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 organisation's short- and long-range objectives. Such forecasting requires both creative and analytical thinking.
Benefits - Companies that make a concerted effort at financial planning can grow their revenues at a more accelerated pace than organisations that have an inefficient planning process. 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.
Considerations - 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 pounds. The financial plan shows the revenues projected to result from the implementation of the strategies and the expenses required implementing the action steps. Senior management and marketing and operations personnel are heavily involved in the strategic planning process. Their efforts must be coordinated with those of the financial staff in charge of preparing the financial plan.
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.
Time Frame - 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. The long-range plan is useful for companies whose product development plans require a long time to complete.
Potential - Each month, actual financial results are compared to the numbers in the forecast, and efforts are made to identify and analyse 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.
Unpredictability - 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 behaviour 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.