Business financial planning is essential to an organization’s success. Unfortunately, many businesses make financial planning mistakes, which in turn can have a detrimental impact on the business itself. The risks associated with business finance mistakes are considerable and present a potentially grave threat to any business.
Indeed, poor financial planning is one of the most common causes of business failures and bankruptcies. However, by understanding common financial mistakes, you can mitigate risks, and thus make better business decisions that will lead to long-term success.
Failing to Have a Cash Flow Plan
Many businesses fail, not because they are failing to generate revenues, but instead because they are not properly managing their cash flows. This is an especially worrisome problem among startups and new entrepreneurs. Often, those newer to the game have a tendency to “trust their gut” rather than analyzing, predicting, and budgeting their cash flows. This can lead to major problems.
Proper cash flow management, however, can reduce or even eliminate the risks. Business leaders need to know how much money is moving in and out of the business and its various operations. They also need to understand what their cash reserves are. By understanding expected cash flow needs management can be proactive about putting financiang (i.e. lines of credit or term loans to finance capital expenditures) in place where it will be needed.
Lacking the Needed Working Capital
Working capital is vital for any business. With working capital, you can make sure that you can buy supplies and raw materials, pay employees, and otherwise keep your business running. However, many businesses handle their cash flow management poorly and as a result, find themselves lacking working capital.
Without such capital, they can’t pay for day-to-day costs. Upon analysis, one will find that working capital needs are quite predictable. There is typically a correlation between the sales cycle and working capital needs. By studying the historical relationship between sales and working capital one can normally predict future working capital needs quite accurately
Not Establishing and Planning Metrics
Companies must constantly keep an eye on revenue, sales, ROI, and various key performance indicators. One such example is advertising, but every business process must be closely monitored.
Cash flow management refers to a lot more than just managing revenues and profits. You also have to establish budgets. Advertising is an example of an expense that needs to be analyzed and planned. Spend too little, and you won’t raise brand awareness and will miss out on potential sales. On the other hand, if you spend too much without emphasizing ROI, you’ll waste precious resources.
With advertising campaigns and other business processes through which money is constantly flowing, it’s especially important to focus on key metrics such as:
Following these closely will help you understand your business goals. While profits are the most obvious objective, they are not the only objective. Perhaps you want to promote a certain product so that you can tie it into the launch of another product in the future. Or maybe you want to build your Facebook page to 100,000 followers. It is crucial to establish your objective and measure your progress against it.
Working Without Tools to Increase Efficiency
In recent years, a wide variety of powerful software tools have hit the market that can reduce the amount of time you spend on menial tasks. That might mean simply using your computer to write up notes and directions rather than pen and paper. Or you might use advanced Artificial Intelligence-driven email tools to automate your email marketing. There are numerous opportunities to enhance your efficiency.
Try to expand your horizon and take time to understand the various tools you can use to increase efficiency. Some business owners and managers may fear change because change takes time and commitment. However, the long-term payoff of shaking things up will greatly outweigh the short-term pains.
Only Planning for the Present
Financial planning is just that. It’s planning. And that means taking the future into account. Work for today, sure, but make sure that you are planning for the future. Financial planning has to consider the days, weeks, months, and even years ahead. True, circumstances will change, and so your planning might change as well. However, it’s better to be proactively updating your plans rather than reactively responding to changes.
Consider contingencies as well. With cash flow management, you need to consider factors that could impact the flow of cash.
You need to think ahead and make contingency plans. While planning for what might seem to be remotely likely events is a waste of time, when the unexpected happens and you have a plan in place it can sometimes make the difference between success and failure.
Financial Planning and Cash Flow Management Are a Must
Sound financial planning and expert cash flow management are crucial for ensuring your business’s health. As a business owner or manager, you are the brain of the operation. Add in your staff, and you have a body as well. However, money is the lifeblood that keeps everything working. This means sound financial planning and cash flow management are essentially the heart of your business, making sure the “lifeblood” is flowing to where it’s needed.