Why Good Financial Plan Is Important For Business Owners

2 years ago
3 mins read

Every business venture needs a good blueprint; a comprehensive framework that guides operations in all aspects and at every stage for successful delivery.

A business plan is a detailed breakdown of your business structure, the size and nature of your addressable market, your operational strategy and the business’ profitability.

Business and financial plan
Illustrating financial plan. Source: afeusa.org

A typical business plan is broken down into the following sections: 

Executive Summary: This provides a birds eye view of the business by providing a brief description of the company, listing out the products and services, explaining what the addressable market is, describing the unique selling proposition, introducing the management team and a brief financial summary.

Business Description: This section details the mission and vision statements, the company values, industry overview, business goals and objectives, critical success factors and the shareholders register.

Products and services: This section details the different products and services the company will offer, explain the unique characteristics of the offerings, explain the research and development strategy, explain the product development processes and future evolutions of the products and services.

The Market: This section covers the industry analysis, what is special about the markets being addressed and a detailing of all the analysis frameworks used. Popular analysis frameworks are Porter’s five forces, SWOT, PESTLE and growth share matrix.

Marketing and Sales: This section covers the marketing plan, what the market segments are and how the segments will be targeted, the strategic positioning of the products, market product fit, pricing strategy, strategic partnerships and channels, advertising strategy, sales strategy and growth forecasts.

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Operations and Management: This section covers where the operations and management team will be located, what will be outsourced and what will be done in-house, the manpower plans, production strategies, inventory management, suppliers, receivable and payable policies, permits and licensing, legal structure of the business, management structure and organogram, ownership structure and board of directors.

Financials: This section details the business start-up costs, the sales and expenses projections, the capital expenditures and assets acquisitions plan, break-even analysis, financial ratios and exit strategy (if any).

Implementation Summary: This is often the last section and details the goals and tasks to be achieved monthly or yearly, and covers any contingency plan to pivot the company in case of internal or external misalignments.

business plan template

The process of creating a business plan can be very tedious and time consuming, often requiring paying an external consultant to coordinate the process. All these seem to demand the three things an entrepreneur is in short supply of: his time, his money and his attention. Unfortunately, many entrepreneurs find excuses not to give these scarce resources towards a business plan and their most common excuse is that business plans are not useful and become obsolete the very day they are completed.

Business tree
Source: Strategic Business Ventures Inc.

Are business plans useful and worth the stress of creating them? That is the question every entrepreneur wants to get answered. The direct answer is YES. Business plans force you to critically examine all the aspects of your business before you launch, bringing clarity to the risks and opportunities that exist in the venture you are embarking on. The problem most people have that makes them regard a business plan as useless is one of wrong expectations. A business plan is not meant to guarantee business success.

In fact, in the business world, nothing can guarantee success and to think that the usefulness of a business plan is tied to ensuring the success of your business is a very faulty expectation. For every entrepreneur, whether a successful one or a struggling one, having a business plan that is constantly reviewed and brought in line with the current business reality is better than having none. It is a plan like every other plan we make in life, what is bad about plans is making rigid ones. If you make a plan that you constantly update and adjust over time, you will be doing better than the version of you without that flexible plan.

Once the business kicks off, a financial plan must also be made. The financial plan details the income and expenses projections, at the minimum, and complete financial statements if comprehensively made. I always advise companies to do the complete financial statements plans covering all the accrual based revenues and expenses, the breakdown of the company’s assets, the listing of the company’s financial obligations, the equity and the business cash flow. This is often referred to as the financial model. It is a very practical plan that gives the most important clarity of financial state to an existing business and forms the foundation for target setting and budgets. In addition to laying out the company in terms of its financials, it is a must have for raising some form of capital and for identifying if the company is operating above/below industry performance benchmarks.

Business concerns
Source: Inventiva.co

Until you do a financial plan, you will never know if you are paying your suppliers too much compared to your competitors, if you are spending too much money on overhead, if you are giving a too lax payment term to buyers, if you are generating enough sales from your assets, if you are paying too much for debt servicing, if you are generating enough unencumbered cash, or if you are having the right debt-equity capital mix.

Let me know your thoughts, suggestions and questions about this important aspect of entrepreneurship via an email to michael@olafusimichael.com or via comments below. And if you are an entrepreneur in need of some planning templates, I will be happy to send one your way.

Michael Olafusi


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