A male coffee shop owner sits in his shop. Before him are papers. He is holding a computer tablet in his left hand a smartphone in his right hand. He is comparing financial data.
The best financial planning software for your venture depends on your needs, goals, business stage, the industry your business is based in, and how much risk you want to tolerate. — Getty Images/Anchiy

Financial planning software empowers small business owners to make better decisions around resource allocation and growth, get deeper insights into the drivers of profit and loss, and improve tax planning. Different tools use different approaches to help you understand your business data and extract deeper insights from your financial statements.

As you explore various financial planning tools, you may find providers are either categorized as cash-based or goal-based. Here’s what these two approaches mean and how to determine which category is ideal for your business strategy.

Goal-based financial planning

As the name suggests, goal-based financial planning begins by assessing your business goals, assets, and savings. Choose a goal, such as expanding, increasing profit, or acquiring or merging with another business. Then allocate the resources you’ll likely need to achieve that goal — revenue growth strategies, investments, cost-cutting measures, or financing options.

Goal-based financial tools then help you create a plan based on those variables. It’s a flexible approach to financial planning that considers an endpoint (your business goal) and then adjusts for savings, spending priorities, risk, and timing.

“This approach is premised on the belief that life and markets change so frequently that it is better to invest [your] time in adjusting the plan regularly as life happens rather than investing that time in a more precise planning process upfront,” wrote Mark Ciucci, Senior Practice Management Consultant at Wealthcare.

Software tools that take this approach offer the direct benefit of tying all your expenses and income to a big-picture objective. However, unlike cash-based financial planning tools, goals-based software won't necessarily record total earnings and categorize your expenses so you can see where you may be off track.

[Read more: What Is the Difference Between Accounting and Financial Planning?]

There’s a time and place for both approaches to financial planning depending on your business growth stage, industry, and other factors.

Cash-based financial planning

Alternatively, you could use a cash flow-based approach to financial planning that accounts for every dollar you spend and earn. The focus of this approach is on your day-to-day finances and is best used for ensuring short-term solvency.

Software that falls under cash-based financial planning meticulously tracks income and expenses, creating detailed cash flow projections and adjusting resource allocation based on real-time data.

“Cash-flow-based planning is ideally suited for doing comprehensive financial planning and detailed income tax planning for clients with complicated compensation structures, business owners, etc,” wrote Ciucci.

The drawback to this approach is that cash-based financial planning is time-consuming and less flexible.

“While this creates a more thorough analysis than goals-based tracking, it can be tedious to input and project every dollar,” wrote US News & World Report.

Cash-based financial planning gets granular, showing you how every dollar you’ve earned, saved, invested, or spent has impacted your progress.

Which approach is right for your business?

There’s a time and place for both approaches to financial planning depending on your business growth stage, industry, and other factors. Goal-based financial planning is popular among startups that may not have income yet or that want to attract investors. Cash-flow planning can better suit more established businesses that are stable and are trying to optimize their operational costs.

Both approaches can give you a complete view of your company’s financial health. Financial planning advisers will use goal-based financial planning software to help their clients create a road map toward a specific outcome. They might then use the cash flow-based approach to monitor progress against that outcome.

Ultimately, the best financial planning approach for your small business is the one that aligns with your specific needs and tolerance for risk. Consider consulting a financial adviser to find a plan that works best for you.

[Read more: How to Create a Financial Forecast for a Startup Business Plan]

CO— aims to bring you inspiration from leading respected experts. However, before making any business decision, you should consult a professional who can advise you based on your individual situation.

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