Why Financial Planning Needs To Be A Pillar When Helping Your Business

As of 2019, there were 500 startups in the Philippines, and there will be hundreds more to come. However, even though the climate encourages new entrepreneurs to invest and current business owners to grow, 3 in 10 of these businesses will fail within the second year. One of the commonly cited reasons behind business failure is poor management, particularly financial management. In fact, 82 percent of businesses fail due to poor cash flow or cash management.

While it is not uncommon for businesses to face difficult times, it is the management of influencing business variables, particularly its finances, that determines the possibility of a business turnaround and its path to it. Planning a business’ financial resources and how best they can be used to get to a profitable point again, is a part of that roadmap. Regardless of whether you are a young entrepreneur just starting out in business or a seasoned pro, the lack of proper financial planning impacts a business’s ability to overcome challenging times and address its future.

A Measure Of Profitability And Financial Efficiency

An unprofitable business model is one of the tops reasons why businesses fail. When we speak of a profitable business model, it does not just refer to the profits it produces at the end of its financial year, but also the efficiency in the use of its resources, and of course, the extent of its operations that are financed by liabilities. Sometimes an unprofitable business model is unpinned by resource inefficiency in the organization, which financial planning can help you get right. It may be poor productivity in manufacturing, above-average repair costs and downtime from old machinery, or even low customer loyalty due to poor customer service.

It can help management to map out the best resource allocation between goals and departments, and guide them in maximizing their returns. This can be the change needed in the business that turns its operations around and navigates it out of troubled waters. Is the business paying more employees than needed? Maybe its return on its marketing investment is low? Cutting inefficiency means it can find its way to a profit-making position again, and also allow the business to explore further actions such as any current or future plans for business growth. When a struggling business has a map of where its financial resources are being deployed and where it is giving the best returns, it can then utilize it to map out its road to survival.

Assessing Your Company’s Options – To Rebuild, Cease Trading Or Sell?

When a business experiences turbulent times, there may come a point where owners/management have to ask the question: Do we carry on trading, or do we sell the business and its assets? In this case, management will have to assess the financial viability (and returns) of each option, including the returns on selling. As a business trades over the years, it begins to establish its brand and build financial value. When building its assets, the benefits of financial planning appears in the constant and day to day decisions throughout the business, such as launching marketing campaigns, purchasing a delivery vehicle or increasing production capacity.

In possible end of business decisions, financial planning is useful in assigning a value to the built-up assets and asserting whether trading or selling would provide enough income to service the costs of the business, such as settling supplier accounts or redundancy payments for employees. Will the selling price of your assets (less any outstanding liabilities) be enough to cover any standing costs or returns required by shareholders? Without proper financial planning, the business can be left in a default position, or the management (new or current) will now have the added task of rebuilding its credit standing with lenders. Financial planning helps you design your finances to achieve this.

Determining The Extent Of Your Business’ Reconciliation Plans – Including Downsizing

When done correctly, a financial plan should encompass both your business’s current and future financial state. In other words, it should act as a supplementary roadmap on how to move your business from Point A to Point B. This is no different in times of difficulty. In fact, it is even more prominent as the business tries to rebuild itself and shed any loss-making activities. With the use of financial planning tools such as financial reports, management is able to pinpoint areas of weakness in a timely manner and work to rectify or remove it. By doing this, it is able to ensure the best chances of profitability, and minimize the possibility of poorly performing departments impacting the overall bottom line.

It should be noted that the practice of financial planning even before a slump would have allowed management to plan for alternative courses of action, and also revise plans as market conditions change. Therefore, they should be better prepared when difficult conditions do arise, including the possession of a built-up financial cushion (retained earnings) to finance business operations as the company navigates times of low sales.

Wrapping Up

For any business, whether they are new or seasoned, practicing financial planning should be a cornerstone in their business operations. Not only does it help a business set and navigate its way to both its short and long term goals, but it also gives owners and managers better control over their business operations when the business is struggling to survive. The financial resources are amongst the driving forces in deciding whether a business overcomes its hurdles. Even in business, failure to plan means planning to fail.