A Structured Financial Plan is a key to success that allows you to organize your finances, measure the progress and focus on achieving your long-term goals. It might feel overwhelming when you get started, but the truth is that this section of your business plan is essential and the most vital to understand.
WHAT IS A FINANCIAL PLAN?
A financial plan is a document giving an overview of a person’s or company’s current money situation and long-term projection of growth, as well as strategies to achieve those goals.
WHY IS FINANCIAL PLANNING IMPORTANT?
Financial planning is essential for all – whether you’re just a startup or in business for the past 10 years, having a strong financial foundation will help you get ahead in the long run.
The better you can manage your financial situation, the more resources you will have in hand for your business. You should assess your finances and consider measuring your startups’ financial metrics to have a long-running successful business.
Not only does it help you set realistic expectations but it also helps you attract investors as a thorough financial plan makes you at less risk and shows that you have a firm plan and a good track record in place to grow your business.
Here’s how you can build a personal and business financial plan in 11 steps –
1) Assess Where You Stand
Firstly, to make progress you need to know the steps you have to take that will help you understand where you stand while starting and what weak points have to be taken care of to achieve those specific business goals.
Measure Your Expenditure
A great way to know whether you are headed in the right direction or not is by tracking your expenses. To keep a check on money flowing in and out of business is a great way to assess where you stand. The cash flow process will ensure that you have funds available for the next billing cycle.
Ascertain Your Net Worth
Another way in this process is to ascertain your net worth. Subtracting your liabilities from your assets will give you your net worth. Wherein, assets include everything you own like home, car, money in your bank account, and liabilities include everything you owe like loans, mortgages, or debts.
Having a positive net worth is what we look forward to for having good financial health. The ratio of assets to liabilities keeps changing over time and is why it is of utmost importance to regularly keep a track of your net worth.
Also Read: How to Calculate the Future Worth of Your Present Money
2) Develop Financial Projections
Create monthly or weekly financial projections based on your anticipated income and expenses. Also, prepare a projected balance sheet and income statement based on various situations. This will help you anticipate the impacts of each project on your sheets.
3) Set SMART Goal
Every company has a list of goals and dreams they want to achieve. If you don’t, start today by putting together a list of your goals to be achieved in a long run.
With the help of SMART goals, you can better plan your finances and put your efforts into goals that need your attention now. Here are a few points you have to stick to while creating SMART goals –
Specific – All plans need to be concrete and detailed.
Measurable – Create a system to measure progress.
Achievable – All plans should be possible and realistic.
Relevant – Plan for something that matters to you.
Time-bound – Keep yourself accountable to a timeline.
Setting goals keeping all the above in mind will help you stay motivated and keep your expenses in place. Remember, your company goals won’t be the same all your life. So make sure your finances follow in line.
4) Creating a Budget
It is important to create a budget and stick to it to smoothen the financial planning process and a well-prepared projection will give assurance to bankers that your financial management is solid.
The 50/30/20 rule is one of the most popular and simple methods of budgeting. Under this, you divide after-tax income into –
- Essentials (50 percent)
- Wants (30 percent)
- Savings (20 percent)
The above rule will help you plan your goals better and achieve all monetary goals.
5) Saving Up for an Emergency
You already know that you should be saving and storing money in case of unexpected challenges. It is important to save money and build a few backups in our good times, whether you’ve been saving for years or just starting your journey.
This one practice of saving will help you go a long way and help you out in your bad times.
6) Pay off Debts from time to time
Prioritizing debt payments from time to time can give you success in the long run. There are two payment methods available to pay off debts
- Debt Snowball Method – Under this method, you have to prioritize paying off small debts first. This will keep you motivated and help see small instant progress.
- Debt Avalanche Method – Under this method, you start to make minimum payments on all loans. Then, with the leftover money, pay off the highest interest rate loans. This way you can save the most money in interest payments.
Make sure to understand these two above methods completely before opting for one of them for you to make smart financial decisions in near future and be disciplined with the payments of your debts.
7) Plan out an Exit Strategy
If you plan to continue and run a business in the long run and intend to seek investments based on the business growth then having a business exit strategy is of great concern. An exit strategy consists of two components:
- how you allocate money.
- how you can access that money.
Moreover, not all companies need a business exit plan. Only the people who intend to take from the profits of the company at the time of their exit are intended to do so. An exit strategy is of utmost importance to your business to match every savings and investment goal in your financial plan.
8) Plan your Taxes
Planning out your taxes is of utmost importance and has a great impact on your long-term financial goals. While planning for taxes, a few points to consider are
- How to reduce taxable income – Capitalize on tax-saving investment options.
- How to itemize your deductions.
9) Insuring Assets
Now comes an aspect as important as investing, that is Insuring your assets. While creating a financial plan, you need to have an insurance policy too to protect yourself from unforeseen conditions.
Below, I’ve mentioned the types of insurance you can get to protect your assets –
- Life Insurance – Life insurance works great to provide funds to the individual’s beneficiaries after they die.
- Homeowners Insurance – Home being one of the most valuable assets one owns, it is important to protect it against any calamities or crimes. Paying time to time premiums and insuring our home is a much-needed thing to do.
- Health insurance – Health insurance covers medical expenses when needed. hence, protecting the most crucial asset, your life.
- Auto insurance: Auto insurance covers the costs incurred due to theft and damage to your vehicles.
- Disability insurance: Disability insurance is reimbursement of any income lost due to illness that prevented you from working.
Other than this, your business financial plan should have all the business risks laid down. Mostly the risks would be financial, and your plan should be a persuasive tool to help you get support for your business.
10) Get Help
If you ever feel that your financial planning lacks expertise, You should contact experts and take help. This keeps you motivated and helps you get together a nicely outlined financial plan.
Also Read: Financial Planning Tips for Business Owners and Startups
11) Monitor Plans Regularly
Creating a plan once and for all and then not reviewing and regulating is a big no-no. Your financial plans should be evaluated and adjusted periodically and as business changes and grows.
Here are a few ques