Importance of Proper Financing to Businesses
Making the best financial plan is a very important exercise for any or every business owner who is looking forward to establishing a great and successful business. Having a well outlined plan for all your financial necessities can make running of your business even easier, from being able to manage your cash, staying focused, as well as managing your expenditure.
Many businesses have monthly or seasonal variations in revenues, which translate into periods when cash is plentiful and times when cash shortages occur. Having a financial plan that is structured so there is always a cash cushion helps the business owner sleep better at night. The cash cushion allows the business to take advantage of opportunities that arise, such as the chance to purchase inventory from a supplier at temporarily reduced prices.
In business it is easy to become focused on the crises or issues that must be dealt with on a daily basis. The price for being too short-term oriented is that the owner may not spend enough time planning what needs to be done to grow the business long-term. The financial plan, with its forward looking focus, allows the business owner to better see what expenditures need to be made to keep the company on a growth track and to stay ahead of competitors. The financial plan is a blueprint for continual improvement in the company performance.
Conserving financial resources in a small business is a critical element of success. The financial planning process helps a business owner identify the most important expenditures, those that bring about immediate improvements in productivity, efficiency, or market penetration, versus those that can be postponed until cash is more plentiful. Even the largest, most well-capitalized corporations go through this prioritization process, comparing the cost to the benefits of each proposed expenditure.
Whether you are planning on putting up a small business or you already have one, having a reliable source of funding to keep it off the menace of being doomed by lack of funding is critical. If you are a starter, you may have a problem getting the idea on raising the extra amount of cash you need to get started. Despite the dilemma that many people find themselves in, being prudent in the pursuit for finances can give a great range of choices where one can get any needed financial support.
Smart leases. Leasing fixed assets conserves cash for working capital (to cover inventory), which is generally tougher to finance, especially for an unproven business. Warning: Don’t put so much money down that you end up spending the same amount of cash as you would have had you bought the asset with a down payment.
Bank loans. Banks are like the supermarket of debt financing. They provide short-, mid- or long-term financing, and they finance all asset needs, including working capital, equipment and real estate. This assumes, of course, that you can generate enough cash flow to cover the interest payments (which are tax deductible) and return the principal.
Customers. Advance payments from customers–assuming the terms aren’t too onerous–can give you the cash you need, at a relatively low cost, to keep your business growing. Advances also demonstrate a level of commitment by that customer to your operation.
As much as financial planning is important in getting the much needed financial balancing of the business operation, all does not always go as it is supposed to be. Sometimes planners go wrong with this exercise and make mistakes that cost them eventually. A wrong presentation, an incomplete plan or a plan that is not realistic are just signs that you are headed the wrong direction.
The plan presentation is sloppy. Once your writing’s perfect, the presentation has to match. Nothing peeves investors more than inconsistent margins, missing page numbers, charts without labels or with incorrect units, tables without headings, technical terminology without definitions or a missing table of contents. Have someone else proofread your plan before you show it to an investor, banker or venture capitalist.
The plan is incomplete. Every business has customers, products and services, operations, marketing and sales, a management team, and competitors. At an absolute minimum, your plan must cover all these areas. A complete plan should also include a discussion of the industry, particularly industry trends, such as if the market is growing or shrinking.
The plan makes unfounded or unrealistic assumptions. By their very nature, business plans are full of assumptions. The most important assumption, of course, is that your business will succeed! The best business plans highlight critical assumptions and provide some sort of rationalization for them. The worst business plans bury assumptions throughout the plan so no one can tell where the assumptions end and the facts begin
Sourced from: https://www.entrepreneur.com/article/81188