What are the advantages of Financial Planning?

No matter how accurately you keep track of your income and expense, failing to plan your business’s finances can lead to unnecessary interest payments, lack of capital during critical periods, and eventual legal problems. Using a few basic budgeting, forecasting and tracking techniques, you can maximize your profit potential.

Cost Controls

One of the most crucial benefits of financial planning is the ability to control costs. Creating annual budgets lets you see your big expenses, plan for them, reduce them if necessary, and monitor them to see if you are on track to meet your goals. Setting a budget doesn’t necessarily solve your problems. You will need to track it each month to make sure your revenues are keeping pace with your expense and profit targets, and to determine whether or not you projected your expenses correctly.

Cash Flow Management

Just because sales are good doesn’t mean you’ll have that money when you need it. Financial planning includes cash flow management, identifying in advance your cash needs each month, regardless of your revenues. If you have slow payables or bad debt during times when you have high bills, you might lose the ability to order goods and services that keep your business running. In addition to creating a master budget that shows your average monthly income and expenses, create a cash flow budget that shows your anticipated actual income and expenses each month.

Improved Debt Management

The interest on credit lines, loans and credit cards is a hidden cost many small-business owners don’t track, because interest is tacked on to a balance and doesn’t require a cash payment each month. A financial plan should address your monthly interest payments, putting them into your budget so you learn your real financial performance. Your plan should address accelerating debt repayment, if possible, to reduce your interest expense.

Accurate Tax Compliance

Financial planning includes estimating your taxes and adjusting your estimates as your sales rise and fall. Failing to pay income, property or payroll taxes on time can result in serious problems, including fines, penalties, and liens placed against your business. If you pay quarterly taxes, budget for those payments and put that money aside. Work with your accountant to determine how to set up your tax payments and make them on time.