Financial planning has always been a complex task for businesses, large and small. However, with the ongoing crisis, it has become more difficult. A massive percentage of organisations are widely at different levels of liquidity and financial situations. This calls for a new approach to managing finances and adjusting both controllable and uncontrollable economic variables.
Proper financial planning, including an integrated, end-to-end plan, can help stimulate operating elements of businesses.
How To Strategise An Effective Financial Planning?
Find out ways below on how to sail through this period of uncertainty.
1. Understand The Correct Time For Forecasting
Start resolving short-term challenges. First, set plans for now, i.e., up to 90 days, next, i.e., up to 12 months, and then for longer-term trends.
2. Determine What Drives The Financial Forecasts
While most drivers have remained unchanged, there are quite a few created due to the ongoing pandemic. Understand how those drivers are hampering your business.
3. Make Rapid Changes Per External Factors
For this, a business owner needs to determine or perform the following –
- Gathering accurate data from the recent trends
- Regularly scrutinising sales, cost of goods sold, working capital, etc.
- Studying changes in macroeconomic situations or any underlying factors
- Improving cash conversation cycle
- Assessing cash flow and operating expenses routinely
- Evaluating daily cash available premised on weekly accounts receivables and payables
- Speeding up sales and delivery cycles to get paid quickly
Other than these, it would help if you made sure customers pay on time. To that end, you can consider sending a friendly reminder or extending incentives for early payments.
4. Strengthen Cash Flow By Opting For Alternate Financial Options
External financing can help businesses keep operations afloat. However, companies might struggle with acquiring traditional loans because of rising delinquency rates in the sector. As such, businesses can consider alternate financing options like the ones listed below –
It helps accelerate the cash conversion cycle. Herein, investors can obtain the necessary funds tied up in accounts receivables by leveraging unpaid and approved invoices. Lenders offer a percentage of the total invoice value, repayable when customers are slated to clear their dues.
Those facing a working capital shortage can avail invoice discounting from cash flow solution providers like KredX. The benefit of ID is there is no need to transfer the sales ledger or credit control activity to the lender.
Revenue-based financing is a royalty-based financing method and a sure-shot option to mitigate a cash flow crisis. This is an agreement between an investor and a company. The former agrees to provide capital to the latter against a certain percentage of the company’s future revenues.
In RBF, investors receive a share of the gross revenue till a predetermined amount is paid. This predetermined amount is typically a multiple of the principal invested. Generally, this amount ranges between 3 and 5 times the actual amount invested.
Herein, businesses do not need to share ownership or pledge a part of assets as collateral. Moreover, RBF is easier than debt or equity financing as it requires less documentation.
Letter Of Credit
It is a letter issued by a financial institution, guaranteeing a buyer’s on time and full payment to the seller. However, if the buyer fails to make a payment on the purchase, the financial organisation will cover the full amount against the purchase.
Being a negotiable instrument, a financial corporation typically requires securities to be collateralised for issuing a letter of credit.
This financial facility enables a businessperson to withdraw funds from their bank account, even with zero balance. Unlike other credit options, creditors do not levy an interest rate on the overdraft limit. Instead, it charges interest on the sum utilised from that limit.
It is essentially a revolving credit facility where one can deposit or withdraw funds anytime up to a predetermined limit. Creditors evaluate the interest rate regularly. However, EMIs do not exist in the case of an overdraft facility.
5. Segregate Personal And Business Accounts
Often start-up owners fail to balance between personal and business goals. As a result, it can hamper professional growth significantly. Therefore, handling separate accounts for business and personal needs can considerably minimise disruptions in the process of development.
8 Benefits Of Financial Planning
The tips described above on financial planning can help a business in the following ways –
- Improves cash flow management
- Helps allocate the budget better
- Reduces unnecessary expenses
- Helps structure growth roadmap
- Cuts down the risk to a certain extent
- Helps manage crisis effectively
- Maintains transparency with investors and workers
- Helps gain clarity regarding upcoming goals
Though economic conditions may improve, some changes will be permanent. Aspects like managing relationships with customers and suppliers, maintaining enough liquidity based on predictable demand levels may differ from the way they were before this crisis.
However, considering the enlisted ways of financial planning can guide one in manoeuvering through this uncertainty seamlessly.