What is financial planning, why is it needed and how to do it...

Business is like a living organism – anything can happen. Predicting all situations is a utopia, but with a competent approach, you can prepare and calculate a lot. To do this, the company must have competent financial planning.

In today's article, we will tell you what financial planning is, why a business needs it, and share recommendations for drawing up an effective plan.

What is financial planning?

Financial planning is the process of managing, distributing and controlling funds, taking into account all the goals and objectives of the company. In fact, it is a forecast of expenses and income for future periods.

Planning is based on the main measurable indicators of the company and analysis of the probability of various scenarios for the development of events.

Before launching a new business or project, a manager needs to clearly understand when he will start making a profit and at what stage the invested money will pay off. This greatly simplifies the process of managing current processes and facilitates strategic planning.

Do not confuse financial planning and budgeting. Financial planning is the creation of an algorithm of actions that will lead a business to its goal. Budgeting is a set of measures for the preparation, implementation, control and analysis of budget execution. In fact, budgeting is one of the elements of planning.

For example, a retail store selling smartphones decided to launch advertising next year. The sales funnel provides for 4 million impressions, which will cost 1 million rubles. Analysts have calculated that these events will help attract 10,000 leads, of which 550 will purchase smartphones for 25,000 rubles. At the same time, 2 managers with a salary of 100,000 rubles were appointed to this project. It is necessary to assess the feasibility of the task. Taken together, this process is planning.

In 2025, revenue from the sale of smartphones will amount to 6 million rubles, advertising costs will amount to 1.5 million rubles. Another 2,4 million rubles will be spent on the payment of wages. This process is budgeting.

The main goals and objectives of the financial plan

A competently drawn up and correctly implemented financial plan helps the business to develop successfully and achieve its goals. In addition, the financial plan will provide answers to the following questions:

— Will there be enough own funds for implementation? Before starting a new project or business area, you need to understand what source of funding to use to implement the idea. For example, to open a new business direction, Alex decided to purchase new machines, rent premises and hire 25 employees for production. If you implement your plans without a preliminary analysis and drawing up a financial plan, then there is a high chance of going bankrupt and getting losses.

— What is the goal of the business and how to achieve it. A timely detailed financial plan allows you to take into account the interests of all persons involved: the manager, employees. For example, warehouse employees turned to the management with a desire to increase the amount of leftovers so that the stock of materials would be for three months. The manager is against it, because he considers this approach unprofitable for the company. A compromise was found in the process of drawing up the plan: the warehouse software that controls the balances was optimized. As a result, the need for large stocks disappeared.

In addition, financial planning helps businesses solve a number of problems:

to identify reserves to increase the company's profits;
to determine the most effective use of funds;
find the most rational direction for the company's development, which will bring profit in the near future;
attract investment in the business;
to ensure the optimization of financial relations with various financial structures (banks) and the budget.

Types of financial planning

There are short-term, medium-term and long-term financial planning.

Short term

In this case, the plan is drawn up for 2-3 weeks and looks like a detailed list of expenses and income. The costs for such a short period of time, as a rule, are known (rent, salary, settlements with counterparties), so planning consists of collecting information and analyzing the situation for the availability of the required amount of reserves.

Medium-term

The period of such planning ranges from several months to a year. At the same time, the forecasting of revenues and expenditures will be quite accurate.

For example, an entrepreneur knows exactly how many personnel work in his production and can calculate with high accuracy how much money will be needed to pay for their work.

However, not all areas will be able to predict accurately. Let's assume that on the horizon of four months it is still known which bills will have to be paid, but what calculations will be due in a year are no longer known.

Long-term (strategic)

The most inaccurate type of planning, in which the company sets goals for itself for 3-5 years and plans its finances based on them.

Strategic planning is not based on known data on future costs, but is based on current financial indicators. For example, profitability, turnover ratios and net profit are analyzed.

Long-term planning is the setting of strategic goals by the business, which at this stage do not require detailed study. The main goal of this type of planning is to determine the tasks that the enterprise will solve on the horizon of 3-5 years and what results these measures should bring.

Sometimes financial planning is distinguished not only by time, but also by:

– the type of enterprise (commercial, budgetary, non-commercial);

– goals (investment, for loans, for the issue of shares/bonds);

– stages of the company's life cycle (operational, organizational, liquidation).

Advantages of the financial plan

A successful business is one where there is order and a clear structure. Financial planning helps with this – this is its main advantage. However, not the only one:

Planning and control of income and costs. A proper financial plan helps a business plan income and expenses for a specific period of time. This allows the manager to set ambitious, but realistic financial goals for the enterprise and monitor their implementation.
Attraction of investments. Any investor or lender wants to make sure that it is stable and reliable before investing in a business. A detailed financial plan helps in this, which will show the current state of affairs and the prospects of the company in the future.
Making informed decisions. Having data on current affairs in the company and a forecast of future income and expenses, it is easier for the owner to assess the effectiveness of certain decisions and choose the best ones.

Stages of financial planning

Two ways of forming a financial plan are used: from top to bottom and from bottom to top.

From top to bottom

With this approach, the owner determines the goals of the business for the future and then brings the information to the attention of subordinates-executors. Then each link in the chain draws up its own plan, focusing on the designated goals and deadlines.

From bottom to top

In this case, the planning process begins with the heads of departments, who hand over ready-made plans to the manager. For example, each department transmits information on the number of employees required, on funds for staff training and the purchase of equipment for the reporting period. Based on the data obtained, the company's management draws up a general financial plan.

Conventionally, the planning process can be divided into five consecutive stages:

Historical data collection and analysis. The responsible employee collects financial indicators for past periods: income, expenses, receivables and payables, investments. Next, the collected data is analyzed and the financial performance of the enterprise is assessed.
Goal setting. Specific and clear financial goals are set.
Forecasting income and expenses. Based on the collected data and the goals of the business, income and expenses are forecasted for a specific period. This helps to assess the prospects and efficiency of the enterprise for future periods.
Drawing up a strategy and action plan. After defining financial goals and forecasting expected results, the process of developing a strategy begins. Then an action plan is drawn up, which already consists of specific sequential steps and measures to achieve the goals.
Control. After completing the previous stages, it is time for monitoring and control. The final stage is necessary to evaluate the effectiveness of the plan and compare the results with forecasts in order to make timely adjustments if necessary.

Structure of the financial plan

A clear structure and form of a financial plan is defined and unified only for state organizations. The rest of the companies independently decide on the sections and information that will be displayed in the plan.

There are enterprises for which one document is enough - a cash flow forecast, which is a table with data on the receipt of money to the current account and spending. The document usually reflects income from operating activities, investment income, personnel costs and loan payments.

When filling out the cash flow, it is important to keep in mind that all information on expenses and income must be shown in the document of the period in which the actions will be performed. That is why it is extremely difficult to control the real financial efficiency of the enterprise based solely on the cash flow table.

To increase the accuracy of financial planning, another document is used - a profit and loss forecast, which reflects the expected costs and income. The peculiarity of this document is that the indicators are equalized by periods - they are shown not as a total figure, but in parts, so that as a result, the expense corresponds to income. Thus, the full financial picture is reflected in the context of months.

It is important to remember that cash flow and profit and loss forecasts must converge. To achieve this goal, another document is drawn up - a balance plan. It reflects the planned assets and liabilities on a monthly basis. The resulting difference between liabilities and assets will clearly show the cost of the company's equity.

In order for the financial plan to be realistic and detailed, it is necessary to draw up at least three documents:

cash flow plan;
profit and loss plan;
balance plan.

Who draws up the financial plan

Drawing up an effective financial plan is a time-consuming task and requires certain knowledge and skills from a specialist in the field of finance and business. In different organizations, this process is handled by different specialists individually or in a team, if we are talking about a large business:

A financial analyst is a specialist whose responsibilities include analyzing financial indicators and developing strategies to achieve the financial goals of the enterprise. It makes forecasts and budgets, assessing possible financial risks.

Financial manager is responsible for managing the company's finances. His responsibilities include: drawing up a financial planning strategy, monitoring budget execution, making decisions regarding investments and managing financial risks.

Accountant is engaged in financial planning in a small business when the company does not have the resources to use more specialized specialists. His responsibilities include the preparation of financial statements.

Owner – as a rule, the owner conducts financial planning only at the initial stages of business development, when there are no opportunities to hire specialized specialists. However, in this case, there is a high risk of mistakes if the manager does not have the appropriate expertise in the field of finance.

In large companies, the financial plan is handled by a specialist who is responsible for the financial accounting of the company. He has the authority to involve department heads and other employees who have the necessary information in the process.

Frequency of financial plan updates

An effective financial plan must be flexible and able to adapt in a timely manner to events taking place within the company and around it.

To do this, once a month and quarterly, the responsible specialist compares the results with the plan. If necessary, adjustments are made.

Some companies adhere to strict planning, which provides for updating information in the financial plan only once a year.

The main mistakes of the financial plan

The most common mistakes in financial planning include:

Budget and strategies in their own right. When making a budget, you cannot start solely from current needs. It is necessary to take into account what results the enterprise strives for in the future. To do this, the budget must reflect the activities from the strategic plan, otherwise a bright future with super profits will remain a dream.
There is a budget, but there is no information. The budget should be drawn up in such a way that in the future it is possible to analyze the results in the context of various strategies. At the same time, the information obtained should be sufficient for further distribution of resources.
Employees are not aware of the plans. All stakeholders must have sufficient information and an accurate understanding of the company's strategy. Otherwise, employees will not be able to assess the usefulness of their actions.
Execution and control in one hand. It is unacceptable that one specialist is responsible for both the implementation of the financial plan and its control.
The human factor. Often, in the process, some important information is intentionally or accidentally not included in the total budget. This leads to errors and unpredictable errors.

Main

Financial planning is the activity of managing the costs and revenues of an enterprise or project.
The main goal of financial planning is to implement business growth and increase its profitability.
Planning can be short-term, medium-term and strategic, depending on the length of the drafting period: from a few weeks to five years.
An optimal financial plan should contain at least three forms of reporting: DDS, profit and loss forecast, budget plan.
In order for the financial plan to be effective, the correct sequence of all stages must be followed when drawing up.