In 2019, a survey showed that almost 90% of all small businesses and startups fail. One of the primary reasons small businesses fail is due to a lack of proper management. Working without a financial plan, it isn’t easy to manage and effectively run any business, but why is that?
A financial plan is a comprehensive and personalized document that describes the financial position of a company. It details the company’s goals and outlines its business strategy. Developing a plan is key to creating a strategy that will help manage the businesses’ cash flow and revenue.
Listed below are some important tools for upgrading your small business’ financial planning and making your business strategy more effective.
Necessary Tools for Upgrading Small Business Financial Planning in 2022
In 2018, a study showed that 50% of small businesses that created a budget successfully reached their quarterly target. A feasible and detailed budget is crucial for financial planning and essential to the overall success of any business.
Construct your budget around your projected sales revenue for the next year to ensure that your budget is feasible. It’s advisable to use sales information from previous years to make the projected figure as realistic as possible. A budget makes it easier to set out goals, meet targets, and maximize revenue.
Payroll Management Tools
Timely payment of employee salaries is crucial for financial planning. When managing the payroll, it’s important to consider how wages will be determined and calculated.
It’s also important to take note of wage laws and policies that apply to your business. Additionally, you may need to apply for an Employer Identification Number (EIN) to file taxes on the payroll.
In 2019, as a result of errors in the payroll tax filing of some companies, the IRS issued about 5 million penalties. Payroll management tools and software make the processes of calculating and maintaining employee payments easier. These tools simplify the process of factoring this expenditure into financial planning.
Inventory Management Tools
Inventory management encompasses tracking, planning, and efficiently maintaining accurate records of the resources and products available in a company.
One of the most common methods of managing inventory is the FIFO (first in, first out) system. With this system, products are sold based on the date of their arrival or creation, with earlier produced goods being sold first. This method is especially useful for small businesses that sell perishable goods.
On the other hand, the ABC analysis system classifies items in the inventory based on their demand. This system may be more useful for focusing resources on products that are in high demand.
Inventory management is essential when making a financial plan for a new period. Although inventory management can be done manually, the use of inventory management tools ensures accuracy and ease. Inventory management tools such as Zoho Inventory and Vend help small businesses conveniently manage stock records.
Tax Preparation Tools
Tax preparation is the process of organizing and preparing the tax returns of your business. According to Forbes, having an excellent tax strategy is key to being a successful business owner.
As essential as tax preparation is, it can be overly expensive to hire a professional to prepare taxes for the company. Tax preparation tools allow small business owners to prepare taxes themselves while maintaining accuracy and productivity.
Properly classifying and registering your company is an important step when preparing your taxes. Registering your business as a Limited Liability Company, a Single Member LLC, or a Sole Proprietorship plays a role in determining how much tax you pay. To avoid overpaying taxes, ensure that your business is classified properly by seeking the advice of a professional.
There are vital parts of business finances that are indispensable to the successful running of the business. Financial statements are key tools of any business that accurately show a summarized record of the business’s financial activity, position, and operation.
These statements are also essential to investors as they provide an accurate description of the company’s financial state. Your financial statement should include a description of the assets, liabilities, and revenues of your business.
Ensure that your financial statement complies with the accounting principles that legally apply to it. Accounting principles are the guidelines your company must follow when preparing its financial statement.
Also, you may decide to include financial statement notes which explain the assumptions and accounting principles used to prepare the statement. If you do not have a detailed understanding of accounting principles, it is best to allow a professional to handle this.
Why is financial planning important for small businesses?
Financial plans are vital for the creation of good business strategies and proper risk management formulas. Four reasons why financial planning is essential for small businesses are listed below.
1. Monitor Cash Flow
It’s essential to draw up a financial plan to ensure that there is no shortage of cash or resources during operations. A good financial plan takes the cash flow statement into account because the income and profit statements do not accurately display the company’s financial position.
Your cash flow statement takes your investments, operational costs, and external funding into consideration. The cash flow statement is important because the business can generate profit while still suffering from a lack of funds. It’s easier to use the financial plan to monitor the cash flow trends since it combines the analysis of the income, profit, and cash-flow statements.
2. Measure Efficiency
An excellent way to know how well your business is doing is through a financial plan. As a small business owner, it can be easy to get carried away with the daily management of your business. A financial plan provides a birds-eye view of the financial season of the business. It also makes it easier to identify the problems and strengths of the company.
One good way to measure the company’s productivity is by checking customer satisfaction through surveys or reviews. If changes can be made to increase business productivity, this will be seen by reviewing and analyzing the financial plan.
However, drawing up a financial plan is not the only way to ensure business productivity. Measuring efficiency is not the only way for a business to improve its productivity, and there are many benefits to using them.
3. Encourage Investors
A good financial plan can encourage and attract investors to the company by allowing them to track the growth and potential of the business. Besides, lenders are less likely to back a business owner that does not have a clear, thought-out financial plan.
According to the Biz2Credit Lending Index, small business loan approvals dropped by almost 50% in the past year. Failure to create a comprehensive financial plan is why many small businesses are denied loans by banks and other investors.
4. Achieve Long-Term Goals
Every business has its long-term and short-term goals. A small business owner has to deal with various expenditures and sales daily, making it challenging to work towards long-term goals consciously. There are different types of long-term goals that can guide the direction of the business.
For example, you can set growth goals regarding how much expansion you hope to achieve, how much gross sales you plan to make, and how much of the market you plan to control. You can also set growth goals in terms of profit. An 8% increase in profit is a feasible goal to set for your business.
However, subjective factors have to be taken into consideration when planning your goals. Financial plans make it easier to make changes and implement strategies to achieve these goals.
Some tools and statements — such as profit and loss statements, balance sheets, cash flow statements, and personnel plans — powerfully affect the financial position of your business. As such, they are among the most important statistics to be considered when writing the financial plan of your business.
Similarly, your financial plan needs to consider and contain ratios, and not just a series of numbers. For instance, a liquidity ratio, which should be shown in the financial plan, describes the ability of the company to settle its current debts.
Lastly, it is vital to periodically review your financial plan to ensure that it remains adjustable to changes in your business.
If you’re running a small business, be sure to check out the online paystub generator when creating the monthly payslips for your employees.