The importance of effective financial planning
Wayne Schmidt, former entrepreneur and general manager at MYOB, on the simple steps to take to avoid financial loss
A recent study revealed that UK small businesses are losing £4.8 billion a year through excessive time spent on financial administration. But this figure could be dramatically reduced if more emerging businesses adopted a simple structured approach to money management.
The majority of growing businesses fail to develop a financial plan or set goals – two crucial factors determining the success of any business. Many owners setting up a company for the first time have strong technical skills, but often lack business acumen.
As a result, many tend to work for their company rather than on it. In many cases, business owners will only address their finances when it’s too late. Lack of financial planning is the main cause of bankruptcy with 90% of entrepreneurs going bust because of it.
A good financial plan will show how much money a small business owner can afford to pay themselves according to how much stock they need to sell and the opportunities available within their target market.
Dedicating one hour per week to financial planning, which includes monitoring that plan and the progress made in reaching goals, will have a significant impact on business profitability.
When formulating a financial plan, emerging businesses must consider factors such as cash flow, VAT and invoicing. The mismanagement of the invoicing process is a common pitfall. Many small businesses do not invoice customers quickly enough, which can significantly affect cash flow.
This stems from not having a systematic approach to financial management, which should be laid out clearly in the financial plan.
Networking is equally important. Entrepreneurs who can surround themselves with other successful people and attach themselves to a mentor group will find the route to financial growth more easily than those who do not.
Finally, investing in a financial software package that allows the owner to measure success – as well as speed up simple, but essential processes such as invoicing will help emerging businesses put their financial plan into action.
Putting in place a mechanism to monitor the achievement of goals measured against the plan will encourage a good routine when it comes to financial planning and management, and ultimately lead to growth and productivity.
Wayne Schmidt is general manager at accounting software and services leader, MYOB