plan. Who will you need – and when will you acquire them – in order to reach your goals?
There’s no time like the present to plan
We’ve seen nine excellent reasons to get to work on your company financial plan as soon as possible. As we explored, the financials form a critical part of your overall business plan, without which you’ll have a hard time assessing your performance as a company.
Of course, this exercise requires projection – you can’t just rely on the numbers you have today. But that’s not the same thing as guesswork. Follow best practices and consider all potential outcomes, and you’ll walk away with a clear roadmap to get you to business success in the foreseeable future.
From there, it’s a matter of putting in the work, measuring success, and regularly updating your financial plan.