Imagine the following situation: your company has just opened and the first few months are going well. However, after a while, the company starts selling all the products that are in stock, however it is not making a profit. Although it seems to be something impossible, this hypothetical situation is the reality of many businesses that do not have financial planning.
This planning of the company’s budget is an issue that, despite being very important, ends up being ignored by some entrepreneurs, which directly interferes in the survival of the establishment. However, before creating the planning that will be imposed on the company, it is necessary to understand what this type of finance organization is and what it is for.
What is financial planning?
This type of organization of the company’s finances is a sequence of procedures and conducts that assist the entrepreneur when creating and executing the estimate of the cost of the service performed by the establishment. Through this implementation of the financial guidelines, it is possible to define the objectives and goals that the store intends to achieve over a period.
For the tool to work fully, the entrepreneur needs to know his company and its size well that means that the goal that is established must be in accordance with the operational and physical dimension of the enterprise. The most interesting thing about this form of organization is its form of use, which can be limited to short periods or in large stages.
In the short term, the entrepreneur is able to use planning as a method of measuring the working capital necessary to keep the establishment in full operation. In other words, the tool helps the entrepreneur to identify the amount that is essential to pay the daily bills that the company has, such as bills for water, electricity, internet, among others.
In the long term, financial planning helps the entrepreneur to establish budget goals related to the amounts needed to invest in the business, for example in the purchase of new machines for production, hiring more labor, among others. With the help of the tool, the entrepreneur can better manage your business and understand what prin cipal spending within your business structure.
However, in order to improve the establishment’s planning, it is necessary to understand about the economic cycles that involve a business and how to control them in order to have total control of the enterprise’s finances. This factor can be decisive for the execution of the plan created for the money that the store receives and uses.
The entire establishment has three cycles that need to be monitored by management, as these cycles have great interference in the company’s administration and in the establishment’s earnings. If each does not have the necessary supervision, the other two may end up having negative results, so the importance of managing each one of them.
The economic cycle
The first cycle is directly related to the stock and the average time that each commodity remains in this sector, ranging from the purchase of the product to its sale. The economic cycle , as it is named, is easy to be calculated, the entrepreneur just needs to write down the date of purchase of each product until the date on which all were sold, from then on there is the average time and duration.
In this way, it is possible to calculate the average duration of each product, which are easier to sell and establish greater control in this sector, seeing if there is a need to increase the quantity of each product or reduce the volume of purchases.
The operational cycle
The second cycle is called the operational cycle, which refers to the entry of values. This cycle is related to the average time that the establishment has in relation to receiving sales. In order to know the average period of receipts, help from the economic cycle is necessary, that is, in this step, the time it takes to receive the amount related to the purchase of that product, ranging from its acquisition to its sale to a customer, will be calculated.
The financial cycle
To have a complete financial planning, the entrepreneur also needs to know the financial cycle of his store. This period, which is also called the cash cycle, refers to the moment when the entrepreneur made the payment to his suppliers until the date on which he received the amount for that product from his client.
Stay tuned to your business cycles!
In more consolidated companies, these types of analyzes are performed daily in a very automated way. But, if you are a small business owner and cannot afford the costs of this type of automation software, it is possible to have management programs aimed at this audience or even spreadsheets capable of helping you to carry out these calculations.
Prioritize evaluations of your numbers periodically to be able to determine your company’s financial planning in the medium and long term.
And even if you are in the initial phase of this planning and your business does not have certain information, be sure to start planning your finances. Think about projections or sketches of what your business’s ideal cycles would be.
Many businesses do not mature due to a lack of vision of the cash needs. Remember that this knowledge of the financial cycles is important for decision making in the company and avoids the lag between cash inflows and outflows.