India is going through what appears to be a golden age of entrepreneurship. Scarcely a week goes by without reading about a start-up who has got huge funding, or finding out that a colleague or friend is starting his own venture. If nothing else, many of those who leave steady jobs are doing so to join start-ups.
But there is more to entrepreneurship than grand plans and a path-breaking idea. When push comes to shove, money has to be put on the table, and that’s where the necessity of a financial plan comes in.
Let us look at the critical uses of a financial plan:
Determine the feasibility of your business venture
Every young entrepreneur is necessarily a dreamer. But simply wishing for your company or venture to be a success will not make it so. Even firms with popular products have failed for no other reason than a lack of funds at the right time. Sometimes cash takes too long to flow in. Sometimes you do not have the money to expand when demand is high and by the time you find the money, nobody wants your product. Make a financial plan first and foremost to see if your business is viable before taking the plunge!
Forecast Future Requirements
Your financial plan is ultimately an exercise in prediction. Even the most savvy advisor will not be able to swear to your plan’s accuracy, but an estimate of when you will need money to pay suppliers, when you will get money from your customers, and when you might need money from a lender will considerably smoothen your path. By telling you when you will need to borrow money, when you will be able to pay it back and how much time you will need to pay your suppliers and employees, you will be able to set expectations accurately right at the outset. Trust me, it will save a lot of heartburn later!
Without funds, there can be no business, and having a plan in place allows you to understand where your money is coming from, where it is going and finally, when it might run out.
Understand your best and worst-case scenario
Any plan is by its nature uncertain. That is why a smart planner always incorporates a variance analysis in his financial plan. Ensuring your plans have a ‘best’ and ‘worst’ case scenario ensures you will also prepare for the downside of an unsuccessful venture. Yes, you would like it if your product moves ten thousand units in the first month after launch, but what if it sells only five thousand units? Or one thousand? For that matter, what if it is more popular than you thought and sells twenty thousand units? Do you have the money to meet the supply requirements?
Last, but not least, in fact perhaps the most important factor – obtaining funding.
These days, whether you opt for funding from a Bank, a private equity investor or even your own family members, the odds are that they will want to see your business plan to understand what it is you plan to do and where the money is going to come from to give them a return on their investment.
So consider the financial plan as an integral part of the business venture itself. Without funds, there can be no business, and having a plan in place allows you to understand where your money is coming from, where it is going and finally, when it might run out. A sound financial plan that makes it clear that you have not just a big idea, but also a concrete plan to make it work, could make the difference between being seen as ‘just another dreamer’ and as a serious businessperson.
It is, then, safe to say that Financial planning is indivisible from success in business. And though, as the poet Robert Browning wrote, “The best-laid plans of mice and men, go often askew”, that is no reason not to make a plan at all! To plan is to prepare for the future, and in the field of entrepreneurship, a financial plan is as essential as your product idea.