Financial Planning: Building a Safety Net for your Business

Business resilience is more important than ever, and financial planning can help build a safety net for your business. Business owners often focus on growth and profitability but having a financial safety net is often overlooked.

A safety net ensures a business can survive long term through both growth and downturns such as global pandemic, financial crises, personal crises, and unexpected expenses.

Establishing a Solid Foundation for Financial Security

To establish a solid foundation for financial security, you should forecast your finances. This means thinking about not just turnover or profits but cash in and outflows expected over the next 12 months. Once you have an accurate cash forecast in place, the financial planning aspect begins. You need to budget for large outgoings or have enough left over to add to your emergency fund.

A budget covers the expected, but you also need to have enough cash for the unexpected. This is where the aforementioned emergency fund comes in. Many say an emergency fund should cover at least 6 months’ worth of overhead expenses. However, this can also include one-off costs specific to your business such as building repairs or new machinery. The emergency fund ensures your business can continue to run without any income in the interim.

Strategies for Sustaining Your Business’s Financial Health

Another important aspect of financial planning involves borrowing. You may need to use borrowing at times to help your business grow. Borrowing at the right rate helps your business manage cash flow long term by ensuring enough is left in the pot for day to day running.

However, businesses should be careful not to fund too much through debt too quickly. This is because repayments can get out of hand with interest rates being less favourable the more debt you have. Maintaining good relationships with lenders can also help when it comes to raising debt finance. Overall, it’s important to remember that businesses should not be reliant on borrowing to pay the day to day expenses of the business.

Financial planning can help you to diversify your income streams, which will help your business if there is a downturn in your market, or if consumer appetite changes. The added stream can be complementary to your existing business or a passive income that builds a small nest egg without much input.

Another way to help with unexpected costs is insurance. A business should always have insurance in place to cover property damage and professional liability. But insurance policies can also be used to help in the event a key person is unable to work.

Financial Planning and Preparedness

Business owners should ensure they dedicate enough time to working on financial planning in addition to the day to day running of the business. Looking at your latest accounts and bank statements can be a good place to start. From there, you start to understand the costs you would include in a budget and emergency fund, as well as what borrowings you currently have or need, and which insurance is likely to suit your business.

Your business will regularly change so it’s important to stay on top of financial planning and update these insights regularly. You may need to reevaluate how much is needed in your emergency fund or make changes to the structure of your borrowings, for example.

All of these steps will help to safeguard your business from downturns which will ultimately protect the business long term.

The next time you speak to your advisor, be sure to discuss financial resilience and how they can assist you. There are plenty of forecasting tools on the market that can do much of the work for you. Similarly, the accounting software you currently work with may already have these features built in.

Westcotts has partners and directors across the South West who can help you get started with your financial planning or any queries you may have. Get in touch with Heather Davis, Partner at Westcotts, if you are searching for personalised and friendly advice. Email her at heather.davis@westcotts.uk or call 01934 620428.