Goal of Financial Planning
Financial Planning is the process of analyzing long and short term cash flows to and from a firm. Planning happens by forecasting and managing funds in order to optimize the firm’s profitability. There are three objectives to financial planning
- Forecast Long and Short term financial needs
- Develop Budgets that plan for financial needs
- Establish Financial controls to drive decisions
Basic Parts of Financial Planning
A short term forecast predicts costs, expenses, and revenues for a period no more than a year. The forecast may have other reports attached to it like a cash flow forecast that forecasts inflows and outflows in future periods that is based on known stationary costs, realistic allocations for changing costs, and the trend of sales. The trend of sales can be figured from past financial statements as a basis.
A long term forecast predicts costs, expenses, and revenues for a period term beyond a year in terms of 2, 3, 5, or 10 years.
The forecast around short and long terms help develop the financial plan, this plan then creates the budget for operational activities. The Master Budget helps create a cash flow and capital budget.
The capital budget makes plans for purchasing of capital, such as; property, buildings, equipment, software or asset development/ maintenance. A cash flow budget estimates inflows and outflows during a part of period. A cash flow project helps anticipate borrowing needs, compliance with debt terms, allocations for operating expenses, and manage investments.
The Operations Budget combines other budgets and summarizes the activities behind operations and estimates of costs and expenses needed to operate a business. The operating budget should have costs of supplies, inventory, distribution, travel, rent, technology, marketing, and salaries. The awareness of costs helps create financial controls that keep the company from getting in a bad cash flow situation or any sub par financial health position.
Financial Controls include processes that help coordinate operations with financial plans. This includes periodic review of the budget to make sure a management is in tune with operations and to take any corrective action when necessary. The budgets break apart all finances and disperse accountability to separate departments. This allows management to identify and trace needs to specific areas. This helps in managing day to day needs of business, controlling credit operations, and making capital expenditures.
Why Financial Planning is Important
When a business is operating it tends to have money going different places at different times, this is why small business managers have such a hard time, if they do not have a specific layer of management to help create a system to understand the flow of money through a business. Often times you have payroll taxes due on the 15th of next month, loans due at the end of the current month, and a changing demand of products that makes it hard to pinpoint when you buy another shipment of what as you wait to learn how much; money flows can be planned but may always eventually run into a cost at a unexpected time.
These are major investments into the operations of the business. This could be assets, equipment, land, legal assets, or research. Understanding all these investments into one concept of capital, helps decide whether the risk is worth the profit potential of a specific direction for the firm.
Credit is an increasingly popular way of payment with customers but is a hassle for businesses. The reason why you may see a premium on credit card transactions or a discount in cash or debit, is because income made on credit hits the books as accounts receivable, and the firm does not actually see the money till sometime later. Also important, is if a company offers line of credit to its customers, the firm has to have accounting procedures set up for recording and accepting payments for credit.
Many large firms need to have good financial planning to be financially healthy in case they wish to borrow from investors or lenders. A company that is attractive to financial lenders and investors can easily find financing if it needed it, by either borrowing and purchasing debt, or by selling equity. Again, either choice has different requirements of accounting and will often show up in the previously mentioned budgets, so that companies can coordinate financing efforts with operational, and administrative activities.
Financial planners help make a business successful by forecasting and managing funds within a firm. Whether an entrepreneur or an individual reading out of interest; successful management of money is not for business only, anyone can do it if it is on a relevant scale enough to you.