Financial planning is an integral part of any business plan. Here we’ll go through exactly how to craft one, and how Soldo can help your business prosper.
Knowing the advantages of financial planning is important in business, but not nearly as important as knowing what it is and how to do it. It’s a vague concept, so what exactly is it? And how do you create a financial plan for your company? In this article we’ll go through a comprehensive breakdown of financial planning for businesses and how best to go about it.
At its most basic definition, financial planning involves using what data you have to make reasonable projections and plans regarding your business’ financial future.
In some ways, financial planning is the opposite of accounting. In accounting you’re seeing what you’ve previously spent and analysing it. Planning involves setting financial goals and predicting future cash flow. For this reason, it’s is far less figure-based than accounting. Of course, you don’t pluck the numbers out of nowhere, but you are making educated estimates.
A financial plan is the practical backbone for the rest of your business plan. Your overarching strategies and expectations for the business may sound good, but if they aren’t backed up by figures then they don’t mean a great deal.
When making a financial plan, it’s a good idea to set out exactly what your goals and aims are, so that you can work back from there and analyse the investments and expenses that will be necessary for achieving them.
This is especially important if you’re looking for external funding, be that a loan from a bank or monetary support from an individual like an angel investor. If they can see that you have a thorough and realistic financial plan then it will increase the likelihood that they’ll put money into your business.
However, a financial plan is not a single fixed document that will guide your business decisions forever, it’s a set of fluid projections that you should reflect on and alter as needed when your goals or profits change.
If you haven’t made a financial plan yet, don’t worry. Similarly, if your business doesn’t have a financial plan yet, then the best time to start creating one is today.
When it comes to setting out a financial plan, one of the most important things to ensure is that your predictions are realistic. Creating a plan that inflates or obscures future profits might look appealing in the short term, but when those predictions never come to be, you won’t be thanking your past self. So always make sure your projections aren’t too low or too high.
As to what should be in a financial plan, there are a number of common features, and we’ll go into each of them individually.
Profit and loss statement
This is an important part of a financial plan that analyses your future profitability. The section is mainly split into three categories: sales, cost of goods sold (also known as COGS, a figure that covers materials and/or labour that goes into your product or service), and gross margin, which is the sales minus the COGS.
This is especially important if you’re a recently launched business, as the first few months of a new company can be very turbulent, and it’s important to keep an eye on what’s coming in and what’s going out. The cash flow section can cover both fixed and variable costs. Financial plans usually cover a three-year period, so if you and your team make a realistic prediction as to your cash flow over this time then that’ll help your business to grow.
If you want to keep a close eye on money, Soldo’s prepaid cards and associated intuitive app offer real-time cash-flow analysis. This data can help you alter your financial plan as your business progresses.
This is a prediction of how your sales will grow as your business gets larger. It can be a good idea to make multiple plans based on differing levels of growth, so you always have a path to take even if your sales don’t grow at the rate you’d hoped.
As with anything in life, you can never predict what could go wrong. However, taking a look at the potential problems your company could face, and how you would address them, is good practice both for yourself and for the benefit of prospective investors.
You’ll want to put serious thought into what point over the next three years your business will break even. Because investors are ultimately looking to profit from their input, they’ll want to know at which point they can expect to reap the rewards. With many businesses it’ll take a while for that income figure to be larger than the outgoings, but that is normal. However, if it looks like your business will be losing money in the long-term, you might want to reconsider your pricing or strategies.
Not every financial plan includes this section, but you might decide it’s beneficial to your business. A team structure would be a breakdown of all the people you’ll need to help your business to achieve its goals.
Financial planning for small business owners
We’ve spoken a lot about financial plans looking good to investors, but of course the plan must also be beneficial to you, particularly if you’re a small business owner. There are a few things to keep in mind regarding financial planning for a business of your size.
For starters, you’ll want to make sure you have a business bank account that works for you. There is a huge variety of packages out there, but some banks offer better deals than others, and it’s worth taking the time to research which can most effectively serve your needs.
Once you’ve decided on a bank to go with, it’s a good idea to establish a comprehensive expense policy so that you and your employees are on the same page and spending doesn’t spiral. And if you’re still using outdated payment methods for expenses (such as petty cash) then it could be time to switch to another system like prepaid cards so it’s easier to stick to your financial plan.
On top of this, selecting a financial adviser who specialises in financial planning is one of the best decisions you can make. Not only will they be beneficial at tax time, but they can also help separate business and personal finances, set out plans for the future, and keep your assets and investments well managed and diversified while you continue to focus on growing your business.
One thing to bear in mind is that it’s essential to take a salary. And as the owner of your own business, you’ll of course be the one deciding the amount. This salary doesn’t need to be high while using business capital in the early growth stages. Many small business owners will pay themselves enough to cover their National Insurance threshold so that their salary is tax-free.
When making a financial plan, there are a few extra factors you may want to keep in mind depending on your circumstances.
You may want to start thinking about retirement or succession. Many business owners dream that the sale of their business will be enough to fund their retirement years, but this is never a certainty. A business finance plan can help to achieve this goal, but it’s essential to anticipate and mitigate a more modest outcome, too. Putting away retirement savings on a regular basis should be incorporated into financial plans.
If you’re planning on the company continuing to be part of the business once you’ve retired, a good exit strategy is required, ensuring the leadership transition is smooth. With a wisely chosen successor, time can then be spent enjoying retirement while still retaining oversight, strategic input, and a potentially significant income.
Lastly, an unfortunate reality you may also want to face is that of your business failing. Although your financial plan should prove that your business is filling a necessary hole, any number of unforeseen problems could prove fatal to a business (just look at the last couple of years). Always be sure to consider how you will personally manage if the worst happens and your business becomes unviable.
The benefits of financial planning are numerous. Not only does a well-crafted plan show investors that you take your business seriously and know what you’re talking about, it also gives you a sense of direction as the business owner.
It means you can establish goals and devise methods to achieve them, giving you and anyone you share the plan with clear targets. This way, everyone’s on the same page and working towards the same purpose.
On top of this, going over your plan to revise it every month or so will provide a consistent picture of your changing financial circumstances, and overall you’ll be more secure in your company’s position. Using this information you can make changes to how you manage expenses or your own salary, for example.
No matter what stage in the business journey you find yourself, taking the time to create a detailed financial plan can only help as you grow and expand.
As we’ve mentioned, financial plans shouldn’t be a simple extrapolation of your current spending, and should in fact foresee future investments, growth, and obstacles. However, your current financial data can certainly provide some insight into cash flow, and as your plan evolves alongside your business, this spend data can become invaluable.
Soldo is a complete spending solution that allows you to take an incredibly detailed look at your business spending. We provide a system of prepaid cards that connect to a mobile or desktop app. As soon as an employee makes a purchase using one of these cards, they just take a photo of the receipt, upload it to Soldo, and all the transaction information is collated for you to view from anywhere.
You have the option to assign cards to individuals, teams, departments, or even vehicles. This way, you can break down expenses into categories that make the most sense for your business. And because the cards are prepaid, there’s no danger of overspending or veering away from the figures outlined in your financial plan.
With Soldo you can move away from paper-based reporting and say goodbye to the retention of physical receipts. This means reporting becomes automated and you save a great deal of time that you can devote to growing your business.
Even better, once you’re ready to carry out a reconciliation, Soldo’s seamless integrations with accounting software such as QuickBooks, NetSuite, and Xero mean that you can send spend data over in just a few clicks.
Whether your business is just starting out or you’ve already got some financial data under your belt, making a financial plan is always a good idea. Soldo can simplify this process with our smart prepaid system.
Changes are being brought in to harmonise HMRC’s penalties, as currently, there is no consistency across the tax system. For example, filing your annual self-assessment return one day late results in an instant £100 fine. At the same time, there are many instances where the late filing of a VAT return for the first time doesn’t result in any charges.