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Why is it important for entrepreneurs to develop financial plans for their companies?

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egordon6 | Student, Undergraduate | Valedictorian

Posted November 26, 2012 at 11:35 PM via web

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Why is it important for entrepreneurs to develop financial plans for their companies?

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pohnpei397 | College Teacher | (Level 3) Distinguished Educator

Posted November 27, 2012 at 12:06 AM (Answer #1)

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Entrepreneurs need to make financial plans so that they can have some idea of how much money they might be able to make and how much they will have to produce in order to make that much money.  This can help an entrepreneur to understand how difficult it will be to start their proposed business and whether it actually makes sense to try to do so.

A financial plan is, of course, only an estimate.  The entrepreneur needs to figure out how much it will cost to produce each unit of output.  The entrepreneur also needs to figure out what they will be able to charge for the output once they have created it.  By making these estimates, entrepreneurs can determine whether their proposed business is likely to be profitable.  They can have an informed guess as to how much they will have to produce in order to be profitable.

If entrepreneurs do not create a good financial plan, they may well mislead themselves about the potential profitability of the business.  They may feel that it will be easier and more profitable than it really will be.  This can lead to the failure of the business that they are trying to start.

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