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How financial planning can help your small business

06 February 2023 dot 4-minute read
Small business Plan Well Feature Healthy Finances Financial Planning
A financial plan will be helpful when you want to stress test the business. (Credit: Shutterstock)
As the adage goes: if you fail to plan, you plan to fail. The same applies to small businesses. Financial planning can make or break the success of your small enterprise. A survey by GoDaddy in Singapore reveals 30 per cent of Singaporean start-ups fail within three years. Without a financial lifeline, you have to be smart with money to keep the lights on at your business.

What is financial planning?

Financial planning means taking a proactive approach to ensure your venture's sustainability. You have three tools to map your business's lifespan: income statement, cash flow forecast and balance sheet.

Income statement

The income statement will inform your every business decision since it summarises financial operations. It shows expenses, income and profit over a certain period.
 
Since the income statement shows when you're making a profit or loss, you can make educated assumptions about your company's future performance.

Cash flow forecast

A cash flow forecast helps you determine how much cash your business is expected to earn and spend. It helps you anticipate a financial setback, so you can make the necessary changes, such as adjust collection schedules or cut overhead costs, before a problem worsens.
 
On the other hand, a cash flow forecast can also determine if you have leeway to make investments to grow the business.

Balance sheet

A financial plan spells out how you plan to mitigate signs of trouble like cashflow chokepoints or high debt-to-equity ratio. (Credit: Shutterstock)
A balance sheet is a snapshot of your business's assets, liabilities and equity at a specific time.
Assets are anything of value to a business, from cash to equipment your company owns. A liability is something the business owes, like the monthly lease of a business space or a long-term bank loan. Equity is the amount you are left with when you deduct all your liabilities from your assets. It represents what you own in the business, including investments and profit.
 
A balance sheet is vital for lenders, as it shows the financial standing of the business and you, the owner.

Benefits of financial planning

One of the key benefits of financial planning is informing a business owner when and how to expand and grow the business. (Credit: Shutterstock)
Financial planning can help you detect problems that may cost the business. For example, an income statement can show when it's time to change to more cost-efficient suppliers.
 
Financial planning also allows you to take strategic actions to set up your business for success. If you foresee your business earning more in a particular year, you can start planning for expansion. Banks and investors will require meticulous financial statements before they provide financing to grow your company.
 
Most small business owners see their business as their primary source of income. However, this comes with risks for the owner and the business. Financial planning can help manage your financial exposure to the business.
 
As the Certified Financial Planner Board of Standards, Inc. explains, your exposure to risk multiplies with every unexpected circumstance. For example, a natural disaster can cause physical harm to you and damage your business assets, leading to a dent in operations.
 
Protect your company with business insurance to help cover unexpected property damage or legal liability. In addition, medical insurance may be necessary if you have employees. Ideally, you should have a separate savings insurance plan for your financial health.
 
Financial planning can be challenging and taxing, but it is rewarding. Having a plan gives you a better handle on managing risks in a volatile environment, turning your vision into a profitable reality. Further ease your worries by hiring a financial partner who can help you prepare for the unthinkable.
 
A "scarcity mindset" may be preventing you from achieving goals. In this episode of AIA Voices, finance experts Anna Haotanto and Lachlan Campbell, with AIA Ambassador Nico Bolzico, explain how this way of thinking prevents financial wellness. Watch as they share tips to put you on the path to financial freedom.
 
 
AIA Voices is a community of influential and educational voices from around Asia to talk about life, health and wellness. A platform to educate, motivate and inspire people to make positive behavioural changes on their health and wellness journey. Providing an opportunity for communities across Asia to connect, collaborate, and learn from each other. Designed to drive AIA One Billion, our ambition to engage a billion people to live Healthier, Longer, Better Lives by 2030.
 
References:
 
GoDaddy. 2016.The Entrepreneur Era: Millennials, Baby Boomers and The Future of Work. [online] [Accessed on 11 November 202]
 
CFP. 2018.Financial Planning for Small Business Owners. [online] [Accessed on 11 November 202]
 
Enterprise Singapore. 2020.Ways to get your business into a good financial position. [online] [Accessed on 11 November 202]
 
PennState Extension. 2016.Developing a Business Plan. [online] [Accessed on 11 November 202]
 
Netherlands Chamber of Commerce Financing Desk. 2022.Financial plan. [online] [Accessed on 11 November 202]
 
Credit Suisse. 2016.Liquidity planning. [online] [Accessed on 11 November 202]
 
Disclaimer:
This is general information only and is not intended as financial, medical, health, nutritional or other advice. You should obtain professional advice from a financial adviser, or medical or health practitioner in relation to your own personal circumstances.