Financial planning is an iterative, ongoing process that helps your business reach its long-term goals. Financial planning strategies assess your business’s current financial position and allow you to adapt to market changes, forecast business growth, and achieve higher returns.
A typical financial strategy combines two key elements to help you reach your short- and long-term financial benchmarks. These elements are debt and investments. As you think about your financial strategy for the next year and beyond, here’s how to evaluate these options for fueling growth.
Start with goal-setting
Before you can determine whether to take on debt or pitch to investors, you must know the result toward which you are working. Set a SMART goal — one that’s Specific, Measurable, Achievable, Relevant, and Time-Bound — that you can break down into smaller financial targets.
For instance, most business owners aim to increase profit. However, there are more manageable goals that you can set along the way to earning more profit, such as:
- Increase revenue.
- Streamline operating expenses.
- Improve customer retention.
- Optimize pricing.
Set numerical targets and deadlines for these smaller benchmarks to get a clear picture of the resources and financial strategy that will help you make progress toward your larger objective.
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How to use debt as a financial strategy
Loans are the most common form of debt that a company can use in its financial planning strategy. Loans from financial institutions, credit card companies, or even friends and family can be a good way to get the cash you need for short-term investments.
As a financial planning strategy, the appeal of using debt is that it’s relatively flexible. “Banks offer a range of different business loan products, including term loans, business lines of credit, equipment financing and commercial real estate loans, among other options,” wrote NerdWallet. “Unless you opt for a product that has a specific use case, like a business auto loan, for example, you can generally use a bank loan in a variety of ways to grow and expand your business.”
However, loans have strict eligibility requirements and can be slow to fund, involving a lot of paperwork and a strong credit score. New businesses may struggle to use debt in their financial planning strategy.
Loans are the most common form of debt that a company can use in its financial planning strategy.
How to use equity or investments in financial planning
Issuing equity (stock) is another way to fund your financial plan. Startups in particular can sell shares of ownership to investors to raise capital for growth, expansion, or acquisitions. This allows you to avoid taking on debt and can bring on partners with mentorship and advice to offer.
“With equity financing, there is no loan to repay. The business doesn’t have to make a monthly loan payment which can be particularly important if the business doesn’t initially generate a profit. This in turn, gives you the freedom to channel more money into your growing business,” wrote The Hartford.
The downside of equity financing is that you will need to share a part of your profit with your equity partners. Equity is best suited for financial strategies that require significant capital quickly.
[Read more: 4 Financial Forecasting Models for Small Businesses]
Final tips for financial planning
Debt and equity are the key ways to ensure you have the cash flow to reach your financial goals, but there are other elements to consider in your strategy. Make sure you plan a safety net for unforeseen risks; build an emergency fund and get insurance to protect your business. In addition, review your financial results quarterly and annually to ensure your projections are realistic.
“As you look over your annual income reports, you can gain insight into the activities that led to improved revenue and double down on them to raise profits as part of your financial plan,” wrote FundKite, a business funding platform.
Revisit your financial plan frequently to make sure the funding options you explore are still serving your business goals. There are plenty of alternative funding sources — such as grants and crowdfunding — that can help you reach short-term benchmarks along the way.
CO— aims to bring you inspiration from leading respected experts. However, before making any business decision, you should consult a professional who can advise you based on your individual situation.
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