As 2023 is around the corner, now could be the best time to review and align business goals. After all, the new year brings new opportunities to improve your business model. Although you need a marketing, human resource, and operations plan, begin with finances. That’s because effective financial planning lays the foundation for goal setting and budgeting.
Entrepreneurs can begin by determining their capital needs. If the business lacks sufficient funds, it can start exploring borrowing options. Otherwise, they can jump to budget allocation if they have substantial capital. Another aspect of financial planning is ensuring business liquidity. It means none of the business practices, such as credit sales, should be contributing to liquidity crises. Similarly, develop financial metrics to measure the company’s performance.
Further, entrepreneurs must create financial forecasts to determine where their business stands in the next few years. These real-time projections can uncover many insights, enabling managers to fix potential problems. If you are well-acquainted with the finance world, have a look below.
Here are six tips on effective future financial planning.
Future Financial Planning Tips For Beginners
- Manage Tax Liability
- Focus on Business Liquidity
- Explore Borrowing Options
- Maintain Financial Records
- Prepare for Valuation
Manage Tax Liability
Unfortunately, tax planning is far more complicated than one can imagine. It reduces business profitability and exhausts ample resources. If you have been struggling with taxes all these years, say no more. Now, managing tax liability and reducing taxable income has become straightforward. If your business engages in donations and charities, open a donor-advised fund at Crewe Foundation to manage tax liability. It will make all your donations tax deductible, reducing taxable income.
Moreover, familiarize yourself with tax laws to keep an eye on changing corporate tax rates. It will also help maximize business expenses to reduce taxable income. A keen understanding of taxation can go a long way in managing tax liability and maximizing business profits.
Focus on Business Liquidity
Is your company earning profits? Financial statements like balance and income statements often reflect that the business is financially sound. However, that doesn’t mean your assets are liquid and you have enough cash to pay for routine assets. Therefore, every business owner should focus on liquidity. You must ensure the business has more assets than liabilities to meet the short-term financial obligations.
Most importantly, identify the reason behind these liquidity crunches. Are your customers delaying payment? Have vendors stopped credit purchases? Not getting paychecks is one of the biggest reasons for liquidity problems. Nonetheless, to prevent this, you can devise solid payment plans. Offer cash discounts on early payments to encourage clients to pay timely. Likewise, negotiate extended payment terms with vendors to reduce outflows.
Explore Borrowing Options
Most business owners self-fund their companies, meaning their savings are the primary source of capital. It might seem enough when starting the business, but you have to invest more money to good returns over time. After all, bootstrapping allows companies to grow with a financially viable business model. If you don’t have enough funds to invest in the business, don’t let this hinder business growth. Instead, explore borrowing options.
You can always reach out to financial intermediaries and banks when in need of funds. They offer money at low-interest rates, helping you fulfill your goals. Feel free to borrow money if you plan to install a new plant or machinery next year. However, it would help if you kept some things in mind to qualify for the loan amount. Look below.
- Create financial projections for the next 5-10 years for the lenders. They want to see where your company stands and whether it can repay the loan.
- Assess your credit score as it reflects your repayment capability. The higher the score, the lesser the interest rate will be for the loan.
- Determine your loan requirements. If you need money to purchase equipment, opt for a lease. Similarly, apply for a small business administration loan if you wish to inject cash into the business.
Maintain Financial Records
Usually, small business owners have everything written in a journal, but that is not enough. Planning becomes impossible when you don’t know your current financial situation. Hence, maintain accurate financial records, complying with International Financial Reporting Standards. You have to prepare journal entries for all transactions that take place in the business.
Likewise, maintain a general ledger so you can devise financial statements. You can hire an accountant for this purchase or use an accounting tool. Tech-savvy finance tools can generate financial statements through a general ledger, speeding up the reporting process while ensuring accuracy.
If you are an investor and don’t know how to write millions in number then read about 50 million in number.
Prepare For Valuation
After every 3-5 years, the business must consider valuation. It is a crucial part of financial planning that ensure you don’t get carried away with high valuations prevailing in the market. You can begin by calculating the goodwill. It will unfold your business’s worth and market value. Next up, revalue your fixed assets. If you bought land three years ago, its value must have increased by now. Hence, calculate how much the value increased and add gain in the revaluation reserve.
Similarly, revalue your machinery, plant, and equipment. If their value has decreased over time, record the revaluation loss in your profit and loss statement. The entire valuation activity will ensure your balance sheet is up to date. In addition, it will reflect the fair and true value of the business and its assets.
An essential element of financial planning involves portfolio reassessment. Once you have created a finance process map, consider reassessing your portfolio. Let’s say you have been re-investing your profits in the stock market. Why not explore another medium? Depending on the market dynamics, you can explore new investment mediums, especially if your existing portfolio is overweight.
If there are predictions about the interest rates increasing, you can purchase financial securities. It will offer higher returns with additional premiums on every security. Likewise, invest in the manufacturing industry if the market is experiencing a bullish trend. Believe it or not, starting with a strategy to allocate assets for future business needs is essential.
Final Thoughts – Effective Future Financial Planning
Effective financial planning is crucial for your business model to be a success. It doesn’t matter if you have an entire team dedicated to finance or you outsource this operation; you have to understand this business aspect. You can only develop the right strategies and plan wisely for the business’s future. You have to focus on thoughtful tax planning, expansion, and forecasts. These few things can strengthen the company financially, setting it up for growth.