Financial Planning: 5 Reasons to Plan Your Financial Results and How to Do It
Financial planning involves trying to anticipate what could happen in the future, make decisions in advance, prevent future problems, and boost future opportunities. Financial planning is more than simply plotting some projections in an Excel sheet. Why is financial planning so important and how can you get the best out of it?
The first three reasons for financial planning relate to the business plan. Managing a company without a business plan is like trying to sail a boat without a compass – you will drift aimlessly into the unknown. A business plan is essential for three reasons:
1) While planning, you analyze your current situation. This will highlight your strengths, weaknesses, opportunities, and threats (SWOT Analysis)
2) You anticipate the future so you can estimate how your business will perform over time.
3) If you don't like the path you see when you look at the future, you can take immediate action to change that path.
There is no business plan without financial planning. For your business plan, you complete the company roadmap, which includes the marketing strategy, operations strategy, and HR strategy. If you don’t do financial planning, it will be impossible to analyze the impact of those strategies on your I&E and Cash Flow, which relate to reasons four and five.
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4) Projecting an I&E will allow you to run a deep analysis of your strategy results. There are several indicators that are calculated over the I&E to analyze performance, such as the Gross Margin, Operating Margin, Net Margin, the Dupont Model, and the EVA.
5) Projecting a Cash Flow will ensure you have enough money to implement the planned strategy. Also, it is extremely useful to anticipate cash needs, have enough time to negotiate credit with banks or vendors, and to anticipate excess money so you can seek out investment opportunities.
Now you see why it is essential to perform financial planning, here are some tips on how to do it. Financial planning requires four steps:
1) The first step is to gather useful data related to previous years such as sales, operational costs, and headcount. It is also recommended to have data associated with the context and economy such as GDP, inflation, consumption, and employment. The question everyone asks is how much information one should have? This is, of course, subjective, but you need sufficient information to be confident with the projections you are making.
2) The second step is to consider the context and past performance of your company and set realistic goals and objectives, ideally using the S.M.A.R.T. model. You cannot make decisions about the future if you don't know what you want to achieve.
3)The third step is to assess the difference between your company’s current situation and your goals. Once assessed, you must consider the actions you need to take to achieve the projected goals. The process of anticipating future decisions is like setting a roadmap when you take a trip. It guides you to your destination. Therefore, these actions should be as specific as possible.
4) The final step of financial planning is modeling the results. Turn your written text into numbers. This means projecting an I&E and cash flow. To do those projections, it is important to simulate different scenarios and evaluate the impact of each scenario on your decision-making and results.
There is no way of managing a company successfully without financial planning. However, the key element of financial planning is financial control. If you set your plan and don't control it, the plan will eventually fail. Financial plans must be controlled by comparing the estimates with the actuals and correcting any deviations you may find in a timely and efficient manner.
There is no business plan without financial planning. For your business plan, you complete the company roadmap that includes the marketing strategy, operations strategy, and HR strategy. If you don’t do financial planning, it will be impossible to analyze the impact of those strategies on your I&E and Cash Flow.
To get updates and read more articles, subscribe to our LinkedIn page.
#b2bsaas #embeddedlending #finance #financialplanning
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