As I proposed last week, planning a business does have some striking similarities to personal financial planning. So what are these? Surely business planning is completely different?
Let’s start with some obvious similarities…
In personal planning, you are generally most concerned with the bottom line figure, and after this, in trying to trim down your regular/semi-regular expenses. When planning a business there are several more objectives, but managing your cash flow and budgeting costs is definitely one of them.
Personal finance is almost always concerned with cash. How much money do I have and when? In business planning, there are a plethora of other reports and indicators of the financial health of a business, its risks and vulnerabilities. But – cash flow is an indispensable part of planning, especially for new businesses. It’s an oft-repeated warning, but a business can be profitable on the surface but fail if it cannot pay its debts on time.
If you’re really into personal planning (isn’t everyone? Oh just me then…) you might have a long-term plan, evaluating how short-medium term activities (your holiday expenditure) affect your long-term goals (becoming a millionaire, or retiring, or both!). I personally don’t think this is an extreme use of personal planning – it draws on the same data and same types of calculation that shorter term planning does.
My feeling is – if it is possible to plan ahead, then why not plan it? It’s better to have some idea than no idea, after all. If you are a budding entrepreneur, you can test run your financial planning skills in your own life. When is the optimal time to buy a new car? What happens if you need a new boiler? These are all considerations that have the same basic elements as larger financial decisions you might make when making a good financial business plan.
Here are a few of the items I consider when doing personal planning:
- How much income my household receives
- What are the costs to the household of generating this level of income (transport, etc)
- What my household’s expenditure is on necessities (keeping the lights on, etc)
- How much money I want to allocate to savings/pensions
- What kind of wealth improving projects should I engage in (buying/improving a house, etc)
- How much I want to spend on luxuries, such as hobbies and holidays
And here are a few I consider when planning a business:
- How much revenue will I generate, in the best and worst cases
- What are the direct costs of generating this revenue
- What are my operating costs, including staff salaries
- How much funding, if any, does the business require and what sort of funding will it be
- How much capital does the business have to spend on growth/marketing
These lists are brief – but you get the idea. There can be quite a bit of crossover.
Now, one thing which seems most different between personal planning and business planning is how you go about forecasting your income. For personal planning, it’s generally simple, at least for short-term planning. But for longer-term person planning, or for periods where you expect to see rapid salary changes or bonuses, you will start to think about planning personal income a bit more like planning a business’ income. Stability or changes in your income level, whether you are a household or a business, will determine when you can commit to big projects and how vulnerable your finances are to sudden changes.
Thinking about personal finance in the long term is a great way to get started thinking about business planning. If you carry through the same considerations into business finance you’ll be well armed to make prudent decisions that affect the future of your business.