Financial Planning 101:
3 Tips Small Businesses Should Include in their Plan
In America, SMEs were 99.7 percent of employer firms. Of this, 89.6 percent of them employ less than 20 persons. With these statistics, it is safe to say small businesses are essential in the American economy. When starting or running a small business, one of the most crucial and beneficial things you can do is financial planning. Once you decide whether your business idea is viable, it is time to begin planning. Failure to thoroughly plan can eventually mean failure in your business.
A business’ financial plan affects all other facets of the business, ranging from its marketing plan and rate of growth to its future feasibility and access to finance. Proper financial planning will in short, help you manage your business and personal finances so as to best achieve your goals.
If you are wondering where to get started, take a look at these three tips.
Look at the Big Picture: Diversify
As alluring as it may seem to you, consider diversifying your assets and not investing solely in one business. You will be tempted to plug all of your cash and particularly your savings into your business. However, by diversifying your holdings and cash flows you are not only managing your risk but if done right, you can maximize the returns from your investments.
When setting your investment plan, consider other avenues in addition to your business. Small businesses can be extremely volatile and risky. Investing solely in a small business means all of your income rests on your business succeeding. In addition, your small business may be making a profit but its growth and turnover may be low compared to other investments. Therefore, you could be getting a much higher return from that spare cash you are thinking of plugging into your business’ account. With the higher return, you are now left with additional funds to expand your business.
A great starting point for your investment plan is to accumulate a cash safety net for your business. Setting aside approximately 6 months of expenses protects you, your family and your business’ longevity should you fall on hard times or see a slowdown in trading. Next, look at other companies and stocks to invest in. These shares will be earning your business returns and increasing your capital if invested. Bonds are also a great addition to any investment portfolio. If you are interested in more recent investments, digital assets including currencies such as cryptocurrency can be the answer. For more help with understanding company shares, offerings and investing, you can contact a financial planner.
The Balancing Act: Income Vs Debt
Every business needs to continually play the balancing act with their income and debt. Deciding how much debt to take on depends on many factors of your business. One useful tool to help you with this is a cash forecast. Doing a cash forecast is essential; it tells you whether you can afford the costs of debt. Remember to take into account not only the repayments but also the interest costs.
If you are just starting your business, the cash forecast will also indicate the amount of capital needed to get your vision on the road to becoming a reality. This is very useful when deciding whether to pursue external financing and when considering your available sources of finance.
If you do choose to seek external finance, there are various avenues for small businesses. Take the time to carefully consider both the benefits and drawbacks of each option before deciding on the one or combination that best suits your business’ needs. When drawing up your financing needs, add a set percentage to cover unexpected expenses.
Protect Your Assets
Protection of your assets are good for many reasons and comes in many forms. Immediately, protection of your assets sets your mind wandering to asset and property insurance. Repairs of faults or damage can be costly and heavily interrupt your cash flow. By ensuring you have insurance, you are preparing for the future and establishing a contingency plan to deal with these costs.
However, property and machinery are not your only assets. Your employees are vital resources and key elements in your business’ success. Take a look at health and compensation insurance for your workers. Not only are you protecting your business and employees in the event of medical needs arising, you can also be ensuring longevity of your business. Accidents at the workplace can occur and can cost small business’ more than they can afford if not protected by insurance. If your business employs three or more persons, workers compensation is compulsory.
Finally, don’t forget to think of yourself as an asset. As the owner and entrepreneur, your value to your business should not be underestimated. Consider life insurance and health insurance to cover your family and yourself in the event of any illness. It is also a good idea to plan for retirement and look at pension plans or other retirement portfolio options. Small business owners can benefit from 401 k plans or other retirement plans. A financial planner will be able to give you more information on your options and what is best suited for you.