Business planning has become such an overused phrase that I think in today’s day and age few people pay much attention to it. It is still as important as it always was. Many entrepreneurs like to believe they have their business plans worked out in their head and do not need to embrace or set out on a formal business planning process. However, this is not the case. As any successful business owner will tell you, having your plan perfectly crafted thought up and written out is the best way to ensure that it is a feasible plan B that you can stick to. Without a plan, you are almost certainly going to fail.
Business planning is really made up of two components – qualitative and quantitative. The qualitative component is critical for the business owner and entrepreneur to undertake on their own. Having an advisor guide and assist you with the process is useful but it cannot be subcontracted out or handed over to an independent body for it to be meaningful. Understanding what you are putting into the business and the risks that come with that are more important for an owner to fully understand than anyone else. understanding the plans, in case something doesn’t go as expected, are crucial because you are the only person that can enact that plan – not your business planner.
The second aspect of the business plan is the quantitative aspect, which is also called a budget or a forecast. This is the numerical interpretation of the qualitative plan that is done before. To some extent, this can be handled by an independent accountant or bookkeeper as all of the numbers are derived from the qualitative aspect of the plan. While it is more convenient and all to have an accountant take care of your books, understanding what your cash inflows and outflows is going to be the best way for you to know when and where you can cut costs or capitalize on certain revenues.
In the end it is important that these two sections of the business plan agree and support each other. Qualitative is important to know what they are getting to. Whereas the quantitative is the important part too, that’s where you going to make a profit or a loss.
The qualitative aspect of a business plan comprises the following main topics
- Vision mission and objectives
- Position audit
- Review of macroeconomic, political and socioeconomic circumstances
- Review of the industry, competitors, technology and market trends
- Analysis of strengths, weaknesses, opportunities and threats
- Preparation of plans including marketing, human resources, operations / production and financial.
Once the above have all been considered and a qualitative plan has been drafted it is impossible to extrapolate these effects into numbers in the form of a financial forecast.
Typically, the financial forecast would include a profound lost statement, cash flow statement and balance sheets and these should all reflect results that are feasible, achievable and comparable to industry standards. If this is done it is possible to produce a plan for 3 to 5 years hence that is both realistic and believable and should sit you on the path to success.
An important subsection of planning is Financial Planning. Many people believe that they can do their own financial planning. I mean how hard can it be, it’s just math right? What have I got in investments now, plug that into a financial calculator, estimate a return and that’s how much I’ll have when I retire…? Right?
Have you thought about what it will cost you when you’re in retirement?
Have you considered when your debts will be repaid, and will those be paid off by the time you retire?
What happens between now and then?
What about the risk side of your balance sheet as well?
And what will happen if you pass away, whether that’s sooner than expected or later?
These are all topics covered by a proper financial planner uncomfortable as some of them are, they are issues that we should all deal with ahead of time rather than leaving them to chance. A typical financial plan should cover:
- Your investment and retirement planning
- Your risks such as if you were to lose your job, become disabled, or lose a loved one
- Estate planning
Investment and retirement planning are considered not only what you’re worth today and what you might be worth in the future. We evaluate your living costs now and in the future. Many people might be surprised to find out that much of their current living cost is in the form of debt repayment. If this is properly managed and settled over time the remaining cost of living can be much more manageable than you think. This realization can change many attitudes to your financial planning and how you save and spend for the future.
Financial planning has in some circles become confused with life insurance sales. It should not be that way. Insurance plays a vital role and is a fantastic tool to be used by everyone. Whether it’s vehicle or house insurance, health insurance, or the dreaded life insurance. We cannot go through life just ignoring the risks that may affect us in the future and our financial planning process is designed to try and anticipate these. Whilst we are licensed life and health insurance providers, we typically do not provide these services ourselves and refer to clients out. This way we believe we avoid any appearance of conflict and leave you to make the decision as to who and what insurance you want to get. After all we are there to advise you, not to tell you. We are here merely to guide you to the decision, that you believe is right for you and your family.
Estate planning is not only for the rich and famous. While the current estate tax threshold is high for most Americans there are still other aspects of estate planning that should be considered. Things like medical power of attorneys, wills, living trusts, and probate. We are not attorneys and do not prepare these documents but will happily refer you to firms who can and will. Our role is to identify what you may need to plan for and make suggestions as to what can start doing now to get you prepared for your retirement.
A financial plan is a dynamic document that should be revisited at least once a year. This works particularly well with our firm in conjunction with our tax compliance services. We will be able to revisit your financial plan every year, meet with you and discuss changes in your life that may be applicable and update your plan accordingly. As investment advisors we will meet with you quarterly (March, June, September, and December) to report back on your investment returns. Having a financial plan in place gives us something to measure against and see if we are keeping on track with our plan. If we are on track, we can confirm that with you and plan our next meeting. However, if we are off track, meeting annually prevents it from becoming a problem. Meeting annually gives us a small window to correct as opposed to many years.