5 financial planning mistakes that too many business teams make
Finances are the backbone of any business. Without accurate projections, a thorough budget, and proper account management, even the most innovative startups are likely to fail.
Despite that, many businesses don’t prioritize financial planning and analysis (FP&A) processes enough and don’t take necessary steps to reduce risks. By avoiding a few common financial planning mistakes, you can increase your business’s chances of success dramatically (and keep the CFO happy at the same time).
1. Not keeping adequate cash reserves on hand
No matter how well you plan, unexpected situations will crop up. It’s just a fact of business (and life). Let’s say you’ve just started a new project for a client, and you realize that you don’t actually have all the required materials on hand.
Another common situation is equipment failure. If a crucial server or piece of equipment suddenly dies on you, and you don’t have a backup on hand, do you have the resources available to replace it and get back to work?
These types of expenses are unfortunate, but inevitable. Thirty-five percent of small businesses exceeded their budgets in 2020, according to data from Clutch. Without extra cash available, you might have to take out an emergency loan or pull funding from another project to cover the costs. On the other hand, having an emergency cash reserve can make these events much more manageable.
How much cash should you keep on hand? Ideally, you’d have enough available to cover your operating expenses for three to six months months if business slows down. If that’s not realistic for your organization yet, start by considering your worst-case scenarios and aim to have enough to cover them.
2. Failing to develop risk mitigation strategies
Somewhat related to point number one, many businesses fail to adequately plan for losses. Some of these are fairly predictable: if you run a retail store, it’s inevitable that some merchandise is going to get misplaced or stolen.
However, even in the case of unpredictable losses, it’s possible to put protective measures in place. This process, known as risk mitigation, and its importance should not be underestimated.
To develop effective risk mitigation strategies, you should sit down with stakeholders in each project or area of your business and ask them one simple question: “What could go wrong?” This type of “what-if” analysis can be highly revealing. With this information in hand, you can put a plan in place to minimize the chances of these things happening.
Let’s look at the retail example again. You could have specified locations in your stockroom for each item you carry so that you don’t have to worry about merchandise getting lost. You could also put anti-theft measures in place, such as limiting where customers are allowed to go or installing security cameras.
3. Not updating projections based on actual performance
Most businesses create financial projections that show their estimated revenues and expenses. These can be short-term (covering the next year) or long-term (typically three to five years). The projections are then used to determine operating budgets for that time period.
While these projections are typically based on extensive data analysis, painstakingly imported and formulated in Excel sheets, they’re rarely perfect. Precisely because they’re so labor intensive, many businesses also fail to update them once operations actually begin.
This can be a critical mistake. If your revenue falls short of what you expected, your planned budget may not be available. If the reverse happens, you may have extra cash sitting around that could be put to good use. To avoid these situations, it’s important to periodically review the numbers and make necessary changes to ensure accurate forecasting.
A tool like DataRails can be a huge help here. It connects to your other data sources to pull in your actuals without having to deal with excessive copy-and-pasting. Additionally, since it uses Excel as the front end, you don’t have to worry about learning a new system or losing all of the formulas you spent years refining.
4. Poorly-organized accounts receivable processes
The number one goal of nearly any business is to make money. Even non-profits need to maintain income in order to cover operating costs.
As obvious as that may seem, many businesses still neglect their accounts receivable processes. If you don’t have a reliable system for invoicing and ensuring those invoices get paid, you might be leaving a significant amount of money on the table.