If you’re trying to open a small business, someone has probably mentioned that you need a financial plan. Or maybe you’ve read about this process a few years after you’ve established your company. Though creating a financial plan is almost universally considered an essential aspect of operating a small business, you might still have one question: why?
Financial planning is important because it serves as the bedrock of any well-run company, large or small. On the personal level, 65 percent of people with a written financial plan feel like they’re financially stable; the same is true for just 40 percent of people without one. It’s not hard to see how these benefits translate to the world of business.
In business, however, a financial plan is not just a matter of your peace of mind. It’s a vision of prosperity and the foundation of goal-setting and decision making as you grow and develop. Read on to learn about the crucial role this process plays in any successful small business (and how you can build your own financial plan).
Financial Planning 101
Before you can truly understand why financial planning is important, you’ll need to know the basics of what this process is all about. In general, financial planning involves three steps:
- Determining where you are in terms of funding
- Assessing your goals and priorities
- Creating a road map to accomplish those goals
While working to create your financial plan, you’ll need to build a retirement strategy and establish succession and estate plans—just to name a few of the many elements involved. That’s why many small business owners opt to work with an advisor when putting together their financial plans (more on that later).
The Reasons Why Financial Planning is Important
Now that you understand financial planning on a broad level, you’re ready to take a closer look at the specific reasons why this work is essential. Completing the financial planning process can help you:
Review Your Situation
A clear-headed assessment of your current financial status is the starting point of any successful financial plan. As part of this process, you’ll have to fully comprehend your business’ net worth, expenses, and income. When you have this knowledge on hand, you’ll be able to build your company’s future on a solid foundation.
Set Clear Goals
Managing a company is challenging when you have no concrete goals to work towards. But if you know precisely where your business should be years from now, you can take logical steps toward achieving these objectives. Financial planning will also help you prioritize your goals, simplifying the process of making complex decisions.
Focus on Liquidity
A truly robust financial planning process includes liquidity planning—that is, the act of estimating your company’s income and expenses months or years in advance. After you go through this procedure, you’ll know roughly how much cash you should have on hand at any point in the future. Liquidity planning is also a highly effective way to spot potential issues with your financial plan and work towards mitigating them before they can cause trouble.
Set Your Risk Tolerance
How risk-averse is your company? It’s a simple question, but you need to have a solid answer. When you think about risk management as part of your overall financial planning efforts, you can decide whether you prefer playing it safe or pursuing high-risk, high-reward investment strategies.
Plan for Taxes
Obviously, taxes are a big part of any company’s finances. As of 2022, the federal income tax rate for small businesses taxed as standard C corporations was 21%. Because of that, your financial plan needs to take taxes into account. Thoughtful financial planning can help you take advantage of tax strategies like deductions, reducing your tax-related costs along the way.
Think About Your Company’s Future
There’s an old saying: the only certainties in life are death and taxes. Fortunately, a solid financial plan can help you prepare for both of these inevitabilities. Putting together an estate plan will ensure your assets go where they should after your passing. And while it isn’t directly related to mortality, establishing a succession plan will let you know your business will still be in good hands after you leave.
Build Your Financial Plan the Right Way
Knowing why financial planning is important is the easy part. Even with this knowledge, you’ll still need to do the hard work of establishing your plan. That means taking time to consider retirement and succession planning, employee benefits, insurance, and much more. Naturally, going through this process alone can be an intimidating prospect for small business owners already overwhelmed by their day-to-day duties.
If you need help with your company’s financial planning process as a whole, or any individual element of this plan, Janney is here for you. We focus on providing common-sense financial advice to individuals, families and small business owners, and assisting with financial plan creation is a big part of our work. Reaching out to our financial advisors is easy—just schedule a time to talk today!
