There are many parts of the business world that can be difficult to navigate without preparation. From the nuances of stocktaking and the production pipeline to managing the interpersonal struggles of office life, being a business owner comes with a wide array of stressors that certainly aren’t going to be for everybody. However, one of the main issues that entrepreneurs often come up against is the game of 4D chess that is financial planning.
The fact is that businesses need to be able to plan ahead for all possible futures. Employees need to be paid, suppliers need to be paid, and bills and taxes need to be paid, all while you’re navigating what can be a very volatile system in which consistency of income is never truly assured. According to financial strategist Melissa Houston, most businesses fail due to poor financial planning, as well as a lack of understanding of finance as a whole.
So, why is financial planning such an essential part of business success, and why should businesses always be looking over the horizon?
The Market Is Often Out Of Your Hands
It’s impossible to plan for every possibility. If you were a physical retail store or the owner of a restaurant chain in 2020, the COVID-19 pandemic likely changed how you operate forever in ways that no individual business could have predicted. Whilst we’re unlikely to see another cataclysmic shift in society on that scale in the near future, fingers crossed, one of the lessons that many businesses have been forced to learn the hard way is that the market is subject to factors that are simply out of our control.
Whether it be trends, new research, new competition, or yes, a global pandemic, there will always be ways in which your business or industry can be thrust from the comfort of normalcy and leave you on uncertain ground. Whilst you may not know what will cause this shift, you can prepare for what eventualities may transpire. Get an online MBA degree, start to take a closer look at your expenses, and have financial preparations in place for a situation in which one or several of your business’s parts are disrupted.
Many Businesses Overspend Without Knowing It
If you don’t have a strong plan for your finances, you likely don’t have a strong understanding of where your finances are going, and if you don’t know where your finances are going, then you don’t know how your business is going to deal with setbacks. As surprising as it may be to learn, many businesses are working on razor-thin margins, in the sense that practically all of the money coming into the business is also leaving it. Whether this be due to high salaries, high importing costs, high material costs, or just finances being spent on unnecessary business expenses, a distressingly large number of businesses see more money coming in as more money that can be spent.
There is some debate about how much money you should be saving as a business, and how much is cause for concern. However, American Express suggests that three to six months of operational costs should be the goal for savings, and this does make a lot of sense. Even if catastrophe hits and you need to pivot massively, having that buffer of six months is a fantastic safeguard against many of the issues that may lay just beyond the horizon. This will also give you a safety net for more intentional pivots, such as changing suppliers or shifting your brand into something that may take time to get off the ground.
Keeping The Future Clear
You may have a vague idea of where you want your business to end up in five, ten, or twenty years, but do you really know how you’re going to get there? As a business owner, I’ve worked with many excitable entrepreneurs who have dreams of earning $2mil in the first 24 months of their business, and as much as you don’t want to burst their bubble, eventually, you have to ask what they’re basing that number off. Running a business is expensive and difficult, and for every $100 a new business earns, they’re likely to see $75 walk out the door due to expenses, taxes, employee salaries and more, which is rarely factored into that dream of being a multi-millionaire by Spring.
By working on your business financial planning, you’re not only safeguarding yourself against surprises. Rather, you’re showing yourself the path ahead, and allowing yourself to tweak that path towards your goals. Knowing where all your money is going now means it will be easier to figure out where your finances should be in ten years’ time, and whether your current trajectory is going to allow you to reach the goals that you’ve set out for yourself.
Things will change, and goals are never quite as easy to achieve as we may hope, but at least you’ll know when things start to veer off track. When the day comes that your path is different from the one you had initially planned for, then you can plan all over again, and the journey continues.
Business Finances, Horizons, And Conclusions
The ways in which we think about the future are often more tied to money than we’d like to believe. We think about our families, our retirements, and what we will be able to do when we hit certain financial milestones. It’s healthy to be concerned about how your financial situation is going to shift over time, but for your business, it is an absolute necessity.
Remember that a business has a lot of people relying on it, both as customers and as employees. So, you owe it to them, and yourself, to ensure that your business’s financial planning is as robust as it can possibly be. So, take that MBA course, hire an accountant, or just sit down and work it out with your team; your future self will thank you.