Financial planning is one of the vital segments of organization management. Many owners of medium or small businesses prefer to keep control over financial flows in their hands, for fear of delegating subordinates with such responsible authority.
However, as the company develops, it becomes increasingly difficult for the owner to control accounting even though the time allotted to them to work with accounts grows in proportion to the company’s turnover. Email marketing companies are also making many rounds in the field of successes but it all depends on the financial planning to make it big time.
Implementation of the “financial planning” tool helped many to reduce his busyness with current issues up to four hours a week, halve staff, and clean up finances.
The essence of financial planning processes
Planning business processes, including financial, can be called the search for the right sequence of actions that will help determine the most profitable direction of activity and growth of the enterprise.
Planning of financial processes is part of the overall development plan: it is a documented relationship between actions to form and use cash reserves: the main task of financial planning is to consolidate a sustainable and economically justified balance between the assets (property) and liabilities (sources of income) of the organization.
In practice, there are three main planning methods:
“Bottom up”: production system managers develop documents justifying the financing of their departments, which are combined and coordinated by an authorized person or body;
“Top to bottom”: the financial planning process is detailed according to the hierarchy of departments, that is, the needs of production structures are adjusted to the tasks of the main plan;
Counter planning, when the amount of financing is approved “from above”, and the head of the department distributes it according to the cost items at its discretion; after amendments and approvals, the project is included in the main plan.
The principles of financial management in the organization
To achieve sustainable success, the planning of any type of company activity should be systemic, that is, obey certain rules. In total, in scientific and research works on business you can find up to three dozen principles of financial planning formulated by different authors.
Consider the most important of them.
- Forecasting is a key element of planning: the reliability of the financial plan depends on how qualitatively the economic components of the external and internal environment of the company are analyzed.
- The principle of correlation of the timing of receipt and sale of funds: in other words, to lay the financing of a large project from short-term sources, even if numerous or stable, is irrational.
- Priority allocation (the principle of matching financial planning to the financial needs of the company) – cash flow planning is associated with complex objects, so it is necessary to highlight the most significant interconnected business processes, combining them into a single structural element of the plan.
- Safety: market realities never correspond to the ideal model, therefore the financial plan should take into account possible risks and the possibilities of their reduction; for example, long-term risky projects can be invested from net profit, then the necessary resources will not suffer in case of failure, and the organization will be able to maintain the necessary cash reserve.
- Coordination principle: it is impossible to plan financing the activities of one unit, not taking into account its economic ties with other structures.
- The principle of process optimization involves finding the best alternatives among the possible ones.
- Documentation: a systematic approach to financial planning is impossible without careful recording of financial and economic activities; when the processes are described in the documentation, the manager can at any time control the process of execution of the plan.
Goals and objectives
The objects of financial planning at the enterprise are cash reserves and economic activity, which are expressed in the following concepts:
- Performance indicators (cost of a product or service, gross turnover, revenue, costs of raw materials, wages, rent);
- Indicators of financial resources and inquiries (volumes of own funds or loans, current and planned expenses);
- Financial relations between company divisions;
- Organization cash flows (income, expenses, investments);
- Expenses related to tax liabilities;
- Indicators of financial stability, solvency (liquidity, level of business activity, profitability of the company).
The fundamental goal of financial planning in business is to determine the optimal development paths that can be achieved by increasing the competitiveness, profitability, and stability of growth, which are realized through the appropriate use of funds received from production, investment or other activities.
Based on the statement of goals, we can distinguish the main objectives of financial planning:
- Maintaining the smooth functioning of the enterprise
- Pragmatization of capital structure
- Determination of the volume and terms of financing projects, structures, processes
- Protection of interests of owners, as well as other interested parties
- Determination of the most effective way to use available resources
One of the primary tasks of financial planning is forecasting adverse situations and designing measures to prevent them.
The methods of financial planning are called specific techniques and methods for determining the necessary indicators used depending on the task:
- Economic modeling (analysis) makes it possible to assess the financial difficulties of the organization, to determine the dynamics, the trend of indicators, to identify the volume of sources for increasing financial assets;
- The normative method is that the company’s need for financing is calculated on the basis of established standards: tax fees, credit rates, depreciation charges;
- the balance sheet method of financial planning draws information from the balance sheet; by rearranging the articles and changing the balance structure, the method allows you to connect the needs of the enterprise with the sources of their budgeting; most often used to redistribute company profits;
- The method of optimizing financial decisions is implemented through the development of several action scenarios, from which the best option is selected; this technique is advantageous in that it allows you to work out the company’s position in various economic circumstances;
- The calculation and analytical method is used in those circumstances when it is impossible to use standards, since only an indirect relationship is established between the indicators; the basis of the analytical methodology is an expert assessment of the situation.
When using any planning method, tables, graphical images, and mathematical models are widely used as tools.
Fundamentals of Financial Planning For Business Owners
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