Today, banking, and in particular refinancing, is on the minds of many small business owners, and one way to impress your banker and to speed up the loan process is through good financial planning.
Having a realistic set of projections, knowing your cash flow and how much you need to borrow, and why, helps the process. You may even seek the services of a Fairness Opinion Firm to provide an unbiased view of your business plans and strategies.
In addition, there are many benefits of using financial planning techniques for internal purposes. Yet it has been my experience as a business consultant, and as a CFO, that small businesses often do not do an adequate job of financial planning. And yet this is one of the most important aspects of overall planning and directing.
This may be because the company does not have the internal resources and does not seek them out as required. Or it may be that the owner does not see the merit in spending time (and money) in this endeavor, although there are outside resources that can cost-effectively contribute.
This article is intended to encourage the small business owner to commit to this practice on an ongoing basis. The following are some ideas/recommendations about financial planning for small business owners.
Financial planning ideally should flow from strategic planning. Once the long-term roadmap has been established, the strategic actions and expectations need to be captured in a financial model, and then tracked.
I am also a firm believer in performing (with the help of Excel) sensitivity and scenario analyses. (The former is where only one variable is changed and the latter is where two or more variables are changed). This adds important perspective to the possibilities of both upside potential and downsides from various risks and variables that could occur.
Presumably the long-term goal of the small business owner is to create value for the company and thus for him/herself. Understanding how value is evaluated (in the eyes of a potential buyer) and therefore how to increase value over time is important, and financial planning can assist with this exercise. My experience is that many small business owners really do not focus on value creation until one day they wake up and decide they want to sell! Better to have been planning ahead and taking certain steps to increase value before the sale sign goes up!
Financial planning, and its kissing cousin, financial analysis, should be directed towards ways to grow profitability, not just sales. In fact, sometimes a company can reduce its top line and increase its bottom line by weeding out those low-margin orders.
Developing an annual budget by month really should be mandatory and then compared monthly to actual results. This type of financial planning provides a tool to evaluate current operating results. I have seen some small businesses develop a projected Income Statement but not include a projected monthly balance sheet. The latter is very important as it will provide critical cash flow projections. Since growth in revenue almost always leads to the need for additional financing, it is important to know how much and when so financing plans can be developed.
Even with a monthly set of projections, managing the challenges of day-to-day cash flow suggests the use of a short-term financial model to help decision making, particularly with respect to inventory levels, accounts receivable, and accounts payable.
A large capital expenditure consideration should be put through the rigors of standard analytical tools to determine, not only its payback, but its contribution to value for the company. My experience is that many small businesses do not do this kind of analysis. It is not difficult and is worth the effort. Sometimes the analysis will suggest NOT to proceed, or that a change of assumptions is required to make it a value-adding expenditure.
In summary, financial planning with the help of an expert Financial Advisor can add significant value to a business by helping the business owner progress with more certainty, and it provides a tool to address challenges as well as opportunities. Keeping your banker happy is not all that bad either!
