7 Reasons Why Sound Financial Planning is Important for Businesses
Financial planning for businesses goes a little deeper than just accurate accounting. Businesses who master financial planning use their skills to build better cash flow, plan for future cash flow needs, build assets, increase savings, and develop a healthy emergency fund. All of those things work together to help business leaders build and grow their businesses. Understanding why financial planning is important helps businesses understand how they can build a brighter future.
Budgeting is one of the most important tools that businesses can employ. Budgets allow for the recognition of spending trends and the identification of short-term financial shortfalls and trends. It also shows how well a business meets its savings goals. Budgeting is a short-term tool, but when combined with financial planning, the two work together to create long-term solutions that help eliminate short-term problems.
Prudent business owners look carefully at trends in spending and find ways to reduce the outflow of cash. Using financial planning to address cash flow concerns is the first step on the road to financial security. Many online accounting software programs offer advanced budgeting features that help to project future cash flow patterns and alert managers of potential shortfalls. With enough time to plan for shortfalls in cash, managers can make informed decisions about preventing negative cash flow.
Businesses need emergency funds that provide cash when the unexpected happens. The emergency fund is much like a savings account, except that it is not used unless there is an emergency. Businesses need at least 30 days of working capital in a business emergency fund. An ideal goal is the development of an emergency fund with three to six months of operating expenses.
Businesses use savings accounts to grow their investments. This is a fund that works with the daily cash needs of the businesses. Businesses should base their savings goals on budgeting needs. Savings goals should also work together with investment goals so that savings goals continually add capital for investing. Business leaders use financial planning to set savings goals based on company growth, sales, growth, and the development of funding for future business projects.
Capital is the sum of your cash-on-hand and the value of your assets. This is the amount of funding you have available for creating growth, smoothing out cash flow problems, and building a strong future. Building capital helps businesses become solid because it increases security. Financial planning is a tool to determine the ratio of cash versus assets that is healthy for each business.
It makes sense to keep some cash on hand, but prudent business owners invest extra cash so that the money earns income. Businesses use assets to overcome times of negative cash flow. By selling off investments or borrowing against them, business can infuse cash in the operation as needed. Assets also work as collateral for business loans. Financial planning is the gateway to building quality assets. Assets are important for businesses because they provide collateral for business loans, earn income, and act as liquid cash when your budget needs help.
Growing a business takes capital. Financial planning is the gateway to creating enough capital to grow your business. By managing cash flow and developing an emergency fund, your company can begin to grow savings, add assets, and develop liquid capital. These tools help business owners to develop goals for growth. They also help the management team to meet those goals. This chain of events allows the business to prosper. Once you have all seven of these tools in place, growth is not only possible but it is more manageable and secure.
The tried-and-true steps to business growth and development are tied together by financial planning, and it is fair to say that each step becomes stronger when approached from a sound financial perspective. Together, the sum is worth more than the parts. Are you ready to implement financial planning as a tool for your business?
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