Dollars to Donuts – The Importance of Business Financial Planning

There’s an adage that goes “no business planning? plan to have no business”, and while some recent upstarts have been running around waving their arms around proclaiming “you don’t need a business plan, don’t waste your time”. At some point, you do. It might not make sense to create one at the inception of an idea of what you’d like your business to be, however, once you start thinking about customers and marketing, that would be a good point to put some financial data together. Remember, even the most disruptive, game changing, thought leading companies out there still need to pay their rent and employees. (How was that for buzz word compliance?)

My other favorite adage of recent note is “your company should be producing revenue whether or not you’re at work that day”. In fitting along those lines, as part of my role in the company I’m working with, I’ve been thinking about ways to create reoccurring revenue via licensing streams and reseller opportunities. Neither of these options are going to spring alive fully formed and ready to go. Both paths will take time, effort and cost to set-up relationships and build customer bases for.

Regardless of which, if either, path we choose, I’ve entered into running multiple forecasting scenarios for upcoming revenue. Forecasting is a good exercise to conduct a couple of times a year, it allows you to take a look at where you are, review variables for how successful (or not) your current revenue streams are, then make informed decisions – like where to expend marketing effort, from the results.

I like to run the worst case scenarios first. I feel as though if you can conquer the worst case scenario for any situation, you remove much fear, unknowing and doubt from your actions. In my spreadsheets I have scenarios of “what our revenue decreases by 50% for 6 months” (it would be a struggle and after month 2 we need to reassess the business goals and opportunities ) as well as  “what if we run out of operating cash” (less survivable and probably game over). While no one wants to mange themselves out of a job; what the exercise is doing is to help establish where you might run into trouble on your current course walking the line between revenue and overhead.

Now that you’ve looked at the worst case scenario, it’s easier to approach where it makes sense to address growth opportunities. Growth comes with costs, whether tangible or intangible. It invariably means more overhead expenses including equipment and or possibly moving into a larger location to support additional staff. Many pundits are advocating slow-growth company cycles. This is not a bad idea as until you are running your company, it can be tough to you see where the potential for increases are, and having initial slower growth periods can help identify them.

Back on the upside, along with growth, doing periodic financial budgeting and forecasting will allow you to arrive at a company valuation, and personal equity in it, regardless of what, if any exit strategies you might have. In addition, if you’re going for funding, having a solid understanding of what your company is worth, will be a benefit in the negotiation process.

Knowing what your company valuation is, is useful in other areas as well. Perhaps you just need something as simple as a corporate credit card, or a line of business credit to help with short term purchases. Banks want to know who they’re dealing with and what the risk value is of the credit they’re extending. Being able to walk in and talk to a banker with your balance sheet in hand goes a long way to getting approvals and building relationships with them.

Businesses inherently have many moving parts, but in order to keep the momentum, it’s important to check in and see how the financial part is moving, and what steps need to be taken to keeping it so.

How often do you review and forecast your company’s financial data?

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