Accounting for actual costs is not enough to run a successful business, planning is necessary to secure the required resources and funds. Financial plans rely on accounting data: weekly expense report, income statements, and information on vital operational assets and resources.
If you offer products, you need to identify their initial cost, delivery expenses, personnel wages, rent, utilities, and other charges. Once you know the amount of money spent and received from customers, you will clearly see the profit margin. If you offer services, identify the resources you utilize and their cost to get a clear view of your revenue.
Financial planning includes several critical stages:
- Identify the products and services you will offer within a specified period (one month, three months or a year) and create a list of resources you will require over the same time. The more detailed your plan is, the more precise your calculations will be.
- Develop a profit-and-loss account (P&L) by adding the amounts of money you will earn and spend over the planning horizon. Specify the prices of your products and services, create a list of expenses. Cash flow analysis and forecast will let you know when your company will have enough revenue for growth and when you will need to secure additional funds.
- Update the basic expense report and compare it with your planned P&L. Regular analysis of your plans and current financial status will help you develop an accurate financial planning system. Careful planning will identify your business' needs and highlight possible problems in time for you to solve them without losing the company.
P&L and cash flow analysis will let you see the big picture of your business' financial situation. After three to six months, you will be able to:
- Identify the products and services that possess the largest profit margins and bring most of the revenue;
- Get rid of the products and services that don't generate enough revenue;
- Manage your expenses to minimize them;
- Plan large purchases of new equipment, etc;
- Realize the seasonality of your business and account for it;
- Rethink your business expenses and find new ways to increase efficiency.
Even a surface financial analysis will provide you with a new perspective. However, financial planning and accounting take time and attention. If your salary expense budget doesn't allow for an in-house financial analyst, automated financial management software can make the job manageable for your accountant. Efficient integration of bookkeeping and analytical software will ensure the accounting and contract data is automatically derived and processed to generate financial plans and reports.