Strategic Financial Planning To Boost A Small Business

According to a survey in 2020, the economic slowdown had negatively impacted 80% of Indian companies with a reduced cash flow. A positive cash flow is important for effective business operations. 

Whether you own a small or large business, sound financial planning is essential for proper cash flow management and ensuring financial stability during an economic crisis.

It allows a business owner to identify the critical financial inefficiencies and pitfalls to avoid. Here’s a detailed guide on why and how you should adopt simple financial planning to ensure smooth business operations and survive market fluctuations.

Why Is Strategic Financial Planning Important?

Strategic financial planning begins with accounting, budgeting, forecasting to create an actionable business goal. Take a look at few listed benefits below:

• Effective financial planning ensures proper cash flow management. While creating a financial plan, one must consider the cash flow statement to assess any inadequacies in cash reserves and accordingly leverage credit to cover short-term operational costs. 
• Financial planning offers a draft for a long-term business goal. It allows you to see the outlays, account receivables, liabilities like tax payments, outstanding dues, etc. 
• Accordingly, it helps create a forecast model based on the current financial position. These forecast models can vary monthly, quarterly, or annually depending on business needs. Thus, it allows businesses to survive economic uncertainties or enable proper allocation of resources during increased sales.
• Strategic planning can prioritise expenditures that bring immediate benefits and postpone discretionary or unnecessary spending.
• It offers clarity by providing insights into how a business is growing or inefficiencies to improve accordingly.

How To Create A Financial Plan For Your Small Business?

Now that you are familiar with the benefits of strategic financial planning let’s dive into a detailed guide of how to go about it – 

Differentiate Between Personal And Business Objectives

Most small business owners make the mistake of overlapping their personal goals with business objectives. However, balancing both is imperative as personal goals can interfere with your business plans for expansion or tapping into new business opportunities. Also, make sure to create a separate personal and business current account to avoid discrepancies in transaction records in the future.

Determine Your Business Financial Health

Begin your planning with the current fiscal status of your business. Next, take a look at your accounts and cash flow statements to get an insight into the inflow and outflow. Then, create a cash flow forecast model to cater to multiple revenue scenarios. Your next step includes covering up inefficiencies if any. 

For example, reducing variable costs like hiring, decreasing discretionary costs or negotiating terms with existing vendors, etc. This helps boost cash flow for smooth business activities.

Leverage Business Finance

A small business owner often opts for bootstrapping. However, investing entire savings can put an entrepreneur at financial risk, especially during an emergency. Hence, it is ideal to opt for an additional source of funding to cover day to day operations without any monetary roadblocks. 

Herein, one can opt for invoice discounting. It is a suitable source of credit for a small business owner ineligible to borrow from traditional financial institutions. An invoice discounting helps you raise capital against unpaid and approved invoices. The credit amount is usually lower than the outstanding receivable amount. 

However, the specific percentage of discounting can vary financier-wise. Individuals can turn to apps like MANDII in this regard. They can check various invoice discounting options on the app and select a financier that adequately meets their requirements.

Manage Taxes

Managing taxes can become complicated for small business owners. Hence, at an initial phase, experts advise opting for professionals. This will free up your time and may reduce any tax liability if rested on a skilled hand.

Optimise Working Capital

Effective management of working capital involves managing your account receivables, payables, and proper inventory control. To that end, you can consider the following strategies:

• Expedite account receivables by creating digital invoices upon delivery of goods or services. This allows you to receive payments online, shortening the cash conversion cycle as you do not have to wait to accept payments on hand or through cheque.
• It is wise to check inventory regularly. Efficient management of inventory helps a business owner understand the demand and supply of existing goods. One can also shorten the cash conversion cycle by selling goods at a discounted price that are not in need. This boosts cash flow for the efficient functioning of a supply chain.
• Communicate with your existing vendors or stakeholders if you are facing a crunch in disbursing your payables. It may include renegotiating the repayment tenure for an extension. In addition, it improves transparency and increases your company’s goodwill in the market. 

Risk Management

Crises can befall an organisation at any time. But businesses can safeguard their interests by way of a strategic financial plan. This includes creating a separate contingency fund to avoid business disruptions during an emergency. In addition, you can opt for professional advice to protect your enterprise from financial disputes. 

The response from a strategic financial process takes time. But it is necessary to review and revise such a plan routinely to meet changing economic scenarios.