Financial planning needs to be a priority for SMEs, whichever stage they are in their journey. Without it, the opportunity for growth will be small. And it is a plan which needs to be adjusted all of the time, as cash flow ebbs and flows. Gareth Anderson, Head of Business Management at Allica Bank, discusses the steps SMEs can take to good financial planning.
When it comes to running an SME, financial planning can easily become an afterthought. Working closely with my own SME clients, it’s clear that, for many, the day-to-day running of a business often takes more hours than there are in a day.
When there is time to think ahead, there are growth strategies to develop, marketing plans to roll out and recruitment drives needed to keep the engine running. Nevertheless, I am constantly reminding the SMEs I work with that, while there are a million other priorities to be seen to, financial planning is crucial and shouldn’t be overlooked.
Without the right financial plan in place, there is no budget for recruitment, marketing or growth or what funding there is might be unsustainable or better directed elsewhere. So, financial planning should be a key pillar in any SME strategy. But what is financial planning, and what does good look like?
Taking stock
Unlike setting a broad business strategy and then spending a year working towards it, financial planning is more like a constant process of tuning and modification. Cash flows in and out of a business daily. Often, this cash flow will be predictable, making financial planning easier. On other occasions however, it may not be.
A business might gain or lose a client, impacting cash flow. Perhaps a big order comes into a business, meaning production needs to be ramped up and bigger premises found. A new investor might come on-board and give the business a cash injection. All of these things and more mean that financial planning is more a constant process of iteration rather than a fixed document.
So, the first step toward good financial planning is to develop a clear appraisal of where your business is now, where you want to head to, and financially speaking what you’ll need to help you get there. Every other decision down the line – whether investing in staff or marketing or cutting back on overheads – will need to reflect this reality.
Financial foundations
So, with that in mind, we can now recognise that financial planning forms an integral part of business and scenario planning.
With a clear sense of where a business is financially, SME owners can then begin to develop a wider business plan and allocate budget and spending toward that plan. One of the biggest flaws I see in business planning is owners and entrepreneurs letting their imaginations run away from them and developing business plans which aren’t anchored in the current financial reality and simply can’t be delivered. So, good financial planning will ensure your business plan and strategy are realistic, grounded in sound assumptions, with forecasts based on robust scenario planning.
Having a clear grasp of company finances however, and a clear objective of where you’d like them to be in half a year, a year and beyond, allows for smarter financial decision-making which will support business growth and financial health.
For example, if you find the need to invest is undermined by strained finances, a clear understanding of current spending will allow you to see where – if anywhere – cutbacks could be made to support investment. That way, an intelligent business decision can be aligned with broader business priorities.
Smoothing out the bumps in the road
Another area where financial planning is key is in helping a business navigate the bumps in the road that will inevitably come.
As mentioned earlier, there are many financial and business events which we can’t plan for. A travel business might be impacted by extreme weather in one of its destinations. Many construction companies in recent years have seen the prices of materials rising, putting pressure on margins. Alternatively, it might be good news; new investment or a significant client win.
All of these events mean that, no matter how meticulous your financial planning was in January, by February you could be looking at a completely different picture.
By leaving some stretch in your budget, however, some means of absorbing shock and steadying the ship when things get difficult, your business will have a much better chance of dealing with life’s twists and turns than it might otherwise. Good financial planning is therefore essential risk management and a good financial plan will anticipate what risks it can, and set up strategies to mitigate and manage those risks.
Sustainable growth
Another area where some detailed financial planning will benefit your SME is in supporting sustainable growth.
Growing SMEs will often require finance to help them achieve their goals. Whether it’s short-term finance to get through a tricky month, or longer-term finance and funding for a significant investment, borrowing is a key part of the journey.
It’s crucial however that borrowing is both sustainable and affordable, and financial planning can help here. A clear financial plan will let you know what your budget is every month for paying off borrowing, it will also let you measure investment against revenue growth to ensure that the investment is working for your business and change strategy if it isn’t.
When it comes to raising finance and securing favourable terms too, a detailed understanding of business finances and realistic expectations about growth, profit and loss and expected revenue is incredibly helpful. A lender will feel a lot more confident working with a business that can provide this detail and that can demonstrate high levels of financial planning and literacy.
Conclusion
As we can see then, financial planning is crucial to the success of any SME and is often the difference between those SMEs that flourish, and those that don’t.
A financial plan is the basis upon which all other business plans and activities have to be based. Without a financial plan, it’s impossible to have a full picture of whether an investment is sound or risky, of whether a new team member can be justified by the budget or of whether current outgoings are absolute necessities or nice-to-haves.
So, SME leaders should be working on financial plans as a matter of course, and working with service providers who understand the value of financial planning and can help businesses realise their financial goals.