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How Financial Planning Can Help You Achieve Your Business Growth Goals
- by Mark Hayes
- Jul 5, 2020
- 6 minute read
In-demand products and smart marketing are integral to the success of your online store, but the most successful business owners know if the math doesn't work, their business won't work. Thorough financial planning lays the foundation for growing a business that goes the distance.
In fact, our data shows high-growth stores, or businesses with outsized levels of year-over-year growth, are more likely than their peers to put together a financial plan. While this foresight can be invaluable further down the road, especially during times of economic uncertainty, every business owner can and should create a financial plan to help grow their business.
A detailed financial plan can reveal opportunities that other businesses might overlook, but it can also highlight potential limitations that can and should factor into a business’ growth plans.
Here, we’ll take a look at what financial planning entails and how it can help you grow your online business. We’ll examine exactly what financial planning is, how to go about conducting it, and other important considerations for merchants of all types and sizes.
Learn more: What Does It Really Cost to Start a Business?
What is financial planning?
Financial planning is the process of documenting a person’s or business’ current financial situation and identifying financial goals and how the person or business will achieve them.
A financial plan itself is a document that serves as a roadmap for a person’s or business’ financial growth. It shows where a person or company is currently, where they want to go, and how they intend to get there.
Some people mistake financial plans for budgets. However, the two terms are not interchangeable. Financial plans include budgets but also include other important information, like detailed, itemized breakdowns of a person’s or business’ assets, cash flow , income and revenue forecasts, typical expenditures, and other data that create an overall picture of an individual’s or business’ financial health.
Financial plans also typically include longer-term objectives, such as specific growth goals, as well as potential obstacles that must be overcome to achieve those goals.
Individual versus business financial plans
It’s worth noting that, while most financial plans include much of the same information, there are many differences between financial plans for individuals and for businesses. This is because an individual’s financial objectives are likely very different from those of a growing company.
For example, an individual’s financial plan will typically include a retirement plan, a strategy for making investments, and an estate plan. Similarly, an individual’s financial goals will more likely focus on achieving a minimum annual income, reducing their tax liabilities, and securing their estate for their children.
Conversely, a business’ financial plan is more likely to include goals such as hiring additional staff, purchasing additional inventory, diversifying into new product lines, and expanding to a brick-and-mortar location. These goals are radically different from those of our hypothetical individual above, which means an entirely different strategy—and financial plan—will be necessary to realize those objectives.
Does my business need a financial plan?
Not every business needs a financial plan—but every business can benefit from one.
Creating a financial plan forces you to consider not just where you are right now but also where you want to be and how you want to get there. Most businesses don’t grow accidentally; growth is usually the result of hard work. But without specific goals in mind, you could work hard and still fail to achieve your objectives because your efforts may not be focused on the things that can help grow your business.
For example, many online retailers aspire to open a brick-and-mortar location. But aspirations will only get you so far. By creating a solid financial plan with a specific, tangible goal—such as opening a physical location—you can calculate how much you’ll need to sell to meet your current financial obligations and establish the funds necessary to open that store.
The same principle applies to almost any growth goal for an online merchant. Launching a major marketing campaign, hiring additional staff, expanding into new product lines or service areas—all of these goals become much easier to visualize and achieve when you have a detailed plan of action to back them up.
How do I create a financial plan for my business?
If you’re considering applying for business financing, such as a loan, the lender will likely expect to see a detailed financial plan before making a decision. If this applies to you, it may be worth consulting a licensed financial professional before submitting any loan paperwork. However, you can also prepare your own financial plan to serve as a roadmap for success.
Regardless of the type of business you have (or plan to launch), there are three major components you’ll need to create a solid financial plan:
- A balance sheet
- A cash flow projection
- An income statement
Let’s take a look at each of these in turn.
In a financial plan for businesses, the balance sheet is a statement that outlines all of a business’ assets, liabilities, and any equity the owner holds.
For most merchants and business owners, assets typically fall into two categories: current and fixed. Current assets include the amount of cash a business has available as well as money owed to the business, such as outstanding invoices (also referred to as accounts receivable). Fixed assets are tangible things that a business owns, such as land, property, and equipment. There is a third category of assets known as intangible assets, which refers to copyrights, patents, and intellectual property.
Liabilities are debts that a business owes. This includes any money owed to entities such as suppliers and vendors, employee compensation, and, in some cases, unpaid tax obligations.
Equity is the value of your business’ assets after subtracting its liabilities. Business equity also includes shares or stock options, though this probably won’t apply for most merchants.
Read more: Predicting Profitability: How to Do Break-Even Analysis [+Free Template]
Cash flow projections
As its name implies, a cash flow projection is a forecast of how much money flows into and out of your business. Cash flow projections are one of the most reliable indicators of whether your business can afford to repay a loan, for example, so they’re a vital part of any financial plan.
This should not be confused with a cash flow statement. Cash flow projections focus exclusively on how much money is expected to come into and out of your business during a specific time period in the future. Conversely, cash flow statements focus exclusively on how much money actually moved into and out of your business during a specified time period in the past.
Cash flow projections typically focus on three main elements:
- Cash revenues
- Cash disbursements
- A reconciliation of cash revenues to cash disbursements
For most merchants, cash revenues mean how much money your business brings in on a monthly basis. Despite the potentially misleading name, cash revenues should include payments made to your business by credit or debit card, but only if those card payments are likely to be processed and deposited in your merchant account within the specified time period.
Cash disbursements are your monthly expenses. This should focus on regularly recurring expenses you pay most months, not one-off payments. This includes everything from lunches paid for with petty cash and office supplies to employee payroll costs and commercial rent (if applicable).
Reconciliations of cash revenues to cash disbursements are calculated by subtracting cash disbursements from cash revenues. This should include any balances left over from the previous month; this balance should be added to your cash revenues total.
An income statement is an itemized outline of a business’ expenses, revenues, and profits for a specified period.
Most established businesses create income statements either quarterly or annually, but many new businesses create income statements on a monthly basis. This is because it often can take time for these figures to stabilize as a business matures in its first year or so, and monthly statements offer a truer picture of a business’s financial health during that time.
Income statements typically include the following information:
- Revenue. The amount of money a business brings in based on goods sold or services provided.
- Expenses. This should include direct expenses , such as your salary, employee payroll, equipment costs, and materials, as well as general and administrative expenses , such as accounting fees, advertising costs, bank charges, insurance, and rent (if applicable).
- Total income. This is calculated as your revenue minus expenses before income taxes are subtracted.
- Income taxes. This includes both state and federal taxes.
- Net income. This is your total income once expenses and taxes have been subtracted.
Read more: The Entrepreneur’s Guide to Small Business Financing and Management
How can financial planning help me achieve my goals?
As we mentioned earlier, preparing a financial plan can be a helpful tool in demonstrating your creditworthiness to prospective lenders when seeking business financing . But even if you’re not looking to take out a loan to grow your business, sound financial planning can still help you visualize the true financial health of your business and begin working toward tangible, specific growth goals.
Whether you’re hoping to diversify your business with new product lines, expand into a brick-and-mortar location, or hire additional staff, a solid financial plan can help you identify what’s realistic based on the historical performance of your business or projections based on actual data.
Many business owners fail to realize their goals because they don’t proactively prepare and plan to expand. Even businesses that are doing well can fall into the trap of waiting for growth to just “happen” when in reality it often takes a sustained, deliberate effort to grow a business. This is especially true in uncertain economic conditions.
Almost every business owner has experienced the anxiety that comes with preparing to expand and grow. But financial planning can be a shot in the arm that can give you the confidence you need to pursue opportunities you may not have considered otherwise.
Financial planning in business FAQ
What does financial planning mean.
Financial planning describes the process of investigating the financial situation of a person, business, or organization, and identifying financial goals and strategies to achieve them. Financial plans can include both short term and long term goals.
Why is financial planning important in business?
Creating a financial plan for your business can make it easier to achieve financial goals by focusing on areas that help grow the financial health of your business. With a good financial plan, short term and long terms goals become easier to visualize and achieve.
What is a financial planning process?
- Create a balance sheet.
- Develop cash flow projections.
- Create income statements.
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Financial Plans: Meaning, Purpose, and Key Components
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What Is a Financial Plan?
Understanding a financial plan.
- When to Create It
- How to Create It
- Financial Plan FAQs
The Bottom Line
Liz Manning has researched, written, and edited trading, investing, and personal finance content for years, following her time working in institutional sales, commercial banking, retail investing, hedging strategies, futures, and day trading.
Gordon Scott has been an active investor and technical analyst or 20+ years. He is a Chartered Market Technician (CMT).
Ariel Courage is an experienced editor, researcher, and former fact-checker. She has performed editing and fact-checking work for several leading finance publications, including The Motley Fool and Passport to Wall Street.
A financial plan is a document that details a person’s current financial circumstances and their short- and long-term monetary goals. It includes strategies to achieve those goals.
A financial plan can help you to establish and plan for fundamental needs, such as managing life's risks (e.g., those involving health or disability), income and spending, and debt reduction.
It can provide financial guidance so that you're prepared to meet your obligations and objectives. It can also help you track your progress throughout the years toward financial well-being.
Financial planning involves a thorough evaluation of one’s money situation (income, spending, debt, and saving) and expectations for the future. It can be created independently or with the help of a certified financial planner .
- A financial plan documents an individual’s short- and long-term financial goals and includes a strategy to achieve them.
- The plan should be comprehensive and highly customized.
- It should reflect an individual’s personal and family financial needs, investment risk tolerance, and plan for saving and investing.
- Planning in finance starts with a calculation of one’s current net worth and cash flow.
- A solid financial plan provides guidance over time and serves as a way to track progress toward your goals.
The Fundamentals of Financial Plans
Whether you’re going it alone or with a financial planner, the first step in creating a financial plan is to understand how important it can be to your financial future. It can provide the guidance that assures your financial success.
Start your planning effort by gathering information from your various financial accounts into a document or spreadsheet.
Then make some basic calculations that establish where you stand financially.
You may complete the following steps as an individual or a couple:
Calculate Net Worth
To calculate your current net worth , subtract the total for your liabilities from the total for your assets. Begin by listing and adding up all of the following:
- Your assets : An asset is property of value that you own. Assets may include a home, a car, cash in the bank, money invested in a 401(k) plan , and other investments accounts.
- Your liabilities : A liability is something you owe. Liabilities may include outstanding bills, credit card debt, student debt, a mortgage, and a car loan.
Determine Cash Flow
Cash flow is the money you take in measured against the money you spend. To create a financial plan, you must know your income as well as how and when your money is spent.
Documenting your personal cash flow will help you determine how much you need every month for necessities, how much is available for saving and investing, and where you can cut back on spending.
One way to get this done is to review your checking account and credit card statements. Collectively, they should provide a fairly complete history of your income and spending in a wide range of spending categories.
For example, document how much you’ve paid during the year for housing expenses like rent or mortgage payments, utilities, and credit card interest.
Other categories include food, household (including clothing), transportation, medical insurance, and non-covered medical expenses. Still others can include your spending on miscellaneous entertainment, dining out, and vacation travel.
Once you add up all these numbers for a year and divide by 12, you’ll know what your monthly cash flow has been (and where you can improve it).
When establishing your cash flow history, don’t overlook cash withdrawals that may have been used on sundries, from take-out, to shampoo, to sodas. ATM withdrawals can also highlight where you might cut unnecessary spending.
Establish Your Goals
A major part of a financial plan is a person’s clearly defined goals. These may include funding a college education for the children, buying a larger home, starting a business, retiring on time, or leaving a legacy.
No one can tell you how to prioritize these goals. However, a professional financial planner should be able to help finalize a detailed savings plan and specific investing that can help you reach them off, one by one.
The main elements of a financial plan include a retirement strategy, a risk management plan, a long-term investment plan, a tax reduction strategy, and an estate plan.
Benefits of a Financial Plan
- A financial plan involves a thorough examination of your income and spending.
- It can improve your understanding of your financial circumstances at all times.
- It establishes important short- and long-term financial goals.
- It clarifies the actions required of you to achieve your various financial goals.
- A financial plan can focus your attention on important immediate steps, such as reducing debt and building your savings for emergencies.
- It enhances the probability that you'll achieve financial milestones and overall financial success (however you define it).
- It can guide your efforts over time and provide a means to monitor your progress.
- It can keep you out of financial trouble and reduce the stress and worry you may have experienced in the past.
Reasons for a Financial Plan
Financial planning is a smart way to keep your financial house in order. It's a money tool for everyone, regardless of age, earnings, net worth, or financial dreams. It offers individuals a way to document their personal goals and corresponding financial goals. It can keep people on track to meet ongoing financial needs and major financial goals.
When to Create a Financial Plan
A financial plan is always an advantage for those who want to make sure that they manage their finances in ways that are best-suited for them. You can create one at any time, whether you've just joined the workforce or have been working for years.
Beyond that, here are some particular instances that call for the creation and use of a financial plan. They can also serve as signals to adjust existing plans.
- A new job that results in added income, new expenses, or new opportunities
- An income change that can affect your ability to pay expenses, pay off debt, or save
- Major life events such as marriage, children, or divorce that can change financial objectives and spending needs
- Health adversities that result in re-directing income and spending away from existing goals
- An income windfall, such as an inheritance or insurance payment, that can affect efforts to reach your financial goals (such as providing more money for investing and debt reduction)
How to Create a Financial Plan
Certain steps are needed to create a financial plan. In addition to calculating your net worth, determining your cash flow, and establishing financial goals, as outlined above, here are additional plan elements/steps to include.
Do It Yourself or Get Professional Help
Decide whether you'll create your financial plan on your own or with the help of a licensed financial planner . While you can certainly build a financial plan, a financial pro can help ensure that your plan covers all the essentials.
Build an Emergency Cash Fund
Based on what your cash flow allows, start setting aside enough money in a liquid account to cover all your expenses for at least 6 months (preferably, for twelve) if you find yourself without income due to unexpected events.
Plan to Reduce Debt and Manage Expenses
If you have debt, the faster and more effectively that you can eliminate it, the better for the growth of your savings, your standard of living, and the achievement of specific financial objectives.
Make it a habit to cut expenses whenever possible so that you can add to your savings. In addition, stay on top of expenses that you know you'll have, such as taxes, so you always meet those obligations on time.
Manage Potential Risks
Your financial well-being can be affected when accidents, health problems, or the death of loved ones strike. Plan to put into place the appropriate insurance coverage that will protect your financial security at such times. This coverage can include home, property , health, auto, disability , personal liability , and life insurance.
Plan to Invest
Take part in a retirement plan at work that automatically deducts contributions from your paycheck. And plan to maximize your tax-advantaged investing with a personal IRA if and when your income allows.
Also, consider how you might allocate any other available income to a taxable investment account that can add to your net worth over time. Your plan for investing should take into account your investment risk tolerance and future income needs.
Include a Tax Strategy
Address the goal of reducing your income taxes with tax deductions, tax credits, tax loss harvesting, and any other opportunities that are legally available to taxpayers.
Consider an Estate Plan
It's important to make arrangements for the benefit and protection of your heirs with an estate plan . The details will depend on your stage in life and whether you're married, have children, or have other legacy goals.
Monitor and Adjust Your Financial Plan
Revisit your plan at least yearly (on your own or with a financial professional) and more often if a change in circumstances affects your financial situation. Keep it working efficiently and effectively by adjusting it as needed.
What Is the Purpose of a Financial Plan?
A financial plan should help you make the best use of your money and achieve long-term financial goals, such as sending your children to college, buying a bigger home, leaving a legacy, or enjoying a comfortable retirement.
How Do I Write a Financial Plan?
You can write a financial plan yourself or enlist the help of a professional financial planner. The first step is to calculate your net worth and identify your spending habits. Once this has been documented, you need to consider longer-term objectives and decide on the ways to achieve them.
What Are the Key Components of a Financial Plan?
Financial plans aren't one-size-fits-all, although the good ones tend to focus on the same things. After calculating your net worth and spending habits, you’ll explore your financial goals and ways to achieve them. Usually, this involves some form of budgeting, saving, and investing each month. To ensure that you live comfortably and financially stress-free for the rest of your life, the areas to focus on include an emergency savings plan, a retirement plan, risk management, a long-term investment strategy, and a tax minimization plan.
A financial plan is an essential planning tool for your financial well-being, now and into the future. It involves setting down the current state of your finances, your various financial goals, and methods that can help you achieve them.
It's never too early or late to create a financial plan. And no matter the amount of money that you have, a financial plan can help you to determine the best way to put it to work so that you can meet your financial needs through all of your life stages.
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- Financial Planning: Can You Do It Yourself? 6 of 15
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About Business Financial Planning
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How to Forecast Profits for a Business Plan
The role of finance in formulating business strategies, why is strategy implementation often considered the most difficult stage in strategic management.
- The Importance of Planning in an Organization
- Absorbed Cost vs. Full Cost
The process of financial planning in business is designed to forecast future financial results and determine how best to use the company’s financial resources in pursuit of the organization’s short- and long-range objectives. Because planning involves looking well into the future, it is a highly creative thinking process as well as an analytical one.
Benefits of Good Planning
Companies that make a concerted effort at their financial plan in the business plan can grow their revenues at a more accelerated pace than organizations that have an inefficient planning process, according to Brilliant Tax & Accounting Services, Inc. Financial planning provides the numerical logic for decision making. It shows where the business should concentrate its resources for maximum effectiveness in building revenues and managing costs. Efficient financial management allows more funds to be available for marketing, expanding operations and product development, which in turn brings about more growth.
Strategic planning determines the course of action the company will take: the tasks scheduled to be accomplished, as well as who is responsible for their timely completion. Financial planning takes the actions described in the strategic plan and converts them into dollars. The financial plan shows the revenues projected to result from the implementation of the strategies and the expenses required to implement the action steps.
Senior management and marketing and operations personnel are heavily involved in the strategic planning process. They should all be coherent in topics in finance and have a list of financial statements on hand, as their efforts must be coordinated with those of the financial staff in charge of preparing the financial plan.
Financial Planning Significance
Financial planning in business requires proficiency in using spreadsheet software. Even in smaller companies, the financial models created to predict future revenues can be complex. Research and data gathering skills are also important. The accuracy of the financial plan depends on the quality of information used in the assumptions for the financial models. Creating realistic assumptions for key variables such as projected unit sales and pricing is critical.
A business should prepare a financial plan once a year. This will include developing a forecast profit-and-loss statement for each of the next 12 months. Some businesses also prepare a long-range financial plan for as long as five years in the future, according to BBN Times . The long-range plan is useful for companies whose product development plans require a long time to complete.
Potential vs. Reality
Each month, actual financial results are compared to the numbers in the forecast, and efforts are made to identify and analyze significant variances. These variances may require an adjustment in strategy to get the enterprise back on track toward its revenue and profit goals. Variance analysis shows when the competitive environment has changed significantly from what the company expected.
Financial planning in business is difficult because so many variables affect the company’s financial results, and each of them is hard to predict. Consumer behavior is especially hard to predict – how well customers will respond to both the company’s products and the price being charged. Changes in cost factors can also cause significant variances. For example, the negative effects of increases in the costs of fuel can be severe for some businesses. Many start-up companies face the additional problem of having a business model that has not been tried before, so there is little data available on which to base the financial plan.
- Brilliant Tax & Accounting Services, Inc.: The Importance of Financial Planning for Small Businesses
- BBN Times: Importance of Financial Planning in Business
The importance of a financial plan for a small business, what are the different functions of business finance, business enterprise planning, why is it important for entrepreneurs to develop financial plans for their companies, what is a revenue model, the impact of planning on business growth, accounting errors that affect the balance sheet, what is the meaning of corporate planning, most popular.
- 1 The Importance of a Financial Plan for a Small Business
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Financial planning & cash flow projection for your company
"Businesses that don’t plan thoroughly are more likely to struggle."
This axiom is particularly true when it comes to financial planning. Financial planning analyzes current and future costs and income to help determine the best plan of action. It touches every aspect of an organization, including payroll, workforce training, marketing, inventory and research and development.
Business financial planning allows companies to determine how to allocate their resources with greater confidence. Does the company have the capital to invest in a new technology platform or new office space? Is it a good time to dip into reserve funds? How will signing a new client impact revenue?
Comprehensive financial planning demonstrates a company's commitment to sound business practices - an ongoing ability to meet financial obligations and spend wisely . That can encourage outside investors and increase the likelihood of long-term success.
Yet, many companies bypass planning or don't pay enough attention to it. In some cases, they may find the thought of creating a financial plan intimidating.
Below you’ll find guidelines to help you focus your financial planning efforts, which will make the process less daunting.
Crafting a solid financial plan
To create a solid financial plan, you'll need to analyze the main components of your business. Make assumptions about cash flow – how much money you're taking in and paying out. What are your biggest costs, and where are they likely to increase spending the most in the near future? Where will you be able to cut costs? How is competition likely to affect your business?
You'll also be looking at potential changes to your workforce and at external circumstances, such as fluctuations in the economy - a recession or growth cycle - and inflation. These can have dramatic effects on business growth. You may also consider how your business compares to similar companies in your industry. Their stories, particularly if they're a little further down the road in terms of experience and success, can inform your decisions. How have they tended to invest their earnings? What are their priorities?
Remember, too, that a financial plan isn't a one-time event. Conditions change. You’ll likely repeat the process at different stages of your business and see different results.
All these variables will help steer your company's actions. Some of the important elements to include in your plan should be:
- Amount of capital required for operations
- Planned use of this revenue
- Future earnings
- Balance sheet: a line-by-line account breakdown of your debts and income
Revenue projections should be detailed and broken down quarterly for the first two years, and then the plan should offer annual projections for years three through five. Among other things, a financial plan should explain how you'll finance your venture.
Mastering cash flow projection
Cash flow projections ensure that you handle income and expenditures properly. They let you know how much money you have and how long it's likely to last.
Because income can rise and fall unexpectedly , projections can miss the mark. The point is to be as accurate as possible with them so you can create a reasonable budget.
You want to be able to plan several months in advance - or more. For example, you might know there's going to be a short-term dry spell or that you're about to see an infusion of cash based on renewal fees for a service-oriented business. You also might anticipate the start date for a large, new client. In these cases, you can plan accordingly. You'll know when you’ll have funds to pay back a loan or if it's better to hold off on borrowing 2 . Banks and other lenders weigh this type of information heavily in their lending decisions.
A sound business practice
The more detailed you are in your planning and cash flow forecast, the better it'll be for your business. You’ll have a solid framework for making major business decisions and smaller ones in every area of your organization, and you'll be better equipped to set achievable milestones and goals. As you proceed, you'll also more readily see where your missing projections alter courses quickly. In today’s rapidly changing economy, the ability to adjust is increasingly important.
Like most entrepreneurs, you have a personal interest in seeing your venture succeed. Taking the time to project cash flow and develop a solid financial plan can ensure that your business thrives. Nationwide can provide your business with coverage and other resources to help you achieve this goal.
 "Projecting Your Business Cash Flow, Made Simple," https://www.sba.gov/blogs/projecting-your-business-cash-flow-made-simple
Related topics & resources
Financial planning - definition, objectives and importance, definition of financial planning.
Financial Planning is the process of estimating the capital required and determining its competition. It is the process of framing financial policies in relation to procurement, investment and administration of funds of an enterprise.
Objectives of Financial Planning
Financial Planning has got many objectives to look forward to:
Importance of Financial Planning
Financial Planning is process of framing objectives, policies, procedures, programmes and budgets regarding the financial activities of a concern. This ensures effective and adequate financial and investment policies. The importance can be outlined as-
- Financial Management - Introduction
- Finance Functions
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Financial Planning Defined
Financial planning is a process, not a product. It is the long-term method of wisely managing your finances so you can achieve your goals and dreams, while at the same time negotiating the financial barriers that inevitably arise in every stage of life.In order to create a sound financial plan, goals must first be established. Data is then gathered to analyze and evaluate your financial status. Once complete, your plan can be developed and implemented. Monitoring the plan on an ongoing basis is essential in order to make necessary adjustments to reach your goals.
Benefits of Using a Financial Planner
How do you know if you could benefit from the services of a financial planner? You may not have the expertise, the time or the desire to actively plan and manage certain financial aspects of your life. You may want help getting started. Some reasons for seeking professional financial planning guidance might include:
- Making sure your money will last during retirement or rolling over a retirement plan
- Handling the inheritance of a large sum of money or other unexpected financial windfall
- Preparing for a marriage or divorce
- Planning for the birth or adoption of a child
- Facing a financial crisis such as a serious illness, layoff or natural disaster
- Caring for aging parents or a disabled child
- Coping financially with the death of a spouse or close family member
- Funding education
- Buying, selling or passing on a family business
Procrastination is the greatest enemy of financial independence, and using a financial planner will keep you on track.
Why a CFP® Professional?
CFP® professionals are dedicated to using the financial planning process to serve the financial needs of individuals, families and businesses. Most CFP professionals have earned a four-year college degree in a finance-related field, and have completed a course of study in financial planning approved by CFP Board.To earn the prestigious CFP® certification and remain certified as a CFP professional, individuals must meet four main requirements.
Examination: Certified Financial Professionals must successfully complete CFP Board's comprehensive certification examination, which tests an individual's knowledge on various key aspects of financial planning.
Experience: Certified Financial Planner Professionals must acquire three years of financial planning-related experience before receiving the right to use the CFP certification marks.
Ethics: Certified Financial Planner Professionals must voluntarily ascribe to CFP Board's Code of Ethics and additional requirements as mandated. CFP practitioners who violate the code can be disciplined, including permanent loss of the right to use the CFP certification marks.
Education: Certified Financial Planner Professionals must complete 30 hours of continuing education every two years to stay current in financial planning knowledge, including ethics.
CFP®, CERTIFIED FINANCIAL PLANNER™ and federally registered CFP (with flame logo) are certification marks owned by Certified Financial Planner Board of Standards. These marks are awarded to individuals who successfully complete CFP Board's initial and ongoing certification requirements.
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9 key benefits of business financial planning
Published on February 3, 2023
Building a business financial plan is never easy. It requires effort, good data, and a fair amount of imagination. And if you’ve never done this before, you’ll likely hit a few roadblocks along the way.
But this post will show you why it’s so valuable, nonetheless.
A good financial plan keeps you focused and on track as the company grows , when new challenges arise, and when unexpected crises hit. It helps you communicate clearly with staff and investors, and build a modern, transparent business.
And there are plenty of other advantages .
We’ll explore nine of our favorites shortly. But first, let’s define exactly what we’re talking about.
What is business financial planning?
Your company’s financial plan is essentially just the financial section of your overall business plan . It applies real financial data and projections to put the rest of your business plan in context.
And crucially, it is forward-looking. While you use existing accounting figures (if you have them already) and experience to create your plan, it’s not simply a copy/paste of your accounting data. Instead, you look at your business goals and define the level of investment you’re willing to make to achieve each of these.
But this doesn’t mean that financial plans are just “made up.” If anything, this section of your business plan is the most grounded in reality.
As Elizabeth Wasserman writes for Inc :
“A business plan is all conceptual until you start filling in the numbers and terms. The sections about your marketing plan and strategy are interesting to read, but they don't mean a thing if you can't justify your business with good figures on the bottom line.
The financial section of a business plan is one of the most essential components of the plan, as you will need it if you have any hope of winning over investors or obtaining a bank loan. Even if you don't need financing, you should compile a financial forecast in order to simply be successful in steering your business.”
The importance of financial planning in business
This probably won’t come as a surprise to most readers, but financial planning is essential to building a successful business. Your business plan dictates how you plan to do business over the next month, quarter, year, or longer - depending on how far out you plan.
It includes an assessment of the business environment, your goals, resources needed to reach these goals, team and resource budgets, and highlights any risks you might face. While you can’t guarantee that everything will play out exactly as planned, this exercise prepares you for what’s to come.
We’ll look at the precise individual benefits next, but suffice it to say that, without a clear financial plan, you’re basically just hoping for the best .
9 benefits of financial planning for business
So what exactly can you hope to gain from business financial planning? The benefits of business planning are probably endless, but here are nine clear advantages.
1. Clear company goals
This is really the starting point for your whole financial plan. What is the company supposed to achieve in the next quarter, year, three years, and so on?
Early on, you’ll want to establish that there is a real need for your business , and that your business fills this need. This is also known as “product/market fit.” For many startups, the first several years may be devoted to building a product and establishing that product/market fit. So this would be your chief one-to-two year goal, with smaller checkpoints along the way.
Crucially, if this is your key goal, you won’t set lofty sales targets or huge marketing KPIs. What’s the point of investing in sales and marketing for new customers, if the product isn’t ready to sell?
We’ll refer back to your company goals throughout this post, so it’s worth getting a handle on them from the start.
2. Sensible cash flow management
Your financial plan should also set clear expectations for cash flow - the amount coming in and out of the company. In the beginning, you’ll of course spend more than you make. But what is an acceptable level of expense, and how will you stay on track?
As part of this plan, you also need to figure out how you’ll measure cash flow easily. You may not have seasoned finance experts in the team, so can you accurately and efficiently keep track of where your money’s going?
By making your plan now, you can anticipate challenges both in receiving money and spending it , and identify ways to do both more effectively.
3. Smart budget allocation
This is obviously closely related to cash flow management (above) and cost reductions (below). Once you have a clear understanding of the amount of funding you have to spend - whether through sales income or investments - you need to figure out how you’ll actually spend it.
The company has its overall budget - essentially its “burn rate” for each quarter or year. Break this down into specific team budgets (product development, marketing, customer support, etc), and ensure that the amounts dedicated to each reflect their importance.
Budgets give each team their own constraints from within which to build . They know what resources are available to them, and can plan out campaigns and personal or product development accordingly.
At the company level, tracking project or team budgets is always going to be easier than monitoring spending as a whole . Once you break each budget down, it’s relatively straightforward to keep an eye on who’s spending what.
Get our free marketing budget template to help.
4. Necessary cost reductions
Aside from setting out how much you can afford to spend (and on what), a financial plan also lets you spot savings ahead of time. If you’ve already been in business for some time, building your financial plan involves first looking back at what you’ve already spent and how fast you’re currently growing.
As you set out your budget(s) for next year, you’ll refer back to past spending and identify unnecessary or over-inflated costs along the way. And then for next year’s budget, you simply adjust accordingly.
This conscious effort is all part of spend control , the practice of keeping company spending in line with your expectations. Even better, a quarterly or annual review almost always unearths areas where you can save money and put your resources to better use.
Learn more about effective spend control .
5. Risk mitigation
A crucial aspect of the finance team’s role is to help companies avoid and navigate risk - from financial fraud to economic crisis . And while plenty of risks are hard to predict or even avoid, there are plenty that you can see coming.
Your financial plan should make room for certain business insurance expenses, losses through risky inefficiencies, and perhaps set aside resources for unexpected expenses . Particularly during turbulent times, you may in fact create several financial forecasts which show different outcomes for the business: one where revenue is easy to come by, and one or two others where times are tougher.
Again, the point is to have contingency plans in place, and to attempt to determine how your roadmap changes if you grow only 20% next quarter instead of 30% (or 50%) . There’s no reason to go overboard, but you can find risky areas within the business, and also consider your best responses if things go wrong.
6. Crisis management
The first thing that tends to happen in any company crisis is you review and re-build your plans. Which of course means that you must have a clear business plan in the first place . Otherwise, your crisis response is simply to improvise.
As the 2020 financial crisis unfolded, the key refrain we heard from finance leaders was the need to reforecast constantly. Nobody truly knew how long the crisis would last, or how it would impact their business. So companies created new financial plans on a monthly or quarterly basis, at least.
And those with robust and well thought-out financial plans found this process easier. They weren't starting from scratch over and over, and they’d already identified obvious risks and the key levers to pull in response.
7. Smooth fundraising
Let’s shift away from risk entirely now. Whether you’re a brand new startup, a sustainable company that needs a small cash injection, or looking for a significant series-level investment, at some point you’ll likely need funds.
And the first thing any prospective investor or bank will ask you for is your business plan . They want to see how you intend to grow the business, what risks and uncertainties are involved, and how you’ll put their money to good use.
A financial plan that speaks to investors is critical, and the better your history of planning is, the more likely they’ll trust your projections. So whether or not you’re looking for funds today , a business financial plan is an important tool in your chest.
8. A growth roadmap
Finally, your financial plan helps you analyze your current situation, and project where you want the business to be in the future . Again, your wider business plan will do this on a broad level: the markets you’d like to be present in; the number of employees you’ll have; the products or services you hope to sell.
The financial section adds data to these goals, and plugs in your level of investment along the way . For example, if you wish to hire 100 new employees this year, your financial plan will likely need to include recruiters, and a specific budget to find new talent.
Take the time to set out how large you expect the company to be, your expenses with a larger company, and the amount of revenue coming in to compensate. If you’ve raised venture capital to help grow financially , you can probably expect to burn cash faster than you make it - this is normal.
But if you burn through money and can’t reach your growth targets, then you’ll need to re-evaluate your position. So set those growth targets out now, and you’ll be able to assess as you go.
9. Transparency with staff and investors
We already mentioned how necessary your financial plan is for investors. So we won’t dive into them more here.
But the same is true for staff. It is now expected that company executives will be open and honest with staff . Some startups go so far as to publicize their salaries for the world to see.
At the very least, modern employees want to see that the company is in good hands and on the road to success. And when executives can share the financial plan in all-hands meetings, they bring real data to what would otherwise be a business plan lacking in details.
Employees love to see key figures like revenue coming in, costs, and where you are on the road to profitability .
What to include in a business financial plan
We won’t go into too much detail here, but it’s worth giving an idea of what belongs in the typical financial plan.
A three-year financial plan is most common. But whatever the period in question is, your plan should include:
Sales projections : Project your expected sales growth for the near future, as well as the cost of sales . You can break these down in different pricing groups, products, and other important factors.
Expenses & budgets : Most important here are costs - separated into fixed and variable expenses. (Lower fixed costs usually mean lower risk for the business).
Profit & loss statement : Alternatively, you can create a cash flow statement, which achieves a similar outcome. You essentially want to project money in and money out over the next three years.
Assets & liabilities : These will usually be separated from your P&L statement, and will certainly include startup costs and assets for new businesses.
Break-even analysis : Ideally, you’ll be able to identify your break-even point within the coming three years.
Hiring & team structure : This one is not essential, but it makes sense to add as part of your business plan. Who will you need - and when will you acquire them - in order to reach your goals?
For more information - especially on forecasting in uncertain times - read our expert’s guide to startup financial planning .
There’s no time like the present to create your business financial plan
We’ve seen nine excellent reasons to get to work on your company financial plan as soon as possible. As we explored, the financials form a critical part of your overall business plan , without which you’ll have a hard time assessing your performance as a company.
Of course, this exercise requires projection - you can’t just rely on the numbers you have today. But that’s not the same thing as guesswork . Follow best practices and consider all potential outcomes, and you’ll walk away with a clear roadmap to get you to business success in the foreseeable future.
From there, it’s a matter of putting in the work, measuring success, and regularly updating your financial plan.
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Financial planning definition.
Financial planning enables a business to determine how it will afford to achieve its objectives and strategic goals. A business typically sets a vision and objectives, and then immediately creates a financial plan to support those goals. The financial plan describes all of the resources and activities that the company will require—and the expected timeframes—for achieving these objectives.
Financial planning is crucial to organizational success because it compliments the business plan as a whole, confirming that set objectives are financially achievable.
The financial planning process includes multiple tasks, including:
- Confirming the vision and objectives of the business
- Assessing the business environment and company priorities
- Identifying which resources the business needs to achieve its objectives
- Assigning costs business costs centers included in the plan
- Quantifying the amount of equipment, labor, materials, and other resources needed
- Creating and setting a budget
- Identifying any issues and risks with the budget
- Establishing the time period of the plan or planning horizon, either short-term (typically 12 months) or long-term (2 to 5 years)
- Preparing a full financial plan summarizing all key investments, budgets and departmental costs
Generally, the financial partner role includes three areas:
- Strategic financial management;
- Determining financial management objectives; and
- Managing the planning cycle itself.
- Connecting business partners and teams to financial plan
What Is Financial Planning?
Financial planning is the process of assessing the current financial situation of a business to identify future financial goals and how to achieve them. The financial plan itself is a document that serves as a roadmap for a company’s financial growth. It reflects the current status of the business, what progress they intend to make, and how they intend to make it.
Financial plans include budgets, but the terms are not interchangeable. Budgets are just one piece of a financial business plan, which should also include other important information that contribute to a complete picture of a business’ financial health, such as detailed, itemized breakdowns of company assets; typical expenditures; and forecasts of income, cash flow, and revenue.
Typically, business financial plans also focus on specific growth goals and other long-term objectives, as well as potential obstacles to achieving those objectives. A detailed financial planning checklist can identify overlooked opportunities and highlight possible risks that will affect the growth plan.
The comprehensive financial planning process in business is designed to determine how to most effectively use the company’s financial resources to support the objectives of the organization, both short- and long-range, by accurately forecasting future financial results. Financial planning processes are both analytical and informative, balancing the use of data and metrics to predict the future as well as institutional knowledge in departments and teams.
What is Financial Planning and Analysis (FP&A)?
Financial planning and analysis (FP&A) is a group within a company’s finance organization that supports the health of the organization by engaging in several types of activities: budgeting, integrated financial planning, modeling, and forecasting; decision support via reporting on management and performance; and various special projects. FP&A solutions link corporate strategy and execution, enhancing the ability of the finance department to manage performance.
FP&A professionals provide senior management with forecasts of the company’s operating performance and profit and loss for each upcoming quarter and year. These forecasts allow leadership to assess investments and strategic plans for effectiveness and progress. They also enable improved communication between external stakeholders and management.
To map out future goals and plans and evaluate the company’s progress toward achieving its goals, corporate FP&A professionals analyze the company’s operational aspects both quantitatively and qualitatively. FP&A analysts review past company performance, consider business and economic trends, and identify risks and possible obstacles, all to more effectively forecast future financial results for a company.
In contrast to accountants, who are tasked with accurate recordkeeping, consolidations and reporting, financial analysts must analyze and evaluate the totality of a company’s financial activities and map out the financial future of the business. FP&A professionals manage a broad range of financial scenarios and plans, including capital expenditures, expenses, financial statements, income, investments, and taxes.
Budgeting, planning, modeling, and forecasting
The primary responsibility of FP&A is to anchor the company, unite the business and translate plans to actionable & informed results. . So, what is financial planning and analysis, and how does it look in practice?
Senior management creates and drives the strategic plan in a top-down way, setting net income and revenue goals, core strategic initiatives, and other high-level business targets for the company’s next 2 to 10 years. FP&A’s corporate performance management aim is to develop the financial plan needed to achieve the strategic plan created by management.
In the past, financial planning and analysis teams developed annual budgets that remained mostly static and updated annually. However, whether in tandem with a traditional budget or as a replacement altogether, modern FP&A teams are increasingly developing rolling forecasts to cope with stale static budgets. Other important tasks of FP&A teams that are related to the budgeting, planning, and forecasting process include:
- Creating, maintaining, and updating detailed forecasts and financial models of future business operations
- Comparing budgets and forecasts to historical results, and conducting variance analysis to illustrate to management how actual performance and the rolling forecast or budget compare, suggesting ways to improve future performance
- Assessing expansion and growth opportunities based on forecasts and other projections
- Mapping out capital expenditures and investments, and other growth plans
- Generating long-term financial forecasts in the three- to five-year range
Decision support and reporting
FP&A reports variances and forecasts, naturally. However, the team also advises management using that data, offering support on decisions concerning performance improvement, risk minimization, or risk benefit analysis of new opportunities from outside and within the company.
One primary piece of this the FP&A team typically generates is the monthly budget versus actual variance comparison. This report explanations of variances; analysis of historical financials; an updated version of the forecast with opportunities and risks related to the current stage of plan; and Key Performance Indicators (KPIs). Ideally, this report or analysis offers leadership information sufficient to identify ways to meet specific goals or optimize performance, and answer imminent questions of stakeholders. However, the true goal of the budget vs. actual report should be to inform the business around gaps or opportunities that inform the future.
Other ongoing pieces of the FP&A team’s reporting and decision support role include:
- Using key financial ratios such as the current ratio, debt to equity ratio, and interest coverage ratio to gauge the overall financial health of the business
- Identifying which company products, product lines, or services generate the most net profit
- Determining which products, product lines, or services have the highest and lowest profit margins—separate from total profit
- Assessing and evaluating each department’s cost-efficiency in light of the percentage of total company financial resources it consumes
- Collaborating with departments to prepare and consolidate budgets into a single corporate budget
- Preparing other internal reports in support of decision making for executive leadership
Inevitably, the FP&A team works on special projects, depending on the size and needs of the business. For example:
Capital allocation. How much of the organization’s capital should be spent, and on what? Based on factors such as return on investment (ROI) and comparisons with increased stock dividends, different possible investments, and other ways the business could utilize its cash flow, are the company’s current investments and assets the best use of excess working capital?
Market research. What are the sizes and contours of a given market in which the organization may have a competitive advantage? Who are its laggards and leaders, and what potential opportunities does it hold for the company?
M&A. Which potential buy-side support, acquisition targets, integration, and divestiture opportunities exist for the company?
Process optimization. How can the company improve problems of process and workflow inefficiency? How can tools and technology in use by the business speak to and work with each other more effectively?
Ultimately, the FP&A team provides upper management with advice and analysis concerning how to best deploy the organization’s financial resources for optimal growth and increased profitability, while avoiding serious financial risk.
What is Corporate Financial Planning and Analysis?
Corporate financial planning is the process of determining what a company’s financial needs and goals for the future are, and how best to achieve them. Corporate financial planning considers the individual circumstances of the company as well as its broader economic context to determine which activities and investments would be most advantageous and appropriate. Generally, because short-term market trends are more predictable, short-term corporate financial planning involves less uncertainty and more readily adaptable financial plans.
Balanced corporate financial planning should elucidate how the company can achieve its goals and priorities while upholding its values. A financial plan for a corporation achieves at least two aims.
First, it forces management to think about the company’s prospects for business success objectively by basing their analysis on company finances. It also gives lenders and investors a good reason to invest into the business performance, by showing the growth and profit projections. Unrealistic or unbalanced financial plans or plans that understate profits tell investors to reconsider their investment or evaluation.
As a basic matter, three financial statements form the core of a corporate financial plan: income statement, statement of cash flow, and balance sheet. These statements clarify how much profit the business earns, and how much cash actually comes in, compared to the income reflected in accounts receivables. They also detail the relationships between corporate liabilities, corporate assets, and owner equity.
What is the Financial Planning Process?
The financial planning process results in the development of a financial plan, a financial forecast, or both. There are several well-understood steps in this process, and they often come out of sequence, depending on the deliverable or project at hand. However, it’s often simplest to think about these as steps in financial planning as financial planning tips, all of which are parts of a larger, flexible financial planning process.
With that in mind, these key components of financial planning for businesses are, in a sense, a set of best practices for your financial planning checklist.
Project revenue or sales for the next three years in a spreadsheet, or even better, in Planful. You’ll track numbers at least monthly in year one, and quarterly in years two and three.
Ideally you want to include sections that track unit sales, pricing, units times price to calculate sales, unit costs, and units times unit cost to calculate COGS or cost of goods sold, also called direct costs. Calculate gross margin, which is sales less cost of sales, and it’s a useful number for considering a new line of business or a new product expansion.
Here you want to determine the actual cost of making the revenue you have forecasted. Differentiate between fixed costs such as payroll and rent and variable costs such as most promotional and advertising expenses. Lower fixed costs mean less risk; higher fixed costs may signal a need for reduced risk tolerance.
Remember, this is not accountancy, but a forecast, so you will have to estimate things such as taxes and interest. Use run rates or average assumptions whenever possible, and estimate taxes by multiplying estimated profits by estimated tax percentage rate. Then estimate interest by multiplying estimated debts balance by estimated interest rate.
Project cash flow
Project cash flow, or dollars moving in and out of the business, in this statement is based partly on balance sheet items, sales forecasts, and reasonable assumptions.
An existing company should have historical documents to base these forecasts on, such as balance sheets and profit and loss statements from years past. A new business which lacks these historical financial statements can project a cash-flow statement broken down month by month.
Remember to choose a realistic ratio for how many of your invoices will be paid in cash, 30 days, 60 days, 90 days and so on when compiling a cash-flow projection so you are not reliant on collecting 100 percent to pay your expenses. Some financial planning platforms build these formulas to make these projections simpler.
The income projection is the company’s pro forma profit and loss statement or P&L, which offers detailed business forecasts for the coming three years. To project income, use expense projections, sales forecasts, and cash flow statement numbers. Sales minus cost of sales equals gross margin. Gross margin minus expenses, interest, and taxes equals net profit.
Compile assets and liabilities
To deal with assets and liabilities that project the net worth of your business at the end of the fiscal year but are not in the profit and loss statement you need a projected balance sheet. Some of these, such as startup assets, are obvious and affect just one part of the process. However, others are less apparent.
For example, although the profit and loss reflects interest, it does not reflect repayment of principle. This means that loans and inventory register only as assets, but only up until you pay for them.
Cope with this by compiling a complete list of assets, equipment, real estate, and an estimate month by month of inventory if the business has it, accounts receivable (money owed to the company), and cash the business will have on hand. Then compile a complete list of liabilities and debts, including outstanding loans.
Conduct breakeven analysis
The breakeven point is when the expenses of the business match volumes or revenue. Undertake this analysis using the three-year income projection. Overall revenue will exceed overall expenses, including interest, within this period of time if the business is viable. Potential investors must engage in this critical analysis to ensure they are investing in a healthy business that is fast-growing and maintains reasonable profit.
Put the plan to work
Many companies work hard to create a financial plan for small business, only to ignore it as soon as it has been created. Placing all of the focus on creating the plan is a major error, because it is a powerful management tool. It is a better practice to compare actual numbers in the profit and loss statement with projections in the financial plan once a month, and use that data to revise future projections.
Compare statements over time
Undertake a financial statement analysis to compare specific items and entire financial statements over time—even the statements of the business to those of other companies. Conduct a ratio analysis to determine the prevailing industry ratios for profitability analysis, liquidity analysis, and debt. Measure the business both against its past performance and other similar businesses by comparing these standard ratios. You can also use the business plans from similar companies as financial plan examples.
Pitch with past plans
Include past financial plans as supplementary documentation of the business’s financial history as the organization applies for a loan or works to attract investment.
Use financial planning software
Obviously, this is a tremendous amount of dynamic information and calculation, making financial planning software a good option for many teams assembling a business plan’s financial section. These digital financial planning tools also enable visual financial projections such as bar graphs and pie charts.
What Should Financial Planning Include?
All business financial plans should include: a profit and loss statement; a cash flow statement; a balance sheet; a sales forecast; a personnel plan; business ratios; and a break-even analysis.
Profit and loss statement
The profit and loss statement is a financial statement that goes by several names, including P&L, income statement, and pro forma income statement. By any name, the profit and loss statement is essentially an explanation of how the business either made a profit or incurred a loss over a specific time period—typically three-months. The table lists all revenue streams and expenses, along with the total net profit or loss.
Depending on the type and structure of the business, there are different formats for profit and loss statements. However, in general, include in the profit and loss statement:
- Revenue or sales
- Cost of sale or cost of goods sold (COGS), although services companies may not have COGS
- Gross margin, which is revenue less COGS
Revenue, COGS, and gross margin are at the heart of how most businesses make money.
The P&L should also include operating expenses, those expenses that are not directly associated with making a sale but that are associated with running the business. These are the fixed costs that fluctuations in business really don’t affect, such as utilities, rent, and insurance.
The P&L statement should also include operating income:
- Gross Margin – Operating Expenses = Operating Income
Typically, operating income is equivalent to EBITDA: earnings before interest, taxes, depreciation, and amortization—although this depends on how the organization classifies expenses. Another way to think about operating income is the amount in profit before tax and interest but after operational costs.
The net income is the bottom line of the business, found at the end of the profit and loss statement. It represents going back to EBITDA and going a few steps further, subtracting expenses for interest, taxes, depreciation, and amortization to find net income:
- Operating Income – Interest, Taxes, Depreciation, and Amortization Expenses = Net Income
Cash flow statement
Just as critical as the P&L, the cash flow statement is typically a per-month explanation of how much cash the business brings in, pays out, and the ending cash balance. This detailed map of how much cash is in play, where it originates and goes to, and the cash flow schedule itself, is essential to any healthy, functional business.
The cash flow statement assists management in understanding the difference between the company’s actual cash position and the reported income on the profit and loss statement. It is just as important to clearly lay this information out for investors and lenders in the cash flow statement to raise funds.
Some businesses might be profitable but still lack the cash to pay expenses and continue to operate. Others might have the cash on hand to stay open even if they are unprofitable—cash flow break-even is vital to future company scale.. Therefore, the cash flow statement is important to understand.
There are two methods of accounting in the cash flow statement—the indirect method and the direct method. Which you select can affect how the cash flow statement and profit and loss statement compare, and accrual accounting might better reflect actual cash flow than cash accounting for many businesses.
The balance sheet is a picture of the financial position of the business at a specific point in time. It reflects how much cash and equity is on hand, how much is in receivables, and how the business owes vendors and other debtors.
A balance sheet should include:
- Assets: Cash, inventory, accounts receivable, etc.
- Liabilities: Debt, loan repayments, accounts payable, etc.
- Equity: Owners’ equity, investors’ shares, stock proceeds, retained earnings, etc.
Ideally, as the name suggests, the balance sheet items should balance out. Total assets on one side should always equal total liabilities plus total equity.
- Assets = Liabilities + Equity
The sales forecast is the FP&A team’s forecast or projections for a set period of what they think will generate revenue. Particularly if a business is seeking investment from investors or lenders, the sales forecast is among the fundamentals of financial planning, and should be part of a dynamic, ongoing process.
The sales or revenue number in the profit and loss statement and the sales forecast should be consistent. In fact, many types of financial planning software automatically connect these projects. Develop, organize, and segment an individualized sales forecast to meet the needs of a specific business.
The personnel plan identifies the resourced structure and positions needed to run the company operations. How important the personnel plan is depends in large part on the company.
A sole proprietor doesn’t need much of a personnel plan. A large company with high labor costs requires a detailed personnel plan and should invest the necessary time in determining how personnel impacts the business.
A complete personnel plan should describe the expertise, training, and market or product knowledge of each member of the management team. Some businesses might find listing entire departments as a better tactic for the personnel plan.
Business ratios and break-even analysis
To calculate standard business ratios, all that is required are the profit and loss statement, cash flow statement, and balance sheet. Common profitability ratios and liquidity ratios include the gross margin, return on investment (ROI), and debt-to-equity ratios.
The break-even analysis determines how much revenue a business needs to cover all of its expenses, or break even. To assess the break-even point for the business, find the contribution margin—those are the costs necessary to generate revenue.
For management to get an accurate sense of how high revenue must be for the company to stay profitable, they must subtract those contribution margin costs as well as fixed costs from the profit to find that break-even point. For example, most businesses have some labor costs as well as things like insurance and rent—those are fixed costs. Then there might be contribution costs per sale, such as costs per meal prepared in a restaurant or costs per package shipped or outfit sold in a store. A functional business has to cover them all and generate additional profit to break-even.
What are the Steps in Financial Planning?
There are many routes toward creating a solid financial plan. A well-designed financial business plan thoroughly clarifies business goals in financial context and helps a company plan for the future. Although there is no one correct way to engage in financial planning, understanding some basic steps in financial planning can make the process easier.
Review your strategic plan
The strategic plan of the business is usually where comprehensive financial planning services start. If the business lacks such a plan, it’s time to develop one.
As management reviews the plan, they should consider several questions for the coming year:
- Will we want or need to expand?
- Will we need to hire talent/staff?
- Will we need more equipment?
- What about additional new resources?
- Are there any other plans that we have in mind this year that will require resources?
- How will these plans impact cash flow?
- Will we need financing? If so, how much? Can we revise our plans? Should we?
Fully assess the financial impact of all spending on major projects over the next 12 months.
Develop financial projections
Develop financial projections based on anticipated income and anticipated expenses. Sales forecasts are the basis for anticipated income, while things like costs for supplies, labor, and other overhead form the basis for anticipated expenses. Typically these financial projections will be monthly, but weekly projections may be better for businesses focused on cash optimization.
To make a financial projection, the business will compare project costs from the strategic plan to these anticipated costs and expenses. In other words, the team will look at the costs of doing business as normal plus the costs of adding in the projects, keeping in mind that sales will not always convert to cash immediately.
To create a financial projection, management often also must refer to a projected profit and loss or income statement and a projected balance sheet which it may need to develop in tandem with the financial projection. To assist the team in evaluating the impact of each possible scenario, it can be useful to include various outcomes—optimistic, most likely, and pessimistic—for the projections.
Finance’s advice may be essential to developing financial projections. However, ensure that leadership and anyone who will be seeking financing and explaining the plan to investors and lenders understands the projections and how they fit into the plan.
Arrange financing, plan for growth and contingencies
Determine the financing needs of the business using the financial projections. Well-prepared projections presented to financial stakeholders in advance of deadlines are always more reassuring.
How will the business grow in the coming year? Turn to the FP&A team to make smart investment and growth decisions.
Keep emergency sources of money on hand in case business finances suddenly pivot.. Maintaining credit or a cash reserve are possibilities. Keep laser focus on cash management and optimization.
Financial planning is a dynamic process. Compare projections to actual results throughout the year to see if they are accurate or require adjustments. Monitoring assists businesses in spotting financial problems before they are out of control, and ultimately in identifying smarter growth opportunities.
Consult and use tools
For some businesses, expert help in the form of financial planning services may be necessary to create a financial plan. For many others, the right financial planning software and other financial planning tools are critical to the job.
Why is Financial Planning Important?
A financial business plan has two main purposes. A business needs a financial plan that proves the business will grow, scale, and provide shareholder value over the long term.. Ensuring growth, scale and consistent shareholder value is vital to all stakeholders in the business. . Similarly, the financial plan proves to lenders and banks that the business will be able to repay any loans.
Just as critically, though, a financial forecast benefits leadership. A realistic projection of how the business is likely to perform prepares management and staff. A financial plan is a guide to running a healthy business and should be considered a living document.
There are several other reasons why financial planning is important to a business:
Be realistic when developing a financial business plan, make sure your forecast or plan mirrors business reality. However, if you can demonstrate that your financial plan is realistic in a step-by-step way, your financial forecast will be credible. For example, if you break down your figures into components or channels to provide more detailed estimates, you may be able to reassure lenders, investors, and leadership more.
Balancing the balance sheet
Balance sheet optimization is one of the powerful benefits of financial planning. Identifying and assessing all business assets and liabilities and planning in advance how and when to pay all taxes, salaries, expenses, overheads, and miscellaneous costs is part of this process. Another strategy is to divide the business into functions or departments and prioritize them to better identify which important and urgent investment areas.
Efficient, comprehensive financial planning gives businesses improved long-term visibility into fund allocation. Analysis of how funds are deployed within a business can positively affect productivity and revenue and offer deeper insight into the health of the business. This kind of visibility also empowers more insightful decision making.
No business has endless money to burn on marketing, and a well-designed financial plan helps identify which marketing strategies are most productive for that particular business. Business marketing strategies frame tasks for a company, from planning to execution and implementation.
The marketing team may well be experts across the board when it comes to marketing channels and strategies. However, only actions that generate more business in measurable ways should be planned for the company. Ultimately, finance partnership with the business assesses whether the metrics in the reports justify ongoing marketing campaigns, so for every strategy the team formulates for business, they should highlight the ratio of expense and profits.
Monitoring assets (In’s) and liabilities(Out’s)
The financial team protects the stability of the business by routinely monitoring its assets and liabilities and the ratio of liabilities and assets. This ongoing activity provides insight into needed improvements and actionable ways to decrease liabilities and increase assets.
Measuring profit and loss
The finance team compiles financial planning reports to support evaluation of organizational profits and loss. These reports also showcase the net profits and their main causes, assisting management in evaluating which strategies worked best for the business.
What are Financial Planning Benefits?
It is easier for businesses that focus on financial planning to grow their revenues at a quicker pace than it is for companies that lack an efficient financial planning process. Corporate financial planning offers decision making support in the form of forecasts or budgets. It assists businesses in managing costs and building revenues by highlighting where they should focus resources for optimal effectiveness. Impactful financial management nurtures more growth by freeing up more funds for expanding operations, marketing, and product development.
As a broader matter, strategic business planning develops tasks and determines who will be responsible for delivering those tasks in a timely way, thus determining the company’s direction. Financial planning aligns to the strategic plan which then translates to actionable outcomes and measurable results.
The financial plan projects the revenues the team thinks will result from implementing the strategies and the expenses taking those actions will require. Senior management, operations, and marketing personnel are all deeply involved in strategic financial planning, and finance is focused on developing deep business partnerships, connecting the business and tracking the results. Here are some of the specific benefits of financial planning:
The starting point for the financial plan as a whole is what the company aims to achieve in the coming quarter, year, three years, five years, and longer. This is because it is essential to establish that a real need for the business exists, and this company in particular fills the need—a product/market fit.
Many startups devote several years to establishing that product/market fit as they build out and refine their product. In fact, achieving that kind of fit, with smaller checkpoints along the way, is a good one-to-two year goal. In these early stages, the financial plan can reveal to the team that it doesn’t yet make sense to set massive marketing KPIs or sales targets as the refinement process continues.
The financial plan sets forth clear cash flow expectations. For new businesses, the amount of cash going out is often more than is coming in, but it remains important to determine an acceptable level of expense, and ensure the business stays on track, and the statement helps achieve this. Cash flow management is also an important part of a financial plan, so that even team members who are not seasoned finance experts can efficiently and accurately track cash flow as needed. For all of these reasons, a solid financial plan assists with sensible cash flow management.
Agility, collaborative and actionable budgeting
Closely related to both cost reductions and cash flow management, it is essential to know the best way to spend the funding that is actually available to the business, whether through investments, revenue, or some other source. The business should break down the overall budget for the quarter or year into separate budgets for specific teams such as customer support, marketing, product development, and sales. This way management can ensure each budget accurately reflects the team’s productivity and relative importance.
Budgets also allow each team to build within a known set of limits. Team members can effectively plan campaigns and other tasks because they know what resources are available. Furthermore, it is always simpler to track team or project budgets than to monitor overspending at the company level.
Identify spend reductions
A financial plan enables the FP&A team to identify ways to reduce spend in advance. Building a financial plan includes a careful look back over the speed of current growth and what has already been spent. The goal with this kind of spend control is to detect over-inflated costs and unnecessary spending in the past to eliminate it in future budgets. The result from this kind of periodic review is keeping spending in line with expectations and making better use of resources.
The finance team assists the business in avoiding risk and navigating pitfalls when they occur. Many risks, from fraud and other forms of economic crises, are predictable and avoidable.
A strong financial plan should account for some uncertainty, business insurance expenses, and other unexpected expenses, and set aside resources to cope with them. Some teams create several financial forecasts with various business outcomes: one that shows results under conditions with more revenue, and others under conditions with less.
Especially during economically volatile times, prepare for many contingencies in the financial plan, which should clarify how the roadmap for the business will change as growth fluctuates.
During a crisis in any business, the first move is typically to review and re-build strategic plans. Without strategic plans in place, a crisis response is merely improvisational.
As the coronavirus crisis and surrounding financial crisis in 2020 and beyond have revealed, finance teams and leaders must constantly reforecast to deal with adversity. Businesses are developing new financial plans quarterly or even monthly to cope, and nobody truly knows when the crises will end.
The financial-planning team should help get through this particular challenge and other crises by focusing on several steps, all using their ongoing financial planning process. The first step in crisis management is to reassess new business operational baselines. Next, the team should use the plans and feedback to build a reality-based plan they will review many different business scenarios.
The team will next determine the business’s general direction and align on a financial plan that fits with this possibly new direction, in context. Then they will identify the best actions for the company to take, as well as any trigger points that could require further changes. A strong financial planning process, FP&A team, and store of financial statements can all make these crisis management steps much simpler.
Be opportunistic around fundraising
Any prospective bank, lender, or investor needs to see financial planning in the form of a business plan. A financial plan must tell a story to investors, while communicating the trustworthiness of the projections.
Roadmap for growth
A financial plan clarifies both the current financial situation of a business, and helps it project where it intends to be in the future. This may be reflected in various specifics, such as number of employees to hire; markets to penetrate; or new services or products to sell. The financial plan itself augments these goals with specific data, such as a budget for a particular number of new employees, including talent and recruitment costs and other resourcing needs.
Of course transparency in the financial plan is critical for lenders and investors. But it’s just as important for the team and staff. To ensure your team that the business is healthy, following a solid plan towards growth and scale, and in good leadership hands, a transparent financial plan is key.
Does Planful Help With Financial Planning?
Yes. Planful delivers a continuous planning platform elevating the financial conversation, aligning finance’s need for structured planning with the business’ need for dynamic planning, and enabling your organization to make better decisions more confidently, quickly, and strategically by uniting the business together.
Comprehensive budgeting, planning, and forecasting features offer the financial planning and analysis team the control, structure, and partnership with the business they want. Meanwhile, dynamic planning features empower business leaders and finance with individualized, agile models and plans to manage for multiple business outcomes
Planful also delivers complete financial consolidation, including inter-company eliminations, partial ownership rules, and statutory reporting. The platform also ensures your business meets every management, financial, regulatory, and ad hoc reporting need with a robust library of delivery options and reporting formats.
Planful can help your business:
- Reduce reporting time up to 90% by automating manual processes
- Replace annual planning cycles with rolling forecasts to better respond to changing business conditions with increased agility, more accurate financial plans, and optimized financial results in real-time
- Leverage data from across the business to drive strategic planning, long-term value, and growth
- Free up time for collaboration and analysis by automating tedious, manual tasks in the planning process
- Simplify complex ad-hoc financial analysis and explore financial insights with greater confidence and speed
- Reduce time to close by up to 75% by automating data collection, aggregation, and validation across the organization with low risk and high security thanks to robust, searchable audit logs and strong internal controls
- Create impressive, professional financial and management reports that share insights with clarity
- Improve collaboration and workflow with accurate, current data
Find out more about Planful’s Financial Planning solution here.
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