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The Importance of Financial Plans for Entrepreneurs
Financial plans are long-range road-maps aimed at increasing return on investment, market share, and dealing with foreseeable problems. A financial plan is basic to risk management. Financial plans are prepared in order to establish a viable risk management strategy (Hisrich, Peters and Shepherd, 2013, p. 21). The preparation of financial plans involves the analysis of risks involved in future events. Planning enables an organization to establish the various types of risks it is exposed to. Financial plans are also prepared to avert investment pitfalls. Financial plans give an organization a long-range focus and keep it on track. Financial plans are essential when assessing the viability of investment options. They provide a platform for evaluating investment alternatives. Plans enable an entrepreneur to put into consideration many facets of an investment, rather than focusing on return alone (Hisrich, Peters and Shepherd, 2013, p. 45).
Financial plans are prepared for the purposes of coordination and control. Different functions in an enterprise require for smooth running. Financial plans ensure that adequate funds are available when needed. Financial plans such as budgets are prepared for control purposes. Entrepreneurs cannot spend funds beyond the budgeted limits. Financial plans are used to monitor an enterprises revenue and expenditure (Hisrich, Peters and Shepherd, 2013, p. 15).
The onus of preparing a financial plan is determined by the size of the organization. Large corporations have finance departments headed by financial managers. The financial manager prepares financial plans in collaboration with the heads of other sections. In a small start-up, the entrepreneur prepares his or her ventures business plan including the financial plan. Where the entrepreneurs skills in financial planning are limited he or she can employ financial planning experts (Lasher, 2013, p. 33).
A financial plan is characterized as a failure when it misses achieving organizational objectives. A failed plan is evidenced by under performance, or even cessation of an enterprise. One of the major causes of financial plans failure is making unrealistic expectations (Lasher, 2013, p. 93). Some entrepreneurs erroneously assume that businesses will succeed and will yield returns promptly. Unfortunately, this is hardly the case. Most enterprises take some time before they break even and payoff. At inception, an entrepreneurs aim should be to earn back the invested funds. The money earned at the inception stage should be reinvested in the enterprise. Undoubtedly, the entrepreneur should rely on other sources of finance for his or her sustenance when the investment is at introduction stage (Lasher, 2013, p. 93).
Poor planning also accounts for the failure of financial plans. Some entrepreneurs fail to study the market to establish the nature of demand for their products (Greenwood, 2002, p. 47). In addition, some plans fail to factor in administrative costs. The amount of effort committed to ensuring smooth implementation of a financial plan influences its success. Where the entrepreneur is not committed to implementing a financial plan, the outcome is usually unpleasant. Commitment and discipline are essential for the success of a financial plan particularly at the start-up stage (Greenwood, 2002, p. 47).
Inadequacy of funds is also responsible for the failure of many financial plans (Lasher, 2013, p. 93). Many of entrepreneurs make unrealistic assumptions on the amount of funds required to initiate or run a business. Some entrepreneurs hope to finance their activities through external finance, which is hard to obtain. Unless an entrepreneur has a substantial portion of personal funds, the venture is exposed to financial constraints. Other factors that may lead to the failure of a financial plan include poor debt management, over borrowing, poor market research, poor financial planning skills and poor coordination (Hisrich, Peters and Shepherd, 2013, p. 86).
References
Greenwood, R. P. (2002). Handbook of financial planning and control. Burlington: Gower Publishing Ltd.
Hisrich, R. D., Peters, M. P. and Shepherd, D. A. (2013). Entrepreneurship (9th ed.). Boston, MA: McGraw-Hill Irwin.
Lasher, W. R. (2013). Practical financial management. Stamford, CT: Cengage Learning.
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