When compared to the day to day work life of the majority of the population, life as an entrepreneur can seem a very attractive option. The freedom to make your own professional decisions, be your own boss and the potential for large personal profit are all tempting benefits.

However, as ever, with great power comes great responsibility and going it alone involves considerable personal risk and a very real potential for failure. To counteract this risk, preparation is paramount and a large element of the success of any business can be attributed to sound financial planning.

Note: For more information about our financial planning for business owners, click here.

Why Do I Need a Plan?

First and foremost, a financial plan is useful for accountability. Even if at the moment your business is just you, a laptop and a spare bedroom, at some stage outside input will become important, most likely in the form of potential investment, and tracking progress is crucial.

To that end, having a plan in place can help you set realistic goals in a fixed timeline and allows you to measure development in a more structured way. The milestones set in the early stages can help business owners to prioritise objectives and make informed financial decisions, even if the path to success is not entirely smooth.

How Do I Start?

The first step is organising your existing financial records, to ensure that you can be realistic about the starting point for your venture. In most cases, the key documents in an entrepreneur’s arsenal will be an income statement and a balance sheet. An income statement (or profit and loss statement) shows a company’s incomings and outgoings for a fixed time period, usually a year or a quarter, and gives the net income for this time.

A balance sheet is a snapshot of a specific point in time, taking stock of a company’s assets and liabilities and in the difference between the two, showing the owner’s equity. Having these documents as a starting point allows you to create strategies that reflect previous performance, whilst being mindful of the current financial health of your business.

What Next?

Cash flow is the priority. Cash flow is what keeps a company afloat; the delicate balance of money in and out is the constant concern of the successful entrepreneur. The income statement and balance sheet alongside a cash flow forecast are the tools that allow a business owner to manage cash flow effectively.

A cash flow forecast identifies the sources and uses of cash for a fixed time period, which can vary dependent on the nature of the business.

Cash flow forecasting on a regular basis allows early identification of many potential problems and acts as a warning system to allow preventative measures to be put in place to keep the business solvent. Cash flow forecasting also ensures that a business has the funds in place to pay suppliers, while keeping track of payments received from debtors facilitating easier monitoring of external payment patterns.

And For Me?

For entrepreneurs, professional and personal finances are likely to be more closely intertwined so financial planning on a personal level can be equally as important. While a strong financial plan is crucial, external factors outside of your control can derail a new business very easily and a buffer to cover a disruption in cash flow is invaluable, in the form of an emergency fund.

To further mitigate the risks of going into business for yourself, establishing adequate insurance coverage for your personal and professional life is essential to cover unforeseen expenses. Drafting up estate planning documents is also a key element of secure personal financial planning, most crucially a will and a lasting power of attorney to ensure that your interests, both financial and personal, are protected should the worst happen.

Once a financial plan incorporating goals, strategies and a timeline is put in place, it should be used to guide decision making, however, it should be reviewed regularly to take into account market changes, investment opportunities and the current financial climate.

Having a successful financial plan requires foresight and in depth market knowledge in combination with a clear understanding of the strategy for each stage of a company’s growth and the value of practical guidance from experts cannot be overlooked.

For more information, visit the Financial Planning section of our website. This includes details about financial planning for high earners and business owners.

If you have any questions, please call us on 01993 772467, or contact us online.