All businesses should start their year with a robust financial plan – The Team at Pinnaklo are no different, and we recently got together to finalise our plan for 2023.
A financial plan predicts your future revenue and puts in place your spending goals based on that revenue, as well as your strategic goals and your long-term company growth plans. A well-run process should be started early and is usually managed by the head of finance as part of the executive team responsible for overall strategy and business development. This should be finalised by the end of Q4, starting the new financial year with a solid plan in place.
Step 1: Work with those who sell in your business and are close to customers to estimate sales for the year. This should consider historical trends for sales products, future pipelines, promotions, and other activities that influence revenue. The number you end up with against sales must be realistic and not over-inflated.
Step 2: Next you should consider your costs starting with fixed costs such as rent, utilities, equipment or hardware rental expenditure, and your people costs. Once you’ve got these down, you can start to look at your variable costs. These costs may increase directly in line with sales volume – selling more of your product or service – such as raw materials, people, marketing, HR, and IT outlay. Also, consider the sales plan in Step 1 and the impact of this on costs. Growth comes at a cost so it’s critical to make sure that those costs generate growth. It is important, however, especially with the current financial climate, that you also take into consideration elements such as inflation so that you do not come across any nasty surprises later in the year.
Once you’ve outlined your costs (and ensured that they are less than your revenue!) think about any one-off payments – for example investments in new equipment, land, buildings etc.
Step 3: You also need to work out your cash flow, the timing of when you spend the costs above may not necessarily correlate to when you plan to commit to these costs. So, you need to ensure that whilst your total numbers at the end of the year might look promising – you have enough cash in hand throughout the year to pay invoices and expenses as they occur. Many are caught out by cash flow issues, and this can result in businesses going under.
Step 4: Once all this is balanced, you can then work out your predicted profit, and decide how much you want to invest back into the business.
Phew… This all sounds like a lot of work, so why should you develop a financial plan?
Financial Plans are a vital tool for a business – they allow you to track the financial health of your organisation, ensure you are covering your costs, and allow you to make informed decisions about business strategy, direction, and investment. But it’s crucial that you don’t just sign off your plan at the beginning of the year and then forget about it! Regular monthly reporting against your plan and targets is vital to ensuring your business is on track – that sales are being maintained as expected, and crucially, that costs aren’t escalating or getting out of hand. It’s all too easy for spending to run out of control and keeping track of this against your plan is vital.
By running an effective budgetary planning process, and regularly reporting and checking in against your financial plan throughout the year, you can set your business up for long-term success.