Your company is bound to weather many storms throughout its lifespan, and a solid financial plan can help you be prepared. Nowadays, more than ever, it is imperative to be prepared. The world is in a delicate state, and business owners need to be properly prepared to best guard themselves against the economic fluctuations.
Let’s cover the basics of some key points of financial planning.
1. Plan your Cash: You need to have a short-term cash plan and a long-term cash plan.
The short-term cash plan identifies the incomings and outgoings on a weekly or even daily basis and should be accurate to within $100. Having a good grasp of the actions in the shorter cadence can help you brace the company in a recession. Use this as a chance to reach out to vendors to negotiate payment terms or put some on hold, or go through your software deck and see if there are any stale systems that you don’t need to be paying for anymore.
A long-term cash plan helps you identify your runway, the points at which you should be making large purchases, or seeking financing/investment and allows you to have some guidelines to follow when making other business decisions.
2. Focus on the operation: Setting your business up to be self-sufficient means you will not need to raise as many funds or raise them as often. It also means you’ll have better chances of raising funds when you do need them. Focus on the unit economics, the margins from each sale. Aim for profitability over top-line growth. Both are important, but whereas profitability can fuel further growth, growth without profit simply requires more cash to burn.
3. Taking care of your employees: It is vitally important that you take care of your employees. Salary expense is often the largest expense for small business owners, and is often the largest cause of wasted funds. You need to avoid bad hires and employee turn-over as much as possible. Hire slow and terminate the bad apples quickly. Put programs in place to retain employees: simple rewards like healthcare benefits, team activities, treats on Fridays, and consistently listening to employees needs/concerns. All this will keep costs down and encourage them to stay with you through the ups and downs.
4. Avoiding credit card debt, vendor credit or tax liabilities: A major oversight that often proves to be a detriment to early stage companies is taking on the wrong sort of debt. It is tempting to ‘put it on the credit card’ or ‘pay the tax office a little late’ if cash is not available. You may need to spend to take advantage of an exciting opportunity, and you may think you can pay it back quickly. But this is the wrong sort of debt. Business loans and lines of credit are a much better vehicle. The wrong sort of debt comes with angry collections agents, government letters and spoiled relationships with suppliers.
You can’t get too excited when money comes in. You may have found a cash cow client, bringing in more revenue than you had planned for. However, you need to stick to your budget. Save that money for the bad times, there may not be any for a while, but it will come. That extra funding could be the difference between another active year and bankruptcy.
Even if you follow your plan to the letter, revenue is good, and all of your employees are happy, you need to be prepared. When starting out your business, you need to keep the internal and external factors top of mind. While you can easily prepare for the internal factors, our world is constantly shifting from what we are used to, so we need to be as flexible as possible. Financial planning is more important than ever, you are building the foundation on which your company and all the employees’ livelihoods will rest on, no pressure. Be cautious and tedious when planning out your company, leave no area unexplored, and cover all your options to secure a safe future in this world of uncertainty.