Being financially healthy means that you are solvent in the current state of your monetary situation, such that with your credit, debt, savings, investments, and income and that you can meet your financial obligations as and when they arise. To many, achieving financial health in your business may seem like a farfetched dream, but it is achievable in several very easy steps through a business financial plan.
What is a business financial plan?
According to Business Consultant Ann Ichungwa, it is the financial section of your business plan and it uses and applies real financial data to put the rest of your business plan in context. To achieve this, your business financial plan has not only to be forward-looking but also informed with past and current financial positions and future aspirations.
This thus requires an understanding of where you are (and how you found yourself here) and where you want to be. Further, it asks what you are hoping for and since hope is not a strategy, the financial journey from where you are to where you want to be thus informs the strategy behind our business financial plan.
To achieve financial health, your financial plan needs to be grounded in reality based on questions you as an entrepreneur or individual must ask and answer correctly. While the scope of the questions is largely universal, the solutions are never a one-size-fits-all, rather you must tailor make your plan to the uniqueness of your business and industry.
Why is financial planning important?
Financial planning is essential to building a successful business. Your financial business plan dictates how to run your 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, etc., 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.
Correct business financial planning thus gives you a buffet of benefits as summarized below: –
1. Clarity on your company goals Understanding your cash flow needs and how to manage them
2. Smart budget allocation
3. A cost mitigation tool
4. Risk mitigation barometer
5. Crisis management tool
6. A fundraising facilitator
7. A growth roadmap guide
How to develop your business financial Plan?
With a clear view of what is and why it is important to have a business financial plan, the next question is how to do it; what information and knowledge do you need and how do they all fit into your plan to make it work?
This is a 6-step process that involves
- Establish the financial goal you want to achieve
- Evaluating your current status
- Analyzing your shortfall areas
- Customize solutions to address the shortfall areas
- Take action to implement
- Get an accountability partner to help you stay on course
This process is data heavy, data-driven, and data reliant, and as such you as a business owner need to keep daily records to have sight of and access to timely and accurate data from your business to help you in making the right decisions. This data represents your financial metrics and as a business owner, accessing, interpreting, and acting on your financial metrics cannot be delegated.
Key among these metrics is in knowing certain numbers around your business such as:-
- How much are you making daily/monthly/quarterly/
annually? - Are we selling in cash or credit and what is our collection like?
- What are our expenses and what are we spending on – fixed or recurrent costs?
- Are we making money and what is our break-even point?
- How much must we sell daily/weekly/monthly/annually to stay afloat?
The above questions among many others help you understand the impact of making a sale on your bottom line and ability to stay afloat.
Other metrics that as a business owner you must track are
- Financial ratios as they help you understand your metrics via comparison e.g. working capital to payables, bank balance to incomes and expenditure, debt collections and stocks, etc.
- Your annual budget is also a metric that informs on your financial/resource constraints against your plans.
- Four is your cash burn-out rate and this metric informs how long you can operate based on the current status quo before your cash runs out.
- Customer acquisition metrics that inform on customer acquisition, retention, and lifetime value to the business. Ideally, your customer acquisition cost must be lower than the lifetime value of that customer, and through relationship building, loyalty programs, and customer service you can keep the customer longer and more valuable to your organization.
- Indeed, financial planning is not an activity rather it’s a journey; one that needs constant checking, updating, and correcting to remain functional and relevant but also one that if done well will anchor your financial health on solid ground.To perfect it takes time but as it is a product of reviewing and repetition, once you get the hang of it becomes easy to manage while also giving you a bird’s eye view of your business/financial projections and how to get them where you need them to be.Thus as a businessman, you have to be a creature of habit in keeping records, interpreting what they say, and using the analysis to inform your business decisions toward a healthy financial position.
Should you wish to learn more about business financial planning, financial health, and other business-related variables and or access to cash for your diverse business needs, contact Springboard Capital at 0700 944 444/WhatsApp Us through through the button below or email us at info@springboardcapital.co.ke. Our team members are at hand to help you in your business and financial journey and based on your needs you can pick from our buffet solutions or we can tailor-make a package to suit your unique palate.
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Article based on Ann Ichungwa Webinar Presentation– Ms. Ann is a Certified Public Account CPA(K) and holds a degree in Economics and has served in several advisory boards including the Association of Startup & SMEs Enablers of (ASSEK).
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