Operating a business without a financial plan is like randomly driving around in your car and hoping to get to the right place! Businesses need financial plans for many reasons. Often, banks require a business or financial plan to support a loan or line of credit. Almost certainly, equity investors wouldn’t invest without a business plan. Partners or major customers might require a business plan to ensure that you can support their growth plans. But those few examples represent external pressures to develop an annual plan.
But what about internal reasons? What about using it as a tool to know where you are going? To judge profitability? To manage investment and resource deployment? To constantly, measurably strive for improvement? To drive your business instead of “letting it happen”? I would argue these are all superior reasons to developing a financial plan and financial forecast than any external reason!
The true purpose of a financial plan should not be to satisfy some external requirement. Rather it should serve as your day to day roadmap to success. Your financial plan should be a yardstick against which you measure successes and opportunities for improvement in your business. Comparing actual monthly results to your forecast provides a basis for asking yourself (or others) questions about the business. Where are we performing well? Are we exceeding our revenue plan in some areas while falling short in others? Which cost items are fairly stable and which seem to vary wildly or cause surprises?
When I work with a new client, the business leader is almost always surprised to learn something new about the business. And it almost always leads to an immediate action plan to do something differently. Sometimes it leads to a serious review of monthly operating costs and questioning whether each, individual expenditure adds value to the business and whether it is truly necessary. Other times, we see areas of strong performance that may not have shown through the overall results without digging deeper or comparing results to expectations. But it always leads to action! And action drives improvement.
It’s not just big businesses that can benefit from building a financial plan and reviewing it on a regular basis . . . it’s a sure bet that your business can benefit as well.
In the next issue, we’ll talk more about the components of a business plan and why each is important to the total picture. Of course, please give me a call or send an email to if you’d like to discuss your business and opportunities for profit improvement.
Copyright @ 2006 Homza Consulting, Inc.