Parker Revenue Growth Strategies

Why A Business Owner Needs A Financial Plan & Budget for 2022

Jan 11, 2022

Yogi Berra, the famous catcher for the World Champion New Yankees once said, “If you don’t know where you are going, any road will take you there”!!!

It’s 2022 and it is vital that business owners develop a financial plan and budget that outlines the goals and objectives of the business; in other words, a financial roadmap that leads to increased revenue and profitability.

Many business owners think a business plan is more important than a financial plan; I submit that the financial plan is a part of the business planning process. That said, the financial plan must be developed in conjunction with the business plan so there is an integrated process of managing the affairs of the company.

Normally, the budget process is developed in October of the prior year; this enables the owner to use nine months of actual results against plan as a benchmark for the ensuing year’s budget. Its never too late to develop a budget and the month of January offers the business owner a chance to plan for the remaining eleven months of the year.

Financial planning and analysis have critical segments that leads to a harmoniously developed and executed budget for maximum performance and are best represented in the following cycle:

image showing the 6 elements of a financial planning process. Each step is in a different colored boxes

Income Statement

It is critical to fully understand the five components of the income statement: revenue, cost of goods or services, gross margin, operating expenses and profitability.

Cost of Goods or Services

These are direct costs associated with the production of goods or services. This component directly affects gross margins which are critical in covering operating costs.

Gross Margin

This financial component is determined by subtracting the cost of goods from revenue which leaves gross margin dollars or gross margin percent. Higher gross margins leave more money to cover operating expenses which means {in most cases} more profit for the company.

Operating Expenses

Operating expenses are those expenditures that a business incurs to engage in any activities not directly associated with the production of goods or services. Managing operating expenses is vital to the health of any operating business.

Profit or Loss

The profit of a business is determined by subtracting operating expenses from gross margin dollars. It is a measurement of the efficiency of the business in improving the worth of the company. Profits also fuel cash flow which is the lifeblood of any business enterprise. If a business has a loss, then it is imperative to examine all components of the income statement to ensure the long-term success of the business. Losses negatively impacts cash flow and the balance sheet; a structured and organized review of the aforementioned financial components is vital to improving cash flow.

Cash Flow

Cash flow is the total amount of money being transferred into and out of a business; it reflects the liquidity and efficiency of the business. Without positive cash flow, business owners turn to alternative financing, lines of credit and other financial sources to cover cash shortfall on a short-term basis.

In summary, the financial plan, or budget helps guide the day-to-day decision making of the business owner and is vital to the financial health of the business. Comparing forecast numbers to actual results yields important information about the overall financial health and efficiency of the business.

In Chapter 6 of Lewis Carroll’s Alice’s Adventures in Wonderland story, Alice said, “Would you tell me, please, which way I ought to go from here?” Without the financial plan, the road map will remain foggy and Google maps won’t help you find your way!!!