4 Major Components Of A Financial Roadmap Plan
Every financial roadmap plan consists of financial statements, total expenses, forecasting, and financial analysis. Of course, there are other elements, like an operational plan, but we will focus on these major four.
Financial Statements
Your business’s financial statements feature balance sheets, income statements, and cash flow statements. The balance sheet includes your assets and liabilities. Liabilities, in this case, are those accrued expenses, mortgages, and loans that you need to service.
On the other hand, assets are valuables that belong to the company, such as fully paid machinery, inventory, offsite and onsite properties, and trademarks.
These statements typically show you your profit and loss for each month and operational year. You can liken it to the credits and debits alerts in your personal bank’s transaction history—though business financial statements are much more detailed.
Total Expenses
Unlike a business statement that shows both cash inflow and outflow, total expenses only depict cash outflow from your bank account or how much you’re going to spend to get things done. In normal settings, total expenses include operational expenses, and regular, expected, and emergency expenses.
Operational expenses deal with recurring rent bills, utilities, office supplies, insurance, rent, and equipment procurement fees.
Regular expenses are estimated costs for marketing, conferences, and even minors like work vacations. This is where fund mismanagement usually happens. So, it’s extremely important to differentiate between vital and non-essential regular expenses.
Expected expenses are costs budgeted for specific future implementations, such as an increased minimum wage or higher tax rates as revenue grows.
In contrast, emergency expenses do not target specific needs. It could be anything from damage to company properties due to a storm, fire, theft, and so on. Putting this into consideration ensures you’re financially ready, even though they are not desirable expenses.
Forecasting And Cash Flow Projection
Forecasting literally means predicting. When applied to financial planning, it means predicting your business’s financial status by leveraging data such as previous sales conversions, financial statements, and expenses.
For instance, if Company A recorded an average revenue of $1M over the past six years, the revenue pattern is expected to continue that way, provided there are no other unexpected changes.
However, forecasting is full of assumptions and is not necessarily definite despite the various methods of analysis available. But it can give you a clear picture of what to expect and lets you figure out a counterplan for unexpected trends.
In contrast to forecasting, cash flow projection relies on “what ifs” to calculate the trajectory of future inflows and outflows. We discussed how it is used to create forward-looking estimates of a company’s financial performance based on assumptions about future events and market conditions in this article.
Both methods can be used to set short—and long-term goals or influence other decision-making actions within an organization, such as hiring and business expansion.
Financial Analysis
Financial analysis involves comparing the numbers in your financial statements and expense reports to evaluate your business’s performance. This can be done using the Variance, Ratio (Liquidity and profitability), and Break-even methods.
- Variance analysis measures the difference between planned budget and eventual costs. For instance, if your plan was to sell accounting software for $5000 and you ended up selling it for $4000, that’s a variance of $1000. Analyzing this helps you know what went wrong and caused the final variation.
- In the Ratio method of analysis, the liquidity ratio shows you the number of assets you can convert to cash in order to sort business bills within a period, while the profitability ratio depicts how much you make for every dollar of sales made. The higher the ratio, the more you’re in a better position to sort your bills and still keep enough profit after sorting other expenses.
- Possibly the most used analysis method, the Break-even method, helps you figure out how many products or services you need to sell or offer to offset your bills (salaries, rents, utilities, etc.) before making a profit.
Let’s assume you run a freight factoring company, and your total monthly bill is $10,000. If your service costs $500 per factoring, according to the break-even method, you need to offer it at least 21x to meet this expense and still gain a profit of $500.
This is helpful in setting appropriate pricing per product sold or service provided and deciding the minimum number of sales per month.
5 Steps To Create An Effective Financial Roadmap
Creating an effective roadmap to guide your finances is no rocket science. Let’s quickly explore five ways to do that below:
Step 1: Analyze the Current Financial Situation Of Your Business
Remember the four components of a financial plan we discussed?
The first two—financial statements and expenses—show how much is coming in, how much is going out, and why. Break-even analysis shows how much profit you make after sorting your monthly bills or expenses.
Combining them together gives your finance team a crystal clear view of your financial status and enables strategic decision-making.
Let’s say your business’s financial status is in deficit. That’s an indicator to cut down on expenses by canceling non-essential expenses or via extreme routes, such as crippling some operations within the organization and seeking funding.
Some companies go as far as laying off a certain number of employees just to offset the deficit. A good example is Tesla’s mass layoff since the beginning of 2024.
And if your company’s finances are doing quite well, you can use the report to plan foreign expansion or scale your business for more local growth.
Step 2: Set SMART Financial Goals
Once you know the state of your finances, the next thing is to create goals that will help you improve them. And these goals have to be SMART while considering both short and long-term.
Goal: Increase quarterly revenue by 15% within the next year.
- Specific: Increase quarterly revenue.
- Measurable: By 15%.
- Achievable: Analyze past performance and current market conditions to ensure this growth rate is realistic.
- Relevant: Boosting revenue directly supports overall business growth and profitability.
- Time-bound: Achieve this increase within the next 6 months.
Note that forecasting and cash flow projection play a ton of roles here. If you’re planning a revenue boost by the next 6 months, then it means you’re expecting your current growth rate to remain steady based on previous financial performance and surrounding economic realities.
Step 3: Develop a Strategy With Previous Data
A goal gives you an end-point to work towards. And to achieve it, you need a solid strategy.
Take company A, a B2B lead generation brand planning 15% revenue growth within the next 6 months as a case study. To make the plan come true, company A needs to double down on authority-building content marketing, social marketing, and email marketing to acquire more high-value leads. That’s a strategy.
A B2C fashion brand looking to prevent a forecasted downturn in finances might need to cut prices of its products, similar to Tesla, reduce operational expenses, and do more with less or simply seek a merger if none seems possible.
Brooke Webber, Head of Marketing at Ninja Patches, says, “Whichever strategy you use to achieve your goals depends on the current financial situation and the growth challenges your business is facing.”
So, you need tobBrainstorm with your sales, marketing, and finance team to analyze your challenges, current goals, and see what steps will help achieve more results. Outcome could be as simple as outsourcing tasks or cutting unnecessary expenses. You can also check out what other companies in your industry are doing to gain traction financially.
Step 4: Implement the Plan Across All Units
After finalizing your financial plan, gradually implement it across all units. Start with one department and measure the impact to ensure you’re not causing more damage than harm to your business.
Then expand to other units until there’s synchronicity.
Most importantly, brief each member of your organization on why, how, and when this plan will go into effect while educating them on their assigned roles for maximum effectiveness.
Step 5: Monitor and Review Results
Lastly, monitor your business performance after the plan is implemented and benchmark against previous results. This can be done as soon as two months after implementation and allows for quicker modification of your strategies.
Depending on your scalability plans, you might need to wait longer to review the results.
For example, if you invest in backlinks to boost your company website and generate more leads (which equals more sales), it takes at least two to three months and as long as half a year to see tangible changes.
And if you’re investing in content marketing, it could take at least five months on average.
Analyze your performance reports to see what’s working and what’s not. Then modify your strategy accordingly.
Wrapping up on Creating a Financial Roadmap
Financial planning is essential for all business sizes, whether small, medium, or large, so long as you want to avoid going bankrupt in the long run. That’s not something you can negotiate your way out of.
To create an effective financial and business plan, first analyze your current financial status using previous statements, expenses, and performance data.
The next step is to set a financial goal based on the previously analyzed data and develop a strategy to achieve it. Finally, implement the plan across your organization’s units and review or modify it occasionally for the best results.
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