Proactiveness is one of the key ingredients of profitability.
If you focus on how you can make profits today, you may achieve your short-term targets, but you’ll never thrive. You can only adapt to market changes and outdo your competition if you think ahead, plan in advance, and identify issues before they surface.
One of the most effective ways to do so is by planning out your financials in advance. Waiting for the last moment to reconcile bank statements and balance assets and liabilities is never a great idea. It makes your partners and stakeholder think that you’re lazy and don’t prioritize your business. Even tax authorities don’t approve of late submissions and filings.
Let’s take a detailed look at what financial planning is and how it’s done:
Step number 1: Gather data
When we say data, we mean accounting data. There is plenty of accounting data you need to plan your financials. Let’s look at the budget plan as an example. To set a budget for the upcoming fiscal year, you need records of all the expenses that your company usually incurs.
These include operational as well as non-operational expenses like depreciation, insurance, interest, and taxes. Similarly, you also need to take into account expected rates of inflation and see how your business gets affected by those figures.
All in all, none of this is guesswork. Your accountancy team needs to sit down and customize the reports in a way that they facilitates the process of budget drafting. To make things easy, you can always use accounting software like QuickBooks to generate all the relevant data in an organized manner without putting in too much effort.
Step number 2: Analyze the data:
The analysis part depends on the kind of planning you’re conducting.
Let’s say you want to plan and forecast sales for the upcoming cycle. The data analysis will take place accordingly. In this case, you’ll look at historical sales data and see if there is a pattern. Keep all historical sales figures in front of you and calculate the percentage difference between every two consecutive years.
If sales have always increased by around 10%, you can assume that they will follow the same pattern this year—given all other external factors remain unchanged.
This is a very simple form of data analysis. In the real world, most analysis takes place with the help of software. Accounting software like QuickBooks can tabulate, organize, group, and process small data in whatever way you want it to—in short, it’s a small data goldmine.
Whether you want to calculate financial ratios, create reports, analyze key financial indicators, correlate historical trends, or integrate the data with external information—QuickBooks can do it all.
Step number 3: Take decisions
While accounting software can give you the relevant information in whatever way you want it to, it takes a human analyst to help you make sense out of it. For efficient financial planning, you need QuickBooks to generate reports on an automated basis and you also need well-experienced analysts to work on the data.
Let’s say the reports indicate that your non-operational profit was lower in the past three years. You will take a closer look at the reports to see where you went wrong. Maybe the company incurred too many salary expenses or overspent on overheads. In this case, the analyst and the top-tier hierarchy will have to sit down and plan the financials for the next year in a way that these expenses can be controlled.
One option is to allocate a fixed budget for utility bills or plan your expenses in a way that they counteract the effect of expensive overheads. Set quantified targets of how much you can pay the electricity company in the next year and change the workplace habits accordingly.
If the financial reports indicate that there are extra funds lying idle, make a financial plan to invest them. Consider mutual funds and stocks, but make sure you set an allowance for how much you can pay. No matter what decision you take, set a numerical figure and work accordingly. Don’t deviate from the plan.
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