How to win through financial planning

Careful financial planning and managing your cash flow is crucial to consistent growth and profitability. ‍We’ll take you through the financial planning process step-by-step so you can get the right information to make smart decisions for your business.

What is financial planning and analysis?

Financial planning and analysis, or FP&A, is the process of forecasting, budgeting and analysing a company’s finances to guide decision-making across the business to help reach certain goals.

Who is responsible for FP&A depends on the structure of the business. It could be a dedicated financial planning and analysis team, one financial manager who focuses on planning, or part of a broader job description, especially in a smaller business.

The financial planning process

Financial planning boils down to two questions - where are you going to spend your money and where will you get that money from? In order to know where you're going to spend your money, you need to know what you want to get out of it, for example achieving certain goals or targets. To know where you’re going to get the money from, you need to know how much you'll need, when you'll need it and how much you can afford to pay for access to the cash.

So, here’s how you start planning:

Step 1: Set a goal

To get started, first set a target to aim for. Your goal could be breaking even, successfully selling your business, reaching an annual revenue target or hiring a certain number of people. Whatever you choose, you’ll need to ensure it’s SMART – that is, Specific, Measurable, Attainable, Relevant and Time-based.

For financial planning, given the difficulties in predicting the future, it's good to have a finance-specific goal in the medium term (1-5 years). Beyond that, it's challenging to create definitive financial plans because of the potential for unexpected changes.

Example:

A business owner would like to sell their business for £100m in 10 years but is currently selling £120k of product a year and making £12k of net profit each year, giving a net profit margin of 10%.

Selling the business for £100m isn't very attainable at the moment, so instead, they have decided to set a realistic target to increase sales from £120k/year to £1.2m a year in the next 2 years.

They would also like the business to be more profitable, so aim to increase net profit margins from 10% to 20%.

Step 2: Look backwards

Financial planning, by its very nature, is forward-looking. But in order to plan for the future, you need to know what you've got today by assessing and understanding your current financial operations. To do so, it's essential to have good financial data available to you. Ideally, you'd like to understand your financial position across your 3 financial statements:

• Your Profit & loss will help you understand your business's profitability. It should help uncover how you can manage costs, how sales and profitability are interlinked, gross margins, net margins etc.

• Your Cash flow shows the reality of cash movements. You may sell lots of goods in December, but if you bought those goods 2 months ago and they're sold on 30-day invoicing terms, you may not receive the cash until January. Understanding the interaction between money in and your operational transactions is key to finding a healthy cash flow.

• Your Balance sheet provides a screenshot of your business at a moment in time. How much cash there is in the business, how much you owe, how much others owe and what assets it owns.

Example:

The business has done some analysis by pulling all sales data together from their website, Amazon and eBay. They have also run some reports on payments from their bank account, card, and payment providers and found some interesting things.

They buy and pay for their umbrellas in July but don't start selling until October when the rain comes, so they always face a cash shortfall for a few months when they go into their expensive overdraft.

They also aren’t able to access money from their sales for a few weeks because it gets tied up in their merchant accounts. They never have much cash in their account and often have to wait for the money to come in to pay bills, so they can't invest in marketing as much as they’d like.

They’re currently buying each umbrella for £5 from their supplier, which feels too expensive. They wonder if they’ll be able to reduce their buying price by placing bigger orders but have no way of placing bigger orders right now because of their cash constraints.

Step 3: Start planning

Once you've worked out where you want to be and where you are, you can begin adding in the bare bones of what you'll need to get there. It's best to start breaking down your business goals into smaller, manageable chunks. Going from £10k of sales to £20k a month is much easier to plan for than going from £10k to £100k.
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Break down big financial numbers into more manageable figures – what would your business need to look like to sell for £10m in 2 years' time? You might find that a £10m valuation of an ecommerce business would need £10m in annual sales or £2m in net profit. Breaking that down into monthly figures will then allow you to establish the operational infrastructure you'd need in place in order to service such levels.
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This is where we're adding financial meat to the business plan bones so you can bring your business goals to life.
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Remember to factor in things like seasonality of costs and sales. It's highly unlikely that costs and revenues will come simultaneously or that revenues will fall evenly through the year. Think about when you'll be receiving cash and when you'll need to spend it. Most businesses usually have to spend cash before they receive it, so they have lots of money tied up in the business – this is called working capital.
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Most importantly, remember to build in some contingency cash too. Managing cash flow is one of any business's biggest challenges, and we can never predict the future. Supplies may be delayed, or customers may pay late. It's always sensible to factor in a buffer in case something unexpected arises.

Example:

The business owner decides they can take out a card which will give them 45 days of credit terms on their day-to-day spending. That will allow them to manage their monthly cash flows much better by paying off one single bill at the end of the month instead of daily outflows. It'll also free up some cash to increase their marketing spend by 20%, which should also lead to a 20% increase in sales.

The businesses’ current warehouse is working to capacity, so they realise they’ll need a bigger warehouse which will cost more in rent and in staff costs. At the same time, they’ll be able to order more umbrellas and bring down their purchase price from £5/umbrella to £3/umbrella. Given their sales price is £10, that would improve the gross margin from 50% to 70%.

Once they have worked out the costs for infrastructure, umbrellas and marketing, they’ll be able to plot a path towards their goal of £1.2m of sales in the next 2 years whilst also working out where any funding shortfalls may be. They might need to put some of their own money in or take out a loan. It's also possible that the increased sales at a higher margin will improve cash flow, so they won't need any more money.

Step 4: Execute and update

You have a plan. Now it's time to put the wheels in motion. However, as with any plan, things will almost certainly never go exactly as you expect. Whether it's covid, a financial downturn, a storm delaying a shipment or a fire at a warehouse – you'll face many bumps in the road. It's essential to keep your plan alive. Keep reviewing it, keep updating it with new information, and you'll always be one step ahead.
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It's much easier to deal with a £100k working capital shortfall when you've already factored in a £90k shortfall than when you haven't planned for anything at all.

Example:

In the first year of their plan, September is particularly rainy, and the business sells more umbrellas than expected. The business owner needs to quickly adapt their financial plan to account for buying more stock and selling it.

They’ll need another warehouse, more staff and more marketing, so they have to quickly update the plan and reallocate cash from other areas they were planning to spend it.

How to start managing your finances

It can be a daunting task to start financial planning for a business, but it's much easier if you break it down into smaller steps. Taking the time to build a financial plan is worthwhile no matter what stage your business is at. If you'd like to make it easier to manage your finances, check out Juni, the financial platform made for digital entrepreneurs, which will give you a full picture of your business.

_{This article was updated November 2023}