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How to Create a Long-Term Financial Plan?
What is a Long-Term Financial Plan?
A long-term financial plan is a projection of the business’s doable things to reach the financial goal of the organization. The business, therefore, must create the plan so that it acts as a warning, showing the pitfalls of cash flow dips, pinpointing the best time to execute tasks, and identifying financial needs for the future.
A long-term plan is usually longer than a single-year plan as a short-term plan is usually of a year or less, whereas long-term plans have tenures of more than one year. Long-term planning is more static; it may include the facets, such as brand awareness of the products, sales, SEO, public reputation, number of employees, social and digital media presence, etc.
Creation of Long-Term Planning
A long-term financial plan can be created using the following steps −
Reviewing the Strategic Plan
A financial planning process should start with a strategic plan. You must know what you want to accomplish at the start of the new year.
A series of questions that may be necessary to understand what needs to be accomplished may include the following −
Is expansion necessary?
Is more equipment needed?
Is it necessary to hire more staff?
Is any other new resource necessary?
How will the plan impact the cash flow of the business?
Is financing necessary? If yes, how much financing is optimum?
Developing Regular Financial Projections
After creating the strategic plan, you must develop monthly financial projections, recording the anticipated income depending on sales forecasts and estimated expenditures, such as costs of equipment, overheads, etc. Now apply the costs you incurred in the factors required in the previous step. Also, incorporate a projected income statement and balance sheet that may be handy during the overall preparation of the plan.
The financial projections are necessary to get an idea about the required financing. Planning ahead of time would help because it will offer you time to make a detailed projection that will be appreciated by your financial partners. Well-prepared plans will also reassure the bankers that your financial planning is solid. This will help you get more financing in the case of any such need.
You must also take into consideration which form of financing suits you the best. Usually, debt is a preferred method as the interest in debt financing is low. However, you may also go for other forms of financing based on the unique needs of your business.
Planning for the Contingencies
Without a proper plan to manage the contingencies, your long-term financial plan will be incomplete. You must be prepared for the rainy day when your business meets a sudden deterioration. The ways to meet contingencies may include creating an extra fund and/or keeping the line of credit open for extra funds that may be needed in the case the business loses its grip and goes in an undesirable direction. All businesses want to earn profit and grow, but there may be hurdles in the path due to uncertain business conditions. Planning for contingencies may be of great help in times of need.
Monitoring the Business
It is important to monitor the actual achievements in order to check whether the actual conditions of the business meet the projections. If there are errors in management, monitoring will reveal them. Moreover, if some corrections in terms of financials are needed, monitoring can show them too. Also, if any future course of action is needed, monitoring the business will lend a hand in such a case.
Look for Help
If you need help and want to rectify a problem that is out of your grasp, seek professional expertise. It is common for business owners not to know all the tricks of making a plan that will work without any help. So, seeking help in case of any need may work wonders for you.
In the end, it is to be noted that financial plans and financial statements are two different things. While financial statements offer a snapshot of what has already happened, the long-term business plans tell you what you need to achieve in the longer term.
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