There are many benefits of financial planning, although these benefits differ depending on whether an individual or business is planning for the future. Individuals and businesses both benefit from having savings in the bank that can help during rough times. However, individuals use their savings differently from companies, so the advantages of financial planning are quite different.
Income and Cash Flow
For businesses, financial planning is crucial because it provides a clear picture of how much money is needed to cover expenses – both overhead and operating – and how much is necessary to cover any tax obligations.
Overhead expenses are costs a company incurs that are not related to labor or production. These costs occur regularly regardless of how much or little a company makes and usually include expenses such as lease payments, utilities, insurance and salaries.
Operating expenses occur through normal business activities, such as buying materials for production, and are required to keep the business running.
Knowing where a business stands financially helps a company budget for better cash flow, which is an important measurement of a company’s financial health. When a business has more money coming in than going out, it has a positive cash flow.
Businesses need to be able to budget to generate positive cash flow so that they can cover all their debts and, at the bare minimum, break even. When a business fails to do so for an extended period, it can lead to severe problems such as bankruptcy.
Planning for Rough Times
Savings are particularly important for helping a company during rough economic and business times. A business’s performance may occasionally decline, but if it declines for long, it puts a company at risk of bankruptcy. No matter how a business performs, it must pay certain expenses.
Having significant savings allows businesses to cover their debts and expenses as they attempt to improve their performance and financial situation.
Savings for the Future
Industries are constantly changing with time, and no company stands a chance of surviving long-term without continuous innovation. One of the advantages of financial forecasting is that it gives an idea of what the future holds. Proper planning and savings provide the capital needed for investing in research and development.
Businesses that include research and development as part of their financial plans understand its importance to remaining competitive in rapidly changing marketplaces. It puts them in a better position to thrive.
Hiring a Financial Consultant
Although financial consultants are more commonly found working with individuals, businesses do employ financial experts to consult with them on how to best handle their finances. In a small business that does not have the money to hire a CFO, a financial consultant can fill that role, and be just as effective at helping a company make better financial business decisions.
Putting together a financial plan with a financial consultant helps companies avoid costly mistakes. When bringing on a financial consultant, a company is typically bringing on a multifaceted expert who can do much more than make monthly budgets.
The harsh reality is that being a business owner does not always translate into being good at business finances. One of the pros of hiring a financial planner is that it lets entrepreneurs get back to doing what they do best without being bogged down by time-consuming financial matters they would rather avoid.
Source: AZ Central