I have been studying finance as part of my MBA requirements and found the topic of planning for growth especially very interesting, especially as it relates to small businesses.
What interested me in writing about this topic is that lack of financial planning can cause financial distress and business failure. Now I feel it is my duty to help the small businesses in town use my new knowledge to avoid distress outright!
The dimensions of basic financial planning starts with a best case, likely case and a worst case situation analysis. This strategic look at your cases helps examine interactions by examing the ideas you have to expand your business. For example, if you wish to expand your sales, do you have the infrastructure to support your activities? If not, you may need to borrow to make increased sales possible after looking at what your maximum capacity is.
To examine this financially, you need to have good proforma sales forecasts as well as proforma balance sheets and income statements to know your future direction. The objective is, of course, to see if you will have a cash surplus or shortfall.
If you require external financing, you may also want to calculate your internal growth rate before you decide to borrow. If the internal growth rate is acceptable, don’t borrow, and adopt a conservative approach. You don’t in the end growing bankrupt!
Have you implemented planning models in your business?