Why You Need A Financial Plan For Your Business
Financial planning is very necessary for a business’ success. Without a financial plan, your business is more likely going to fail – it will be difficult for you to know if your business is profitable or not. Financial plans help entrepreneurs to:
– Have an idea of how much they need to put into their business project
– How much money they might make
– How much they will need to produce in order to make what they have forecast
This help them to know the level of difficulty in starting a business and also to know if it makes sense going in for it.
Financial plans are just estimates that used for forecasting a business’ success or failure. Before venturing into a business idea, entrepreneurs need to have an idea on the cost of producing a unit of output or service. They need to figure out what they will be charging for the product or service that has been created.
Why is a Financial Plan Important To Entrepreneurs?
Making a financial plan is one of the last things in a business plan. A financial plan includes:
– At least a 3-5 years profit or loss statement
– A cash flow statement
– A balance sheet (optional)
Additional Reading: How To Write A One-Page Business Plan
A financial plan establishes the financial goals of a business. Below are some reasons why entrepreneurs need a financial plan for their business:
It Helps to Determine the Feasibility of the Business
At the creation of a business, many have it in mind that it will be a success. After creation, many find that success doesn’t come like this. It is necessary for entrepreneurs to create a business plan including a financial plan. A financial plan could be seen as a feasibility study of what it takes for the business to be successful. The financial plan will clarify many things:
– If resources are out of reach
– If the market is unstable
With a financial plan, you can know if the price you plan to charge is higher than what your competitors are charging. On the other hand, your price might be good, but the cost of production or provision of the service may be too high and difficult for you to make a profit.
Requirements for Financing Forecast
One of the main problems entrepreneurs face is getting finance. You need money when you plan to start a business. The financial plan helps the entrepreneur to know how much is needed to start and when. If your finance is limited, you could begin at a smaller scale with what you have. Having a financial plan will help you identify where you could have a shortfall. With that known, you will have to adjust the revenue and expense projections in order to avoid such shortfalls. Or, you can try other methods of getting funds such as loans or your own savings.
Apply for Funding
Entrepreneurs who request for funding from investors or lenders will need a business plan that includes a financial plan. The plan contains projections and assumptions behind the forecasts. If your plan looks unrealistic, you should not be expecting any investment or loan. This is a very common mistake entrepreneurs make – giving an unrealistic financial plan. The plan also helps you to identify the type of financing that would be appropriate for your business idea.