The Importance of a Solid Financial Plan

Whether starting a hobby for money or a business that will supplement and eventually replace your day job income, cash flow will play a major role in the success of your endeavor. Along with your overall goals, and your step-by-step procedures, you will also need to create a summary of the potential income versus the proposed expenses. Again, like your goals, the cash flow statements should be realistic and attainable. In fact, no matter how serious or how frivolous you consider your business undertaking, you must realize the importance of a solid financial plan.

Admittedly, starting a business can be daunting. Often, you have many new tasks to learn, and invariably, several functions take a backseat to the daily business at hand. Understandably, many new entrepreneurs forgo making and maintaining financial statements, because they either do not have time with all the other duties, or they do not know how to compose the documents. Because new business owners are caught in the immediate activities of running the business, they often forget to keep proper financials. And, we are not necessarily talking about having an accountant or even keeping the information in fancy software, but a simple spreadsheet will suffice. Typically, though, the importance of a solid financial plan is not really understood, or even contemplated.

Many people fail to realize that financial projections are part of the process of establishing goals. You cannot really expect to earn a substantial income without understanding how the costs impact revenue. Cash flow is important to the health and longevity of any size business. In addition, the numbers must be attainable and realistic. There is no point in making grandiose statements of being a millionaire right at the beginning. Businesses owners vary rarely achieve those kinds of milestones overnight. So like your goals, the financials, too, will change over time.

To start, however, you want to understand how much you can honestly spend without putting yourself into trouble, and you want to be able to have some idea of how much you can expect to bring into the bank. One piece of advice at this point would be to start small. Decide, for example, that you want to profit enough to cover a specific monthly bill, then once you achieve that goal, you can move on to bigger ones. Of course, if your business is bricks and mortar, and you are expected to pay rent every month, then your goals are going to be greater.

Indeed, the importance of a solid financial plan is underrated in most scenarios. You read information all over the internet that entrepreneurs "just do". They do not wait around analyzing everything. This is dangerous advice for some. While it is true that you should not be afraid, and I have recommended elsewhere on this site that you reign in your fears and learn as you go, it is not a good idea to jump in and spend all kinds of money without knowing your financial limitations. For many people, starting a new business is not a luxury. They do not have bank accounts of money just waiting to be spent. On the contrary, many women begin businesses because they have to. There are bills to pay, children to feed, and obligations to meet. A solid financial plan is crucial to balance the personal expenses with the business costs.

Lastly, I should expand upon the type of financial statements that you will produce. As I have indicated, it is not necessary to spend money on accounting software. That is one more cost you cannot afford in the beginning, plus, it is another tool you need to learn. Save your time for things that will bring in cash faster. To make your financial projections, all you really need is a spreadsheet. Again, if you do not have the money for MS Excel, do not worry. Open Office has a free spreadsheet which integrates well with excel. Also, most computers have been loaded with MS Works. This is the baby version of Word and Excel. Use the spreadsheet there to create your documents. And remember, this is not a test. Your documents do not have to perfect, (unless you are showing them to a lender), and they will change overtime. Just get the numbers on paper so that you have a clear understanding of the importance of a solid financial plan.