A quick guide for SMEs to create a financial plan for success

Financial planning is a crucial aspect of any business, regardless of its size. However, for small and medium-sized enterprises (SMEs) operating on limited resources and facing more significant financial risks than larger companies, it is paramount. 

In this article, we will take you through the ground--from managing cash flow and forecasting future growth to effective financial planning to help SMEs make informed decisions, reduce financial uncertainty, and achieve their long-term goals.

What is financial planning?

Financial planning involves drafting a comprehensive plan for managing an organisation’s financial resources. 

It involves:

1. Analysing current financial situations
2. Forecasting future income and expenses, cash, inflows, and outflows
3. developing strategies to achieve specific financial goals

Financial planning goals can vary depending on the organisation’s objectives, but they typically include optimising cash flow, reducing costs, increasing profits, and maximising return on investment. 

But there is more than what meets the eye. While it helps manage cash flows and helps put your finances in order to help attract capital, there are many other benefits that come with having a sound financial plan.

Let’s take a look.

1. Better Decision-Making: A financial plan helps businesses make informed decisions by providing accurate and up-to-date financial information. By analysing the organisation’s financial situation and forecasting future income and expenses, a financial plan helps businesses make better decisions about investments, resource allocation, and risk management.
2. Improved Financial Management: It helps businesses manage their finances more effectively by setting clear goals and objectives. It provides a roadmap for managing cash flow, reducing costs, increasing profits, and maximising return on investment. A financial plan also helps businesses monitor their financial performance and identify areas for improvement.
3. Increased Financial Stability: A financial plan helps businesses achieve financial stability by ensuring they have the necessary resources to meet their financial obligations. It allows companies to manage risks by identifying potential financial threats and developing contingency plans to mitigate them.
4. Better Preparedness: It also helps businesses prepare for the future by anticipating changes in the market, industry, or economy. By analysing trends and forecasting future scenarios, companies can be better prepared to adapt to changing circumstances and take advantage of new opportunities.
5. Attracting Investors: It helps businesses attract investors by demonstrating financial stability, growth potential, and a clear roadmap for achieving financial objectives. A well-crafted financial plan can also increase investor confidence and make the business more attractive to potential investors.

How to create a financial plan?

Creating a sound financial plan involves several steps that businesses should follow to ensure their plan is comprehensive, accurate, and effective. Here are some critical steps to creating a sound financial plan:

1. Define your financial goals: Identify your objectives, such as increasing profits, reducing costs, improving cash flow, or expanding your business. Your financial plan should align with your overall business strategy.
2. Analyze your current financial situation: Assess your current financial situation by analyzing financial statements, cash flow statements, and other financial data. It will help you understand your current financial position and identify areas for improvement.
3. Forecast future income and expenses: Use historical data and market trends to forecast future income and expenses. It will help you create a realistic financial plan that considers potential market or economic changes.
4. Develop a budget: Develop a budget that outlines your projected income and expenses. Ensure inclusion of all costs, such as overhead costs, salaries, marketing expenses, and capital expenditures.
5. Monitor and adjust your financial plan: Continuously monitor your financial performance and adapt your financial plan as necessary. Regularly review your financial statements and other financial data to ensure you are on track to achieve your financial goals.
6. Seek professional advice: If you lack the expertise or resources to create a sound financial plan, seek a professional financial advisor or accountant. They can provide valuable insights and help you develop a comprehensive financial plan that meets your business needs.

A good financial plan should answer the following questions:

1. Where are we now? This question addresses the current financial situation of the business. It includes an analysis of the financial statements, cash flow, and other financial data to provide an accurate picture of the business's current financial health.
2. Where do we want to be? This question addresses the financial goals and objectives of the business. It clearly defines the desired financial outcomes, such as increased profits, reduced costs, improved cash flow, or expansion into new markets.
3. How do we get there? This question addresses the strategies and tactics that will be used to achieve the financial goals and objectives. It includes a comprehensive plan that outlines specific actions, timelines, and milestones for achieving the desired financial outcomes. 

Effective financial planning is crucial for the success of any organisation, as it provides a roadmap for achieving financial stability, growth, and long-term sustainability. A financial plan typically includes a budget, financial statements, and other reports that help organizations monitor their financial performance and make informed decisions about investments, capital expenditures, and other financial activities. Financial planning can also help organisations manage risk by identifying potential financial threats and developing contingency plans to mitigate them.