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Four Components of a Healthy Financial Plan
Red Stories
Mar 31st 2021

Four Components of a Healthy Financial Plan

Esther O.
Esther O.

Money is at the core of every business. I know there are vision, mission and others. But there is money too. It is the one common factor of every business. Every business is out to make money in exchange for its products and services. While vision, mission, and goals can drive the quality of products and services they put out, money is what they get in exchange for it. Money is crucial to your business. And the moment it's not coming in as it should, it becomes a problem to sustain everything else - products/services, staff, assets.


However, in all the noise that comes with having a good business plan, management plan, and marketing plan, a financial plan should also be given due attention. Many businesses don't start with a financial plan. All they do is focus on how much profit they can make. And as long as the figure looks good, they don't try to understand how that money contributes to the growth of their business. Hence they cannot make informed comparisons on the financial health of the business.


As a small business, you can track your finances easily. But it is also good that you have a system in place that can sustain you as you begin to grow and employ people to work for you. The point is, you need to have a financial plan.


But, a financial plan is not just writing a document. It is establishing a practice, setting up a system that works even as you grow. You can set up a basic plan yourself or employ the services of an accountant.


Depending on the size of your business, some factors are relevant or not relevant to your financial plan. But here is a list of four basic components of a healthy financial plan. These four components are intertwined, with one leading to the other and one aiding the other. 


Bookkeeping

Irrespective of the size of your business, Bookkeeping is for you. It is how you track the cash flow in and out of your business. This practice is, as the name implies, to keep your books. It is the act of keeping a record of every money received, profit made, money spent, invested, and lost. That way, you can detect where there is loss and where there is profit, and you can make informed decisions for improvement.


Bookkeeping can work both ways for you such that you can even use it to keep track of stock at hand. It exposes discrepancies between inventory and sales and encourages accountability from staff members. You must update your records daily and reconcile your account periodically.


Redbiller offers real-time transaction reporting to help you keep track of your cash flow. You will get an email notification for every transaction. You can also view your transaction reports from your account. Even if you miss something in your book, you can always confirm on your Redbiller account page. You can confidently leave your business in the hands of your workers knowing you can monitor the cash flow from wherever you are. Bookkeeping is easier with Redbiller.


Standards and Limits

In other words, set rules. It is good to set limits on how much can be spent at a time that won't affect the business. And while there will be times when there will be a need to go overboard, the limit in mind can help inform how much further is safe.


This limit is not only in the area of expenses but also with customers on how much product/service they get on credit. The aim is to keep the company financially healthy and make informed decisions on expenses. It also forces you to prioritize your spending and drop optional ones that are pulling you below the limit.


Goals

Set financial goals for your business. It is not enough to keep making money and keep generating profit. Set goals to increase your cash flow and work towards them. Evaluate your business based on how many of these goals you have attained. It will also open your eyes to see financial decisions you need to review for business growth. The way to keep track of this goal is, of course, through Bookkeeping. Setting limits and working with them also keeps you on track to achieve these goals. 


Forecasting

Make and document projections of the business finances over a period. This projection should include sales, profits and expenses. This is similar to setting goals, but it is not just what you're working towards or trying to achieve. This is about expectations based on the resources at hand, realities of the market, and previous performance of the business. Yes, it is intertwined with setting a financial goal. Forecasting is not just an on-the-spot prediction. It involves research. It helps you take advantage of emerging opportunities. And it prepares you for possible hits. 

 

As with any good planning, financial planning is not just a one-time thing, it is continuous, and as such, it is subject to review from time to time. It is an everyday practice that is effective for business growth.

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