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Why finance is the foundation of your business planning strategy

Your business probably began with an ‘aha’ moment. The idea took root, and pretty soon you were looking around for office space and how to attract the first big deal. As early as that, comes the very real need to plan for what lies ahead, and to make sure your business planning gets off to the right start.

What is the kick-off point for good business planning? To start off, you might have googled a framework and a few tips. You probably already know your business planning should describe the fundamentals of your business idea and provide the data to show what money you intend on making. But what should inform the way you structure your business planning strategy?

Many business owners think that because their business started with an idea – something they decided they were going to do – that this idea should shape their business planning as well. But if you decided to run the comrades marathon, would your first training session be an 80-kilometre run? The answer is undoubtedly no. Of course, your idea to run the ultra-marathon would give direction to your training sessions. But your current fitness, the time available before the race and any injuries you might have would ultimately decide how you worked toward your goal.

The same could be said of the right approach to business planning. Just as someone who has run the race a few times before and a high level of residual fitness could start off with longer, more frequent training sessions, so someone with higher levels of cash reserves or with very little capital requirements can grow their business more aggressively than someone who does not.

The foundation of your business planning strategy should be the financial framework of the company. In other words, the starting point of your business planning should be setting achievable and realistic budgets.

The pro forma statement: projecting your business’s financial condition
The word ‘pro forma’ (think: pro forma invoice) is derived from Latin and means ‘for the sake of form’. It makes sense then, that your pro forma statement gives ‘form’ to the rest of your business planning. It refers to a projection of the financial condition of the business – and it should be the starting point of your plan.

According to William Petty, Leslie Palich, Francis Hoy and Justin Longenecker, authors of Managing Small Business: An entrepreneurial emphasis, your business’s pro forma statement should answer the following three questions:

1. How profitable could the business be?
2. What will determine the amount and type of financing that your business needs?
3. Will the company have adequate cash flows to meet its regular expenses, such as salaries and bond payments?

In order to answer these questions, say Petty et al, business owners and entrepreneurs will need to complete financial forecasts in the following areas.

• Forecast profitability: In short, it’s the reason why you’ve decided to start this business: in the hope of some sort of reward. What return do you, the business owner, expect to receive on your investment? Answering this question should help you answer the ‘why am I doing this?’ component of your business planning.

• Forecast asset and financing requirements: The second pillar to effectively steer the financial portion of your business planning, they advise, is to consider what assets you will require before starting your company. What will you need, what finance must you attract in order to acquire these assets, and what will your levels of debt be as a result? Overinvesting will almost surely lead to that universally unwelcome shortage of cash flow.

• Forecasting cash flows: The mention of cash flow gives rise to the third major consideration in your financial business planning: Determining what your cash flow needs will be. Use the information from your pro forma income statement and balance sheet to develop your expected needs. From there, prepare a cash budget that outlines limits for expenditure.

If the thought of embarking on this exercise is somewhat daunting, consider bringing on part-time financial expertise to help get the job done. This should be someone you can trust to help you comprehensively map out your needs and that is suitably qualified and experienced. As this step will literally be laying the foundation of your business planning, the importance of relevant, professional input at this point in the process cannot be overemphasized.

Once you’ve got this basic framework set out, you can plot out the future of your business in the knowledge that your business planning will take place within safe, realistic parameters. And as long as you stick to your plan, the race your business runs will be a happy and successful one.

 

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