Using financial planning to ensure your business's success

At Sasfin, we often speak of small and mid-sized businesses (SMEs) as the lifeblood of our country. SMEs keep money flowing through our economy. They are employers. They are suppliers and customers. With the right support and product offering, they have the largest opportunity to expand.

But in order to succeed, SMEs need a lifeblood of their own – they need solid financials. Which means they need to use financial planning to set themselves up for success.

Understanding the finance gap

While SMEs are often innovative and able to bring new ideas to market quickly, they also face significant challenges, such as securing start-up funding, managing expenses until profitability is achieved, and navigating uncertain economic conditions. The first five years of a business can be particularly challenging, with failure rates ranging from anywhere between 40% and 80%, depending on which study you read.

Unfortunately, lack of proper financial planning is often a major contributing factor to small business failure. Here’s the good news. With smart financial management and strategic planning, it is possible to achieve success. Ultimately, by aligning business goals with a financial plan, small businesses can better navigate the challenges of the first five years.

The importance of a strong financial plan

With today’s access to information and experts, creating a financial plan can help SMEs in several ways, from providing direction for managing the business to identifying potential costs. A good plan also helps a business owner manage cash flow, control spending, budget for expenses, and protect the business with insurance. Additionally, a financial plan can help identify trends and respond proactively to opportunities to run a better business.

For business owners who do not have a financial background, it may make sense to seek the advice of a business consultant to achieve these goals. Your business bank relationship consultant can also give you some guidance and there are many online financial and budgeting tools that can help you, as well as support structures and organisations that can provide valuable insights and tools for identifying areas of risk, development, and opportunities that you may not have considered.

Here are a few key areas to keep top of mind as you create your strong financial plan:

• Take into account the main challenges faced by start-ups and small businesses. You cannot plan for them if you haven’t considered and documented them.
• A good financial plan includes a budget and projection of financial needs, which can help plan for and obtain the necessary financing to help the business survive and grow. In the long-term, this means effectively managing cash flow, growing assets, and anticipating current and future financial needs that will help the business thrive.
• Starting a business often involves many hidden and unexpected costs. Monitoring your cash flow, both personal and business, is crucial to ensure the success of your venture. It is easy to get caught up in the excitement of starting a business and neglect expenses, so it is important to implement a cash flow management system and to track it daily to avoid any surprises.
• Many start-up business owners have reported that they underestimated the costs and time required to start generating profits. To avoid this, it’s important to make conservative estimates and projections using a ‘worst-case scenario’ approach, and include extra funds just in case actual costs exceed projections.
• Sound financial planning should be done at the start of the business and revisited at least once a year as the business develops. It’s also important to regularly compare monthly results to the financial plan and make adjustments as needed to strengthen the business in response to any changes or challenges.