Financial plan: 6 key elements
Determination of the financial plan and methods of its formation
It is rare that an organization is created without first drawing up a business plan. Among the many sections of a business plan, the financial plan is the most important. Drawing up a financial plan, in the process of creating a company, is based on a marketing and production plan.
When drawing up a business plan for the development of an existing business, another source of information appears on drawing up a financial plan - data from financial analysis of accounting and management reporting. At the same time, the main tool for forming a business plan is budget planning.
Financial planning and financial plan
Financial planning is an integral component of planning the financial and economic activities of an enterprise. Financial planning focuses on the implementation of the business strategy as well as addressing the operational needs of the organization. Financial planning results in a financial plan.
Financial plan - the most important section of the business plan, which is drawn up to justify investment programs, as well as to manage the current and strategic financial processes in the organization. The financial plan is a guiding document that provides a harmonious combination of the company's development indicators and the resources (financial, material, human) available.
Financial planning tasks
1. Provision of production and investment activities with financial resources. It's no secret that you can plan anything you want, but finding funds for this is a difficult task.
2. Achieving a compromise between profitability, liquidity and risk, in the process of determining the required amount of financial resources, while observing the optimal capital structure of the organization.
3. Establishing harmonious relationships with partners, banks, budget, insurance companies. This gives a guarantee of the fulfillment of obligations to the listed entities.
4. Improving the efficiency of capital investment, assessing the degree of rationality of capital use, as well as searching for new investment opportunities.
Financial experts have differing opinions on what should be included in a financial plan. It all depends on the type of business and the goals laid down in the business plan. But regardless of whether you are planning to simply start your own business, scale an existing business, or simply better understand the current processes, there are several key points of the financial plan.
Key components of the financial plan:
- Profit and Loss Statement
- Cash Flow Analysis
- Balance Sheet
- Sales Forecasts
- Personnel plan
- Selected business indicators and / or break-even analysis
Even if your business is in its early stages of development, a financial plan can work for you.
Profit and Loss Statement
An income statement is essentially an explanation of how a business made a profit (or why it suffered a loss) over a period of time. This is a list that lists all income and expenses - usually over a three month period. The same list contains the sum of net profit and loss.
This is a financial statement, which can be called by different names: income statement, income statement, company income statement, etc. It doesn't matter what you call this document, in any case it is an essential report that will help you understand a lot about the business.
There are different forms for income statements, depending on the type and structure of the business (non-profit organization, limited liability company, etc.).
A typical income statement should include information about:
- income (sales)
- cost of sales or cost of goods sold (COGS)
- gross profit ul >
- Operational or short-term planning. In this case, the financial plan is focused on solving specific problems within a short period of no more than one calendar year.
- Medium-term planning or tactical. In the context of this type, the financial plan can cover a period from six months to two years, and it is the medium-term financial plans that are considered as basic and universal.
- Long-term or strategic planning. The strategic financial plan provides for the development of a global financial strategy, assessment of long-term projects, investments and loans for doing business over a long period of time. Long-term planning periods are usually taking into account a time interval of more than two years.
- Forecasting the future situation in the market and at the enterprise. The study of financial plans and the progress of their implementation allows analysts to create realistic forecasts of the financial situation in subsequent periods. A correctly created forecast, in turn, makes it possible to prevent risks or take advantage of emerging prospects to improve the efficiency of economic activity.
- Additional assurance in reporting matters. In the financial plan, all deductions from the company in the form of taxes and insurance fees are clearly taken into account, which means that the preparation of a financial plan and its subsequent execution provide additional protection against accounting errors or any inaccuracies that can lead to adverse consequences for the company.
- Ensuring effective management. The financial plan allows managers to understand how many opportunities they have to use the existing finances of the enterprise in order to improve the organization of work and certain processes. For example, will it be relevant to increase the motivation of workers by providing them with bonuses, or vice versa, in the near future it will be necessary to reduce personnel costs.
- Control and analysis system. Thanks to preliminary forecasting and subsequent analysis of the progress of the financial plan, the company receives an additional tool that can signal the presence of various critical situations, vulnerabilities in the company's financial policy and promptly respond to emerging problems.
In modern business, the financial plan of an enterprise is a document containing the exact structure of all current expenses and income of the company, as well as the estimated forecast of the financial activity of the enterprise for a certain period. A financial plan is necessary for any modern business - and it is best to draw up it at least in an approximate form before starting business. Find out why you need a financial plan and how to draw it up in a business plan for your future enterprise.
Financial plan - what is it
The financial plan of an enterprise means a document that reflects a set of measures for the functioning of a business in terms of its financial activities. Like any other type of planning, a financial plan involves a clear setting of goals, the development of methods and tools to achieve them, as well as subsequent monitoring and analysis of the implementation of the plan, as well as the possible introduction of adjustments to it in case of encounter with various unforeseen circumstances.
As with other types of plans, financial can be divided into several categories, depending on the timing of planning. This division primarily includes:
In addition, the financial plan should be directly integrated as a whole with the development strategy of the enterprise and tactical operational decisions at all levels. The financial plan also has a direct relationship with other planning areas, for example, it is the actual accounting reflection of most aspects of the production plan.
Why do you need financial planning
Almost every entrepreneur in the Russian Federation, with the exception of self-employed citizens, in one form or another is obliged to maintain accounting records and submit relevant reports to regulatory authorities on a regular basis. Thus, since accounting is an integral part of financial planning, the financial plan is present in one form or another in every enterprise.
However, the preliminary development of the financial plan allows solving several tasks at once that face each business entity. Thus, the financial plan provides the following options:
Planning the distribution of funds with the greatest efficiency. The financial plan reflects both current income and income from future income from the fulfillment of obligations to the company and potential income from economic activities. In the same way, the company's expenses are reflected in the financial plan. Accordingly, having a single document in which the planned future income and expenses are clearly fixed, the company can distribute funds so that they work with maximum efficiency, and so that the company does not find itself in a difficult situation.
What needs to be done financially
The financial plan should reflect a number of the most important financial indicators in the conduct of business activities. In particular, it must necessarily reflect the following aspects characteristic of the activities of almost any organization in the Russian Federation: