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Financial Plans: Why they're Important for Your Business

July 10, 2014 | Jennifer Goodwyn

Although completing a financial plan is often the last step in writing a business plan, this doesn't mean it's any less important. Financial plans are important because they establish the financial goals of the company, give entrepreneurs an idea of how much money they might be able to make and how much they'll have to produce in order to break even. While financial plans establish the financial goals of the company, this is not the only reason they're important.

Company Feasibility

When entrepreneurs first start their own business, many assume it will be successful. Unfortunately, many small business owners find out the hard way that success can be elusive. Creating a financial plan is ultimately a feasibility study of what exactly it takes to be successful. If the resources are out of your reach, the market is unstable, or your experience is lacking, a financial plan should make that clear. While putting together a financial plan, you may find out the price you plan on charging for your services or products is higher than what your competitors are charging, or vice versa.

Retirement Options

Financial plans are critical for small business owners since most of them are responsible for setting up their own retirement plans. While there are plenty of ways to plan for a comfortable retirement, consulting a financial planner or tax advisor is a good idea; they'll help you decide which type of plan is right for you and your business. Whatever retirement plan is chosen, saving is crucial. Everyone's goal should be to retire comfortably, and you'll want your retirement savings to protect you against inflation and enable you to maintain your lifestyle throughout retirement, no matter the financial climate.

Forecast Financing Requirements

Starting a business requires money, and the forecast financial plan shows business owners how much money is required and when the money will need to be available. If you don't have the required amount of funding to start a business, you may have to start your business on a smaller scale, or scrap the idea completely. Financial plans also show where your funds fall short and where you should adjust spending. For example, if renting an office proves to be too expensive during the first few years of your business opening, you may wish to consider utilizing the services of a virtual office.

Family Security

Providing for your family's financial security is an important part of the financial planning process. Having the proper insurance coverage and policies can create peace of mind for you and your loved ones. While creating a financial plan for your small business, you can take your family into account. How much would you like to save for family emergencies? Do you plan on expanding your family at some point in the future? These are all important questions you should ask yourself while creating a financial plan.

Although financial planning may seem like just another chore in your already busy life, failing to make financial plans can have unpleasant consequences down the road. Investors and lenders request to see an entrepreneur's business plan, and if yours is missing the financial plan or contains unrealistic projections, a loan or investment will be difficult to obtain.