11/ 15/ 2005
by Steve Strauss
Q: Do I really need to create a financial plan for my business? My accountant suggests I have one, but I really don't see the value of putting time, money and effort into this.
A: You are not alone. By and large, entrepreneurs as a group are high on energy, enthusiasm, ideas and follow-through, but a tad lacking in financial analysis and projections. But the fact is, the success of your business depends in large measure on your ability to adequately crunch the numbers. For example:
- Can you afford to expand into a new location? What will it cost you?
- If you do expand, how much will your overhead increase by?
- How much more can you expect to make at that location and will it be worth the outlay of capital?
The only way to know the answer to these sorts of questions is through a financial projection. A financial projection, or financial forecast, is a tool you can use to see where your business is going, financially speaking. Typically, your forecast looks at your plans for the next few years and helps you understand how much money you will need to get to where you want to go, what it will cost in terms of sales, labor and so on, and how much you can expect to make once you do get there.
Other benefits of creating a financial plan are:
- Better strategic planning: Should you do X, Y or Z? A good financial plan can lay out the financial pros and cons of each scenario.
- Better cash flow analysis: Cash flow is the life-blood of most small businesses. A financial forecast helps you know what to expect from your cash flow.
- Better loan compliance: Loan documents, compliance, and submissions should be easier.
- Better investor opportunities: Good numbers result in investor confidence.
- Better business valuations: What is your company really worth? A financial projection will help you know.
Essentially, a financial projection is a tool you can use to steer your course, make corrections, best utilize your resources and thereby accomplish your goals.
It should be obvious that if you want to create a plan that helps you fulfill your business dreams, you have to input realistic numbers into your projections. Pie-in-the-sky numbers may feel and look good but will do little to help you achieve your goals. Honest numbers, even if they are painful to look at, will yield honest results.
There are two ways to create a financial forecast – you can either do it yourself or hire a professional. (This may be one of those times where hiring expert help may be your best course of action.)
If you do decide to do it yourself, you first need to learn how financial projections are created. There is software out there that can walk you through the process and there are also websites available with online tutorials. Another option would be to go either to your local SCORE chapter or Small Business Development Center. Experts at either place can walk you through the process, for free.
If you hire an accountant, the important thing is to give him or her all relevant financial information about your business. This should include pricing, taxes, overhead, income, sales, the competition, where you see your business going in the next three to five years, and so on.
Whether you do it on your own or farm it out, the end result should be that you will have a financial snapshot of your business that can assist you in making smart choices.
Financial projections, while certainly a lot of work, can be an invaluable business planning tool.
