Business owners have to deliver great outcomes for their clients. They also need to deliver outcomes for themselves.
A financial strategy for your business will help you achieve what you set out to achieve. It will also provide a great financial return.
There are five elements of financial strategic plan:
1. Corporate Structures
Traditionally, business structures start with a sole trader and end with a company. With a range of alternatives in in between: various trust structures, partnerships and the like.
The structure of your business defines how the business is going to be run. How the profits are going to be distributed. And ultimately, how, upon disposal of that business, any capital gain is going to be traded.
One of the biggest considerations in correct structuring is the mitigation of risk to the business owner. Ideally, we want to remove or mitigate the risk to a business owner’s personal assets if there is a failure in the business.
Situations change. So, a yearly review process for key business agreements is important. You want to make sure that your agreements remain relevant and appropriate for your business.
Some of the key agreements might be the lease for your premises, your staffing contracts and your supplier contracts.
3. Accurate Profit and Loss Budgets
A Profit and Loss Budget is a forecast of the future profitability of the business. Like the Cash Flow Budget, a Profit and Loss Budget can be done for different time frames but the most common is monthly.
The idea is to track the performance of the business against the budget.
By doing an actual vs. budget comparison on a monthly basis, you can identify areas where the business is performing to expectations, below expectations or above expectations.
4. Accurate Cash Flow
Cash flow budgets need to be as detailed as possible, so they give an accurate picture of the business’s expected path.
Note that budgets are based on best estimates. One hundred percent of the time, estimates will be incorrect – by a little or a lot. That’s why cash flow budgets are ‘living’ documents. They must be updated when changes to your expectations or business circumstances become apparent or likely.
No one can perfectly forecast the future and budgets aren’t infallible. They reflect the best estimates of business owners and their advisors. Budgets alone won’t get you to your destination. But without them, you’re driving in the dark with no lights.
A budget gives you a focal point. A basis from which to make decisions.
Your business may not fail without a budget. But it will – categorically – make it harder to achieve your goals. Making the best decision is easier when you have all the information. And budgets are a key part of your business information.
A consolidated, formalised financial strategic plan is imperative. That plan will protect your personal assets and improve your ability to access profits from the business. Most importantly, it gives you peace of mind.