Why every SME needs a solid financial plan

Small and medium-sized business (SME) owners are often so occupied with their day-to-day operations that they forget to plan for long-term growth. Finances are essential while trying to expand. Their growth prospects can be affected if they do not have a solid financial plan.

A financial plan is the foundation to build and grow a business. Without it, the SME owner won’t know the economic prospects of his business and whether it is profitable. There are several reasons why an SME owner needs to spend time creating a financial plan. Here are our top five:

1. Cash management

Without a financial plan, an SME owner is likely to fall short on revenue or run out of cash, both of which have negative consequences. Moreover, within a financial year, there will be periods of plentiful revenue, while at other times, revenue will be low. Having a financial plan that takes all these factors into account will help the SME easily owner ride out the bad periods by taking a business loan.

They can also create a safety cushion to take advantage of opportunities, such as a chance to purchase inventory during a low-cost period like the holiday season.

2. Long-term view

When business owners get caught up in the day-to-day working of their company, they often lose sight of where they want their company to be. A financial plan contains the company’s long-term goals that remind the business owner of where they’re going and highlight periods when external finance is needed.

The financial plan is, thus, the blueprint of the company’s path. It tells SME owners how much money they can spend and on what for the company’s overall growth.

3. Spotting trends

A financial plan can help SME owners spot sales and marketing trends. It will tell them if the money they spent on advertising created sales and if certain products or services are doing better than others and need to be marketed more.

A financial plan can also help spot a financial downturn in advance. It tells the SME owner when sales are down or overheads are too high, helping them take the necessary steps to address these issues immediately.

4. Prioritising expenditure

Small businesses require ready cash to succeed. Therefore they must not spend money on something they do not need. They must learn to prioritise their expenses. A financial plan can help SME owners do that.

When an SME owner creates their plan, they will need to know their most important expenditures. They will be able to prioritise accordingly and know when to apply for a business loan. Even the largest, most successful corporations need to go through this process.

5. Measures progress

SME owners are likely to work long hours in the early stages of a company and may find it difficult to keep track of any progress. Having a financial plan can help with this because it will measure (in quantifiable data) how far a company has come since its inception.

Additionally, since the financial plan contains short-term and long-term goals, it becomes easy to tick them off the checklist when they’ve been achieved. This gives the business owner some much-needed motivation to continue their work and finally achieve their long-term goals.

SME owners must spend time creating their financial plan, preferably at the start. They must review these plans regularly and always have ready cash for success.