Financial planning is an integral part of running any business efficiently and effectively and main tool in achieving this is budget. A budget is an estimation of revenue and expenses over a specified future period of time and is usually compiled and re-evaluated on a periodic basis. Corporate budgets are essential for operating at peak efficiency.
Financial Plan
Planning & Monitoring
A budget is basically a financial plan for a defined period, normally a year with breakdown on smaller time portions (quarterly or monthly). It shall serve as starting point for estimation of financial performance of the business as well as monitoring tool for cost efficiency control.
”Plans are of little
Winston Churchill
importance, but
planning is essential.
Method Overview
Financial planning is the process of evaluating financial situation and creating a plan to help the entity achieve their short- and long-term money goals. A big part of financial planning is understanding how to prioritize different goals and areas of company’s financial life. It usually consists of few steps presented below.
Understanding Current Financial Situation
Financial planning process begins with client interviews to get a clear picture of who the client is and what they want. Collected data may refer to qualitative or quantitative information which is processed and analyzed in order to gain clear understanding on the current financial situation.
Identifying and Setting Goals
First step is to identify and prioritize goals and objectives. The client’s current course of action should be also analyzed to understand if it’s moving them toward their financial goals. If it’s not, the alternative courses of action will be identified.
Financial Planning Recommendations
Three main steps are considered in this part of the process: develop, present and implement the financial recommendations. Developing recommendations shall include assumptions overview, connection with the client’s goals, integration with other aspects of financial plan and prioritization.
Develop Financial Plan
This step covers detailed operational work on building the financial plan. It may be built on static or dynamic basis (fixed or flexible budgets) providing the connection between the inputs from all relevant aspects of business and outputs reflected in cash flow forecast and estimated income statement and balance sheet. It will further serve as starting point for monitoring and analysis.
Monitoring Progress and Updating
Plans evolve and change just like life. Once the plan is created, it’s essentially a piece of history. This is why the plan needs to be monitored and tweaked from time to time. Monitoring will provide insights on management efficiency and effectiveness and provide red flags timely identification.