The financial planning of a company tackles questions as strategic as the evaluation of investment opportunities, the degree of financial leverage and how money can and should be spent. Most of the decisions involved in this planning only have a long-term impact. Building a factory or maintaining sufficient cash flow can take years to materialize. That is because you need to wait to see how your finances pan out.
Growth is not the alpha and omega of financial planning
Growing a business, in terms of turnover, market share or sales, is not an easy task to undertake. Despite the proliferation of its stores, national advertising campaigns or an increased online presence, sometimes, businesses just don’t succeed. Is it because they are selling something bad? Maybe. Or is it because they are not maintaining their finances well? More likely. The erosion of the margins of the sector, among others, greatly contributed to its downfall. Growth is only one aspect of a successful business – so is keeping it organised.
Define the planning horizon
When a company considers its future, it generally distinguishes the short from the medium / long term. The short term is, in practice, its situation over the next twelve months. This is what can be found, for example, in the definitions of current assets, where only the most liquid balance sheet items or those entering directly into the production process (raw materials, stocks) are considered. Financial planning is concerned with the situation of the company in the next two to five years. This is called the “planning horizon”.
When the company establishes its financial plan for the next few years, it tends to group all its future needs into one single amount. The projects are aggregated. A certain degree of differentiation can however be retained between the departments. While all advertising expenses, large or small, ultimately depend on the marketing department. And those related to machine maintenance or mechanics fall under production. Therefore cannot be reasonably mixed. The financial director, in their business plan, may seek to assess the various medium / long-term scenarios. This is according to a well-known triptych. Including worst-case scenario, neutral scenario, most favorable scenario. Here is where financial planning content and newsletters come into their own.
In the worst case scenario, the most pessimistic assumptions are used, both in terms of costs and in terms of financial flows. Considering such a scenario, even if it seems totally unrealistic, is vital for the company. This indeed gives it a certain idea of its capacity for financial resistance in the face of an adverse situation. The “neutral” and “favorable” scenarios give a more realistic idea of the company’s needs.
The goal of strategic planning is to define the direction a business wants to take over the medium to long term. Projects and activities are planned over a horizon of 3 years, 5 years, or even more. This is to meet the objectives (turnover, etc.) that the management of the company has set for itself. Strategic planning is a continuous thinking process.
Most of the time, a budget is established on an annual basis and is based on data from different sources. The resources are distributed among the different actors of the company. And the company defines the way in which the general plan can be achieved and how the objectives can be achieved by period. The presentation of a budget takes an essentially financial form. Balance sheet, income statement, cash flow statement.
Forecasting involves the use of a variety of data, in order to reliably predict the financial results of the business in the coming months or years. Management uses realistic data to establish projections and then integrate them into the budget. The horizon can be annual or semi-annual.
How to improve these processes with technology?
Dedicated software will help you structure processes and spend much less time and staff building your budget or planning. Among the main advantages, you will benefit from:
- Better data management: software for budgeting, forecasting and strategic planning uses a single database. With automatic data import and processing.
- More flexibility for users: they can create and manage several versions in parallel very simply (to perform simulations according to different scenarios). They have the information necessary to make the right decisions at any time. Including (forecasts with mobile horizon) and making decisions in line with the company’s long-term strategy.
- Better work processes because the use of dedicated software promotes transversal collaborations. And facilitates exchanges between users, for better quality work.