What is a financial plan?

The definition of financial planning refers to the steps, measures, and boundaries a company puts in place to meet their financial and strategic goals. 

What is financial planning for a business?

Typically, a business’s financial plan is based on the company’s vision. It is comprised of all the activities, processes, staff, IT, resources, associated costs and timelines that a company needs to reach those goals. The financial plan analyzes short- and long-term economic circumstances. For many companies, the financial plan communicates a business’s revenue generating efforts to stakeholders. 

Why should you do financial planning?

You should build a financial plan for a few reasons.

Making a financial plan involves an evaluation of your current financial performance and puts that performance at the heart of all future goals. Without an evaluation of your current financials, your company may make business decisions that are not financially viable.

Doing a financial plan keeps business activities, projects, budgets, and operations aligned. Without a financial plan, it’s easy to go off track, overspend, underspend or use less impactful KPIs to guide decision making.

Developing a financial plan helps you determine:

  • Capital requirements (short- and long-term capital needs)
  • Capital structure (debt-equity ratio)
  • Financial policies (cash control, lending, borrowing)
  • Costs and spending caps
  • How you can maximize resources

Your financial plan is also a health check: By understanding where your financial performance is and where you want it to be, you can better gauge the financial health of your organization. If your actuals aren’t meeting your financial plan, with frequent monitoring, you can respond to improve your results.

The purpose of a financial plan is also to keep stakeholders in the loop. Both internal (executive management, the c-suite, department managers) and external stakeholders (board members) want to know how performance figures impact a company’s direction. This is why projecting cash flows, income, and balance sheet drivers create a foundation for a solid financial plan.

How to make or create a financial plan?

When you’re developing your organization’s financial plan, you should:

  • Review your strategy: How to start your financial plan? Begin by revisiting what your organization wants to accomplish. Refer to your strategic plan to prioritize your goals. Break down major spending requirements on projects, equipment, HR needs, and list all significant spending.
  • Incorporate your financial statements: Your cash flow statement, income statement, and balance sheet should serve as the basis of your financial plan. These statements allow you, your executive team and all stakeholders to get a true look into your company’s revenue, liability and equity. Through this analysis, you’ll understand your profit and cash position and be able to justify future decisions.
  • Access to historical and real-time data: To develop your financial plan, you’ll need access to historical data over time. You'll also need to create projections and monitor current financial position against your current plan and the past.
  • Develop business models and projections: To build your financial plan, use your forecasts, historical and real-time data to project financials. Develop a sales forecast, expense budget, break-even point, and model various what-if scenarios.
  • Determine realistic goals: The goals you lay out in your financial plan should be realistic. The more concretely you can anticipate labor costs, expenses, overhead and other fixed and variable expenses, the more reality will match your financial plan.
  • Determine and anticipate financing needs: If your goals are lofty, you may need to seek external financing. Use your business models, forecasts, and projections to understand precisely what funds you’ll need to meet your strategic goals.
  • Use graphics and visualizations: Your financial plan shouldn’t be a series of numbers. Keep in mind, executive readers should be able to get a sense of your plan at a glance. Use graphs, charts, dashboards, heat-maps and geo-maps and other advanced visualizations to animate your financial plan and bring it to life.
  • Monitor performance against your plan in real-time: As you put your financial plan into action, monitor real-time financials against planned financials. By keeping an eye on your targets, you can change your actions to keep your financials on plan and on budget.
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