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Basics of Financial Planning – 5 Simple Steps to Success!

I have been asked by many people over the past few years this question, “What do I need to do first in order to get my personal finances together?”

When people first started asking me this question, I have to be honest I wasn’t sure what to tell them.

Now that some time has passed though, I feel as though the ANSWER to this question is quite simple.

What I mean to say is that the ANSWER is simple, but what trips people up isn’t the ANSWER but the
ACTION.

So what I am going to do for you today is answer the question: “What do I need to do first in order to get my personal finances together?” by supplying you with some basic ACTION steps to get you started in the right direction.

STEP 1 – Determine Your Values.

This step may seem a little out of place for financial planning. Most people ask me, “What do my values have to do with my finances?”

I say to them, “Stop for a minute and think about it, is there anything more important than your values?”

All your decisions are based on your own personal set of values. Where you live, what you drive, how much and where you spend your money, what you focus your time and energy on – are all affected by your values.

This is why once I understood Step 1; I could tell people with one hundred percent certainty that once you have a clear picture of what you value most in your life – you’ll be better able to figure out how to create your personal financial plan.

At this point you need to take an action step: I want you to take about 30 minutes and write down what your top 5 values are. Remember, we are talking about values not goals.

Values are security, happiness and freedom. Goals are pay off mortgage, be debt free, etc… Once you have figured out your top 5 goals you are well on your way to personal financial success.

STEP 2 – Determine Your Goals.

Now that you know what you value in life, it is time to base your goals on these values.
What I mean by that is if you chose, Security as one of your values, then one of your financial goals could be to start putting aside 10 % of your income for an emergency account.

Another example would be if you chose Excitement as one of your value, then one of your financial goals would be to start putting aside $50 a week aside to take your family on a monthly trip.

Whatever you want to do that is in line with your values needs to be considered.

To get you started, I would take your five Values and chose 3-5 quantifiable, goals that you would like to accomplish for each value.

STEP 3 – Get Organized

Now that you have a better understanding of yourself and what you want based on your values you can begin to focus on your financial situation.

The reason, Step 3 – Get Organized is after determine your values and goals is because, this is the hardest part of the whole process.

Being that this is the hardest part of the process, you can now look back at your values and goals and have some motivation to keep you on track.

Getting organized sounds harder that it is, especially when it comes to personal finances.

The best way to get a handle on your total financial situation is create a system for filing and keeping all your personal financial documents so you know where they are and can reference them fairly easy if needed.

I recommend using a hanging file folder system. All you need is a hanging file folder box/crate, about 15 hanging file folder, and about 100 manila folders.

The most important items that you will need to track are: Taxes (7 years back), Retirement Accounts, Social Security, Investment Accounts, Savings and Checking Accounts, Household accounts, Credit Card Debts, Other Liabilities (debts other than credit cards and mortgage), Insurance. These 9 accounts are the most important and will help you have a better understanding of your total financial picture.

So your action step at this time is to create a filing system so that you can store, access and understand your personal financial documents. Don’t skip this step, it is the most important of the five.

STEP 4 – Determine Your Plan/Budget – Retirement, Savings, Investments, and Tithing

Once you have a better picture of your current financial situation. It is time to be honest with yourself and decide whether you think you are on the right track or you need to overhaul your financial plan.

Most people at this point have decided that they need a complete overhaul. Again, don’t get discouraged, because this isn’t as hard as most people make it out to be.

Determining your Plan/Budget is really just decided what your priorities are and where you money needs to go!

The hard part about this is making sure you are paying the most important people first. I make my priorities Self, Bills, Cost of Living, Fun/Excitement.

When I say Self – I mean “Paying myself first!” Taking a percentage of my hard earned dollars out of my paycheck and dividing in up between saving, investing, and tithing. I pay myself first because I am the most important in my life.

When I say Bills – I mean fixed expenses that you pay month to month. Mortgage payment, gas, water, power, etc…. Things that very rarely change month to month.

When I say Cost of Living – I mean variable expenses that fluctuate month to month. Groceries, dining out, vehicle gas, etc… Things that change month to month.

When I say Fun/Excitement – I mean expenses for things that I want to buy like, golf clubs, cars, guns, etc. Stuff that you want.

Over time you can create a budget yourself or tell a CPA exactly what you want and they can develop a budgeting system that you can use to keep track of what you spend and then you can adjust it yearly as needed.

STEP 5 – Implement Your Plan

Now that you have taken the time to figure out what your values and goals are. You have developed a system for tracking all of your financial information and created a budget based on your values and goals, you have to take action steps to achieving them. This will seem like the hardest part of the whole process but just remember that all things that are worth doing and getting better at take time.

Make a commitment to yourself to take small actions daily to move closer to your ideal financial situation. This process may take up to 12 months.

The question you need to ask yourself though is, would you rather be in the same situation financially in 12 months or would you like to be 5 steps ahead.

It’s up to you to make that decision. I hope this has been helpful and look forward to your comments.

10 Steps for Simplifying Business Plan Financial Statements

For most business owners and entrepreneurs, preparing, and communicating the financial statement section of a business plan is like trying to give driving directions to someone who doesn’t speak the same language.

“Numbers” is the language most investors speak. But, it is also the language that many business owners and entrepreneurs don’t speak or understand.

So how do you bridge this gap?

1) Understand there is a difference between “crunching” or preparing the financial statements and presenting them.

Preparing business plan financial statements often requires expert knowledge of double-entry accounting, taxes, merger and acquisition accounting, and finance. Skills most business owners or entrepreneurs don’t have, except for perhaps the most seasoned or those with accounting backgrounds. Presenting the numbers, however, only requires that you understand how what you plan to do translates into cash; and, what the potential financial risks for the business are, and how you’ll minimize them. If you cannot demonstrate that you understand these, then why would an investor ever give you money?

2) Get help early on.

Okay so you don’t have any money to hire a CPA or an accountant, and they just won’t do it for nothing. Reach out to your local college. Find the head of the accounting department or an accounting professor. Then, see how your project might be used to help the class learn about accounting, starting a business, or building financial models. The point is; you need someone who understands how to build projected financial statements based on your specific plans for the business. It is also important to find someone who can help you understand your financial statements.

3) Know the kind of investor you are seeking.

This is the same as a writer taking the time to know the audience before writing a book. For example, a banker puts more weight on the business’ liquidity, collateral, and ability to convert assets into cash quickly if the business runs into trouble and a loan is called. The emphasis on these financial measures is different for a venture capitalist whose interest is more on how quickly your business can grow, the potential future cash flow it can generate, and the potential for cashing out at an amount much higher than the initial investment.

4) Present only the numbers and measures most important to your type or types of investors in the body of your business plan.

Save the more detailed financial statements for the appendix and due diligence stage. Of course you need detailed financial statements and projections to support your business plan, but don’t think you need to share them with potential investors upfront. Investors are more interested in seeing if a few key numbers and financial measures make sense and that they support your strategies before they waste time digging through your supporting data. If they are interested in moving forward with you, believe me, they will dig into your financial statements.

5) Use graphs and tables wisely to present financial information.

Graphs are great for presenting trends and comparisons. Keep them simple and uncluttered. Be sure headings, labels, axis tabs, and so on are clear and legible. Nothing is better than a great graph or table to convey a message clearly and quickly. But remember, a bad graph or table can create much damage and confusion too.

6) Check you numbers.

Like typos, a wrong number can shatter your credibility instantly. It can cause your potential investors to lose confidence in your ability, or to question your understanding of the business. Be sure the numbers in your plan agree to the correct model or version of your financial plan. Verify the numbers in your business plan agree to all supporting documents.

7) Always include a statement of the sources and uses of cash.

If you have teenagers, I’m sure you always ask them where they’re going to spend the money you’re about to give them, before you hand the money over to them. The Statement of Sources and Uses does the same for investors. It tells potential investors how you plan to use their money. The statement accounts for all the money coming into the deal, whether it is bank debt, seller notes, personal cash, cash proceeds from the sale of stock, and so on. It then explains how you intend to use this money, whether it is to buy an existing business, buy certain assets, payoff existing debt, or payoff certain start-up liabilities, fees, and expenses.

8) Include all three fundamental financial statements: income statement, balance sheet and cash flow.

Don’t just provide potential investors with an income statement, it doesn’t give them the complete story. Also, be sure that all financial statements conform to Generally Accepted Accounting Principals or GAAP. Include at least three years of actual historical financial information, if available, and five years of projected financial statements. Although no one expects you to be able to predict the future with absolute certainty, projections do provide insight into your thought process, assumptions, and understanding of the business and its markets.

9) Maintain a good financial model capable of running sensitivity analyses to show how your projected results will change as your assumptions change.

This allows you and your investors to identify which assumptions are most critical to your future performance. Each critical assumption needs evidence to support it. Also, include in your model benchmark comparisons to other companies in your industry. Compare things like revenues per employee, gross margin per employee, gross margin as a percentage of revenues, and various expense and balance sheet ratios.

10) Use footnotes and descriptions to explain how key numbers were derived or the specific assumptions behind them.

As much as possible, keep these short and to the point. Don’t get carried away footnoting every number. Footnote only key numbers or unusual items.

At the end of the day, more business deals are not consummated because investors don’t feel like they can trust the numbers for one reason or another. Spend the time, effort and money to communicate your financial statements clearly and convincingly. It can be the key to making your deal a reality.