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Asked a question 3 years ago

Why is it important forentrepreneurs to develop financial plans for their companies?

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Developing a financial plan is probably the last step in writing a business plan of a company. Ascertainment of  profit and loss statement for a period of 1-2 years or more and cash flow statement as well. Balance sheet shows the total amount of asset and liabilities a company has . Financial planning plays an important role in identifying the goals of an organisation.

Determine feasibility of company.

When you tend to start a business, you want it to run at a good rate and be successful in long run but sometimes it happens that few entrepreneurs find out that their success can be hampered too.Creating a business plan with the financial plan is really a good study of what makes it successful. If the resources are out of your reach, you don't have the experience or the market is too unstable at the moment, the financial plan will make that clear. You may find that the price you plan on charging for your products or services is materially higher than what your competitors are charging. Or perhaps the price is fine, but your manufacturing costs are too high and it will be difficult to earn a profit.

Variance analysis.

Variance analysis is the quantitative investigation of the difference between actual and planned behavior. This analysis is used to maintain control over a business.Monitoring the actual results against the line-item budget in the financial plan gives you the opportunity to take whatever steps are necessary to get back on track. For example, if you're not reaching the projected revenue, either the projections are wrong or the marketing program is not as effective as you thought. Knowing the assumptions behind the projections is important to find out why the projections have been missed. In other words, you need to know what you did right and what went wrong.

Forecast financing requirements .

Starting a business requires money. The forecast financial plan demonstrates how much money is required and when. If you don't have the required amount of funding to start the business, you may have to begin on the smaller scale your funding allows. The financial plan also shows you where a shortfall will occur. Adjust the revenue and expense projections to avoid the shortfall or make sure you have other funds available, such as your own savings or a loan to cover any cash deficit.

Obtain funding.

Investors and lenders are interested in entrepreneur's business plan, including the financial plan with projections and assumptions behind the forecast. If the financial plan is unrealistic, a common mistake with entrepreneurs, the loan or investment will not be forthcoming. Another reason the financial plan is important is because it lets you know what type of financing would be more appropriate.