Finances are integral to business owners, as running an enterprise means watching every dollar. When money is tight, you need fiscal responsibility and sound strategies to make your company profitable. One method business owners use is a five-year financial plan.
What Is a 5-Year Financial Plan?
A five-year financial plan defines what your enterprise will do over the next half-decade. While a lot can change in five years, this outline provides a better sense of direction. Brands need this plan every five years to reflect how it, the industry and the local economy have changed.
Imagine you started a business in March 2013. The Bureau of Labor Statistics says you had a 34.7% chance of survival at the 10-year mark. What helps your venture survive despite the economic conditions? You need short and long-term outlooks, as they significantly impact outcomes.
Why Is a 5-Year Financial Plan Crucial for Businesses?
Companies thrive when they have direction, and a five-year financial plan puts yours on the right path. Here are three reasons your company needs one for long-term success.
Defining Goals
Among the most vital benefits is defining your goals. Where do you want your business to be in five years? This plan outlines the specific targets you strive for. For example, you could consider two more locations in the same city or another country.
A clear and accurate five-year financial plan makes decisions much easier for decision-makers. With this information, you better understand the enterprise’s expenses and where you should dedicate resources. The data in your financial outlook may indicate it’s not a good time to expand, and you should wait for better conditions.
Identifying Financial Health
Before you look to the future, you must know your company’s financial health. The five-year plan reveals how well your operations are going and the long-term implications. For example, the immediate outlook determines liquidity and how easily your organization can pay bills and employees.
With a five-year financial plan, you can set up your business for long-term success. This detailed map reveals your solvency and how prepared the brand is to tackle its long-term goals. How profitable will you be in three, four or five years? Sales projections and expenses determine your palatability.
Luring Investors
While this plan is critical to your employees, investors are also interested in your financial outlook. A detailed financial forecast lets investors know whether to invest in you. They value extensively researched business plans to find the best opportunities.
Thorough financial plans show how well your enterprise could do over the next five years while displaying the pitfalls. Future returns could be lucrative, but it’s best to be transparent with your investors. A five-year financial plan shows risks and helps shareholders understand your direction.
How Can You Craft a 5-Year Financial Plan?
If you see growth opportunities, it’s wise to start writing a financial plan. How can you determine your business’s next five years? Here are three elements your outlook should include.
Gauge Your Finances
First, your plan should detail the company’s finances. How much money is coming in and out of the business accounts? Start by including your income statement to reveal your revenue and expenses. For a broad view, use your income statements to see how your organization has fared in the past few years.
The income statement reveals your profitability and how well you manage expenses. These factors are critical when investors evaluate your fiscal responsibility. For example, consider your company’s fuel costs. Savvy entrepreneurs know older vehicles and heavy loads increase fuel spending, so they upgrade their fleets and wisely manage their cargo.
Forecasting the Future
Next, you must forecast the future with sales projections. These estimates determine your financial viability over the next five years. With this information, your executives know what to expect and what areas need adjustments for better results. The sales forecast also influences your budget and how it impacts your operations.
Creating a sales forecast is integral to your five-year business plan and requires time and dedication. Start by researching sector-wide trends for your niche. Experts say entertainment spending is rising, so you could see a positive rise in this sector. Your forecast should also include annual growth rates to gauge future fiscal years.
Establish Key Performance Indicators
Five years is a long time for a business, so you’ll need key performance indicators (KPIs) to track your progress. Establish these benchmarks to create short and long-term goals and measure the success of your five-year financial plan. How much revenue growth do you want after next year or the fifth year? Your KPIs show where adjustments are necessary.
KPIs are also integral to demonstrating your company’s progress. Employees, shareholders and executives become more knowledgeable when they see performance metrics over time. Your organization’s KPIs could track debt-to-equity ratios, net profit margins, revenue growth rate and other critical metrics of business health.
Building a Better Future for Your Business
Running an enterprise requires hard work, dedication and careful planning. Finances are tight, so you must be deliberate with every dollar earned and spent. How can you improve your company’s fiscal health? A five-year financial plan sets you on the right path with direction and attainable goals.
Jack Shaw, editor of Modded and author of numerous articles on business success and self-improvement, seeks to inspire readers with his practical tips and strategies for growth. His writings can be found on HellaWealth, USCCG and more.
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