Read Time: 3 Mins
As an SME, managing finances can be challenging as you likely have limited resources and perform multiple roles, while also managing economic volatility and compliance on your own.
However, a financial plan can help you optimally plan your finances to achieve your business goals and increase your chances of success.
In this article, we will discuss why a financial plan is important and the steps to prepare one.
Why is a Financial Plan Important?
In South Africa, the SME failure rate is one of the highest in the world (90%) with most businesses failing due to poor financial management.
A financial plan can help you avoid this fate by helping you plan, make informed decisions, and identify growth opportunities.
Preparing a Financial Plan can be complicated, but it is essential for managing your finances effectively.
To prepare a Financial Plan, follow these steps
Step 1: Analyse the current financial position
- Review the financial statements (the income statement balance sheet and cash flow statement), including each of the line items, profitability ratios (gross profit % and net profit %), asset management ratios (e.g., working capital days), and the return on invested capital (especially if you are the owner).
- List the various contracts and costs that the business has entered into and identify if there is room for streamlining.
- Look at the pricing charged to customers and compare it to the market.
- List available resources like employee capacity and tech in preparation for the Vision step.
Step 2: Define the Vision of the Financial Plan
After analysing the current financial position, create the vision of the business.
Using a Design Thinking methodology, prepare a brainstorm of all the ideas you have for growing your business.
Next, prepare a business analysis to identify opportunities for growth, including conducting a SWOT analysis, PESTEL analysis, competitor analysis, customer interviews, and employee interviews.
Using the insights from the business analysis, choose the best ideas from the brainstorming.
Optional: Build Prototypes to test your ideas
Set SMART goals from the best ideas.
Check out this article for more details on how to set goals
Step 3: Map out the financial impact
For the goals created, list the actions, activities, and resources needed to achieve them.
Using the actions, activities, and resources, map out the financial impact.
If the activities are revenue-generating, map out the revenue that is expected. Identify any direct costs and overheads associated with the new revenue that is expected to be generated.
Step 4: Prepare an Income Statement
Now that you have identified the Revenues and costs for the growth activities, you are ready to prepare an Income Statement.
Finally, Combine the income statement of the existing and growth activities.
Note: A balance sheet and the cash flow as well can be included as well, however, these are not covered in this article as they are quite complex to prepare. For growing operations, an income statement is adequate.
In conclusion, a financial plan is critical for the success of SMEs. By following the steps outlined in this article, you can prepare a Financial Plan that will help you achieve your business goals and increase your chances of success.
Want to work with me?
There are a few ways I can help: