Important of financial planning 2021
Important of financial planning balance is needed to control your assets and your debts. It often happens that a business owner does not look at the balance sheet and misses the moment when his debts become larger than his assets.
Financial planning for small organizations.
“Money is the blood of business.” That is why every owner of a small or medium-sized enterprise, newly created or successfully operating, needs to carefully monitor the state of finances in his business, to carry out preventive “therapeutic measures” to avoid financial “heart attacks”.
Here are a few common money management flaws in small and medium-sized enterprises:
• Lack of understanding of the financial situation in the company. The fact that you have 20 million in your account does not mean that you can spend at least a thousand of them. First, figure out where and how they got to the account, what income they bring and how long they can be on the account, and only then open new stores, buy personal cars and make any other expenses.
• Lack of performance criteria that would be available to you at any time. Do you have a financial model by which you could track turnover, revenue, profit and money flow? If you cannot track these parameters, then you cannot control them.
• Lack of planning. This lack of planning will lead to often the opening of new stores or even entire areas of business is done at random, without knowing whether there will be enough free funds for this. By what means does the development actually take place: at the expense of working capital or at the expense of already generated income? Is the profitability of a new store or direction being calculated?
you need to treat any business as an investment,
Treat business as an investment and compare it with other possible alternatives to investing funds. Make a list how much was invested, how much was received as a result, how long it took, how much effort was put in to get the result.
In order to make financial calculations (independently or with the help of specialists), you must first of all have reliable data on the movement of all cash flows through your company.
Basic accounting reports will help you with this, they contain almost everything you need for analysis.
NO obligation to keep accounting records if company registered as an individual entrepreneur, However, this does not mean that there is no need to keep records, since it is financial information that will help you answer the question about the profitability of the business, because the money in the account is not yet profit.
There are three main financial documents from which you can draw data for further analysis and planning:
1• Balance sheet, balance sheet.
2• Profits and Losses Report
• Cash flow plan
The assets and liabilities of your business are explaining in the company’s balance sheet. The balance sheet is a snapshot of the financial condition of a business. It’s not only gives an understanding of where the money came from in this business (liabilities / capital) but also where it is invested (assets).
It often happens that a business owner does not look at the balance sheet and misses the moment when his debts become larger than his assets.
Your company is a tool for making profit from the world around you. Accurately this value calculated. This is what the profit and loss account is for. The purpose of its preparation is to determine what profit the company has received for the period, and to inform the owner (and not only) about this.
Also, to evaluate your business, it is worth calculating several financial ratios. The most important from the point of view of assessing the effectiveness of a business as an investment in comparison with other investments are indicators of profitability and liquidity.
The profitability ratios ( Important of financial planning )
The profitability ratios show how well the company is moving towards the goal of creating capital for the owner. They represent the ratio of the profit (or revenue) received to other key indicators or resources.
Return on equity (Return On Equity, ROE):
ROE = Net Income (Profit After Tax) / Average Annual Equity.
ROE shows the return on equity for owners.
Return on total assets (Return On Total Assets, ROTA) :
ROTA = Operating Income (Profit Before Tax) / Annual Average of Total Assets.
ROTA measures the operating performance of a company.
Sales margin: ( Important of financial planning )
Sales margin = (Sales revenue – Cost of goods sold) / Sales revenue
Profitability of core business: ( Important of financial planning )
Operating profitability = (Sales revenue – Operating expenses) / Sales revenue.
Here: Operating expenses = Cost of goods sold + Selling expenses + Administrative expenses
Liquidity ratios show the ratio of a company’s resources to its debt due in the near future.
Liquidity ratios are financial indicators that characterize the company’s solvency. In the short term, its ability to meet obligations in a rapidly changing market environment.
Current liquidity ratio:
Current liquidity ratio = Current assets / Short-term liabilities
A high current ratio is better than a low one; however, if it is very high, it means that the company’s funds are “frozen” in money or other liquid instruments and are not used as efficiently as they could.
Quick liquidity ratio
Quick liquidity ratio = (Current assets – Inventories) / Short-term liabilities
quite acceptable coefficient level of 0.6-0.8.