When you set out on a journey, there are usually many different paths you can take to get to your destination. You could take highways or back-roads, fly or ride a bike, take lots of detours or head in a straight line. Your plan depends on the goals of your trip.
Business financial planning is similar. If you know where you’re going, and what your goals are in getting there, you can lay out a plan to get to your destination. Of course, financial planning for your business can be a bit more involved than planning a vacation. In truth, there are five crucial steps needed to create a financial planning strategy for your business.
Step 1: Know your plan
The essential first step to creating your strategic financial plan is to know your business goals. Just as each company’s goals are unique, so too is the financial plan that they must lay out to reach those goals.
For instance, a company who has a goal of 30% revenue growth in the next 3 years will want a completely different financial strategy than one who is looking to sell the company in five years. An acquisition strategy is much different than a consolidation strategy. Your company goals are the driver of financial planning strategy for your business.
Step 2: Budget
No matter the method, your budget is how you keep the company on the road to reach the goals outlined in step one. Having the necessary cash flow to make payroll, purchase supplies and materials, and hire the right resources at the right times is important to meeting your goals
Step 3: Forecast
While your budget outlines your financial position and cash flow against your goals, your forecast helps you see your company’s future potential outcomes based on your past performance and your expectations in the future. For instance, if sales have gone up 20% every year, and you see no reason for that to change, you can add that to the forecast. Plus, you’ll add in the associated costs that go with that assumption, including the cost for product materials, warehouse space to handle orders, team members to build products or additions to the sales team.
These forecasts should be realistic based on what you’ve seen in the past and expect in the near future, and they should point you in the direction of your goals. The forecast should be updated frequently as new information comes in or as the business climate shifts.
Step 4: Measure
If you aren’t measuring your progress against your goals, how do you know you’re making progress? Setting Key Performance Indicators (KPIs) for your financial strategy will let you identify what parts of your financial plan are working, and what parts may be straying from the path.
If, for instance, your goal is to pay off debt, you might set a KPI for a certain percentage of debt to be paid off every quarter. If you fall behind on that KPI, you can look at your budget and forecast and see if you fell short. Or, if you’re paying off debt faster than expected, you might revisit your budget to ensure you aren’t being optimistic and risking coming up short on your cash flow by the end of the year.
Step 5: Execute and Revisit
Once you’ve completed the four previous steps, you can set your financial plan in motion. Reaching your goals is not automatic, however, and isn’t a “set-and-forget” proposition. Revisit your plan frequently and review it against your KPIs. This will let you make adjustments as needed to stay on the right path to your destination.
Small to mid-market organizations rely on Centage Corporation’s Maestro Suite, which includes Budget Maestro™ to help them keep track of and manage their cash flow. Budget Maestro improves the efficiency and effectiveness of business budgeting and planning, financial forecasting, financial consolidation, and reporting processes. For more information, take a tour of Budget Maestro, contact Centage, or call 800-366-5111 now.