Financial Planning for a Business
Managing personal and business finances is not the same thing.
12:23 26 February 2021
It’s usually not a big deal if your personal financial plan doesn’t match the reality because you can easily get a loan at Payday Depot whenever you need it. But it’s a completely different matter for companies. With a business, it’s not just you who is affected by the company’s financial performance but also other people who work for you, as well as your clients.
What to Consider when Creating a Financial Plan
The financial planning process for a business is designed to predict future financial results. Also, it helps discover how to use the organization’s financial resources to achieve its short- and long-term goals. Since planning is all about looking into the future, it is important to use not only analytical skills while making it but also creative thinking.
Businesses that make a huge effort to make a financial plan can grow their revenue. Moreover, they can do it way faster than companies that don’t pay much attention to the planning process.
Financial planning provides the reasoning for making decisions backed by numbers. It shows where the company should dedicate its resources to increase revenues and manage costs as efficiently as possible. Productive financial management allows your business to devote more funds to marketing, expand operations and product development, which, in turn, leads to the company’s growth.
Strategic financial planning dictates the course of action for the business. It drafts the tasks that need to be completed and the person or team responsible for completing them on time.
Financial planning takes the actions outlined in the strategic plan and converts them into money. The plan shows the projected income from the upcoming implementation of strategies and the costs required to complete all the steps. Senior management, marketing, and operation staff are all greatly involved in the strategic planning process.
Financial planning in business requires the skill of using spreadsheet software. Even for small-sized businesses, financial models for predicting future earnings can be rather complex. Research and data collecting skills are also critical. Making realistic predictions for key variables is crucial. The accuracy of the plan depends on whether the assumptions for the financial models were based on high-quality information.
An organization must work on building a financial plan every year, and it should include developing a projected income statement for each month. Some companies also prepare long-term financial plans for up to 5 years. A long-term financial plan can be useful for companies who spend a lot of time on product development.
Every single month, actual financial results need to be compared with forecasted figures. Any significant differences must be identified and deeply analyzed. Such variances might require strategy adjustments to get the business back on track and meet its revenue and profit goals. Variance analysis reveals when the competitive environment has changed significantly from what the company expected.
To Be Noted
Since there are so many variables that affect an organization’s performance, and each of them is difficult to foresee, making a business financial plan is not an easy task. It is especially challenging to predict consumer behavior, as in how well customers will respond to both products and prices charged.