Let’s discuss the development and role of a sound “financial plan” when preparing to launch a successful retail operation.
First off, the financial plan is incorporated in the business plan, the financial plan should provide facts and figures showing how fast the business is expected to grow and how that growth will be funded. Keep in mind that it is critical to support the financial plan with documented research. Be sure the numbers add up. When developing a business plan with the goal of securing capital financing, all assumptions and cash flow projections must make sense to the lender.
Your plan should cover a three year period. While projecting three years out is like predicting the future and will sometimes be inaccurate it is a path for proper planning. It also serves as a gauge or barometer when tracking the success of your overall business plan.
At minimum, at least three years of budgeted financials should be planned and projected. Be accurate and realistic, remember to; “overstate expenses while understating income.” Project years two and three, but use a simple “growth” curve (on both expenses and sales) for projection. Remember, retail is impacted by economic conditions, layoffs, change of seasons, holidays and physical surroundings therefore plan accordingly.
The plan should allow for proper forecasting of financial needs necessary to operate your business. It is a common mistake to use the P&L (profit and loss statement) to run your retail store versus a cash flow analysis. Your P&L does not account for your payables each month or inventory purchases, etc. In reality it is possible to have a profitable P&L, but still run into serious trouble due to cash flow issues.
The financial plan should also give you a measuring tool for your retail store. Typically, when a new retailer opens their store it’s hard to know if it is doing well or not. An example is that your P&L states that you are doing well, cash flow is positive, however, when compared to your business plan, you may find that your projections are way off. There can be many factors for this inconsistency, look for patterns and predictors that may be economically driven or simply market conditions.
Regular updates and adjustments are not only necessary but something every business owner should practice on a routine schedule. Review your plan monthly and adapt according.