10 Reasons Why Financial Planning Is Essential for Small Businesses

When you have enough on your plate managing your business on a day-to-day basis, it can feel like doing a proper financial plan can wait until you’re less busy. The truth is, it can’t.

Financial planning is critical to business success. Without it, you simply won’t know if your business is profitable — if you’re ultimately doing things right. Below you’ll find ten important reasons why you need to make financial planning a priority for your business. If you need help creating a financial plan, you can get it from business planning books or an accountant.

1. Your business is more likely to fail without a financial plan. A lack of financial planning is one of the main reasons why small businesses fail, whether it’s being caught out with cash flow or overestimating their revenue.

2. It can help with everyday costs. If you have a plan already in place you can see how much you can afford to spend on every day extras, for example how much expenses you can give employees and training budgets you can set aside. This will help your business to run more smoothly in the long-run.

3. It can help you focus on the future of your business. It’s easy to lose track of the long-term view of your business when you have so many immediate pressures at hand. A forward-looking financial plan can help you see what expenditures need to be made to grow your business in the long term.

4. You probably won’t be able to access financial support without one. Lenders will not consider your business viable for a loan or other financial assistance if you don’t have a sound financial plan in place, complete with a balance sheet, income statement and cash flow forecast.

5. It can help with your marketing decisions. A financial plan will provide you with the information you need to know if the strategies you’re putting into place are actually delivering increased revenue. Did the money spent on advertising lead to an increase in sales that justified the expenditure? A financial plan can tell you.

6. It can quickly identify a financial downturn. If your revenue is lower than you forecast, you can focus on sales and marketing to try and increase it. Or if your overheads are coming in higher than expected, you can take steps to reduce them. By reviewing your financial plan regularly you can address any issues straight away, rather than being caught out by bigger problems down the line.

7. It can measure your progress. Is your actual revenue better than what you forecast? Seeing how your business is achieving profit growth in black and white is a great motivator.

8. It can help you prioritize spending. Ready cash is vital to the success of small businesses. The financial planning process can help you to identify your most important expenditures against those that can wait until your cash flow is better. It’s a common mistake for small businesses to underestimate the ready money they need to keep their business running — a mistake that unfortunately leads many businesses to falter before they really have the chance to get up and running.

9. It can spot sales trends — and enable you to capitalize on them. Are certain products delivering higher returns? Or others less so? With accurate sales records as part of your financial plan, you can identify your best – and worst – performing products and market them accordingly.

10. It will help you better understand your bottom line. Bringing in tons of money won’t matter if your expenses are almost as high, or even higher. Your business success is down to profit, not revenue. A financial plan can clearly document your net profit, and help you identify ways in which you can increase it.

Even in the best of times, running a small business is extremely hard work. As these aren’t the best of times, it becomes even more important for you to closely monitor your finances through a financial plan that can give your business a solid foundation for success.

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Derin Clark
Derin Clark is a writer for Octopus HR, a company that provides outsource HR services to small business owners.

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  1. Measuring your progress is the best way to gauge the success of your business. If you don’t have a plan, and have specific goals in mind that you want to track, then it becomes more difficult to understand just how well your business is doing. Setting benchmarks allows you to compare and contrast your business progress with your goals and aspirations.

  2. Pingback: GrowthForce Bookkeeping Blog Roundup for August 27, 2013

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