Make A Financial Plan And Work The Plan!

Make A Financial Plan And Work The Plan … In my 20 plus years of consulting small and medium size businesses it is rare that I find a business with a financial plan that is being monitored. Most financial plans are generated to obtain a bank loan and once that purpose is served the plan usually finds its way to the lower bottom draw of the owner’s desk to collect dust. The other day I had an occasion to check one of these plans out with a client whose business was in trouble and sure enough, most everything in the plan had been ignored. If only part of the plan had been followed and monitored the business would have been profitable and not in need of any outside help.

Usually when a financial plan or budget is first put together it is based on the business history, knowledge of the business and industry, and some valid assumptions about the business future. A flight plan is put together in much the same way, however as soon as the plane takes off and winds change, adjustments must be made in order for the plane to reach its destination. The same holds true for a financial plan. Once the business is put into operation, some things change either with the product or the marketplace, and adjustments must be made to achieve the profit objective. Therefore, a financial plan must be monitored to identify the variables as they present themselves.

In a business these variables usually present themselves when a Profit and Loss statement is compared to a financial plan. Unfortunately, since most small business owners do not value their financial plan there is no urgency to check it against a P…L statement that tells you what actually happened in the business for the particular period of the report. Since the plan is not being monitored it is very easy for the business to head off course and in the opposite direction of its profit objective.

Comparing each item in the Profit and Loss Statement (What is actually happening in a period) to the Financial Plan (What you want to happen) will identify the variables and help you identify where problem(s) exist in meeting your profit objectives. However, identifying the problem is only the first step in solving it. You must research further to find what is really causing the problem and then make the necessary adjustments. Various solutions should be considered before picking the best solution, and after implemented, the new solution should be monitored to see if it really solved the problem.

The importance of a Variance Report that compares a financial plan (budget) with a profit and loss statement cannot be overstated. These are two important management tools to control your business and reach your profit objectives. If you have a financial plan, start using it to control your business, and if you do not have one, create one, it could mean the difference between success and survival. Good Luck!

Copyright © Donald N. Lombardi

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