Financial planning is a subfield of business planning and an important instrument in its management. It forms the basis of your future financial decisions. All financial elements of a business are captured and analyzed within the financial planning process. You can thus determine the real profitability of your business. If the analysis is positive, your financial plan can, in turn, convince investors to bet on your business.
When starting a business, its founders often think intensively about financial planning, which also plays a central role beyond this initial phase. If you've done everything right, the financial plan shows you your cash flow at all times. So you know whether your business is financially healthy or whether action is needed. Think of the financial planning process as an investment for the future. You will need it if you intend to survive long in the market. The financial plan also influences future decisions by accurately presenting your financial situation. You must, therefore, constantly compare the actual case and the hypothetical situation and make the necessary adjustments if necessary.
In the following paragraphs, you'll find out what to pay attention to during the financial planning process, what pitfalls to avoid, and how to outperform your competitors.
What is the purpose of financial planning?
Financial planning aims to use the available resources — the financial means — in the most profitable way possible. This tool is the key to using the resources available to your business as efficiently and economically as possible. The financial plan allows you to determine your own financial needs, reduce financing expenses and make decisive decisions for your future.
Importance and missions of financial planning
Your financial plan's missions are derived from the goals you've set. In principle, you should know how much cash you need and how much you already have. You need an accurate overview of the amount and number of receipts and expenses and their due date. A good financial plan gives you visibility on the company's situation, the real foundation of its sustainability.
Other missions then complete this picture. An effective financial plan allows you to determine your cash flow needs for the days, weeks, and months to come while limiting financing expenses as much as possible. This ensures your company's liquidity. Suppose you use the financial plan to compare forecast and actual values. In that case, it can also fulfill the function of a management control instrument: in the event of deviations greater than 5 to 10%, measures are necessary - if you have higher than expected costs, for example, you have to limit them. If you have a larger surplus than expected, you can consider appropriate investments.
The financial planning process is solely considered feasible if it is integrated into the overall planning process of a business. This is why we also speak of integrated financial planning.
Types of financial planning
A distinction is made between operational and strategic planning and short-term and long-term planning in financial planning.
The periodicity generally depends on what you want to anticipate and achieve as a goal with your planning. The next section tells you which periodicity best suits your schedule.
Planning periodicity
A good financial plan allows you to keep an overview of your company's financial situation. In addition, focusing your planning on different periodicities can help you achieve your goals.
Operational planning extends for a maximum of one year and can be considered a short-term forecast. Its mission is to guarantee the ability to pay at all times. Therefore, it shows deficits and surpluses. Depending on the company's current state, you can also set a periodicity in days, weeks, or months. This is useful if you need to account for large fluctuations in your planning.
During tactical planning, the period chosen is from two to five years. Strategic planning extends over more than five years. It is employed to secure long-term financing or to determine long-term capital needs. However, since long-term planning does not allow conclusions to be created about the financial structure, it is not ideal to rely on it to make financing decisions.
It is best to establish a detailed plan during the first year, month by month. Then, you can plan quarterly from the second year and the third year and switch to annual planning. The financial plan should cover a horizon of three to five years.
Steps in the financial planning process
Various indications will help you identify the elements that must be considered in your financing plan. Those listed below seem particularly important to us:
- Revenue planning
- Capital requirements planning
- Investment planning
- Liquidity planning
Revenue planning
Revenue planning forms the basis of the financial plan. Considering the next 2 to 5 years, it serves as a decision aid vis-à-vis the banks for the granting of loans. You should therefore draw up your plan as thoroughly and realistically as possible. If data from previous years is available, it is integrated into sales planning, as are capacity limits and seasonal limitations depending on the sector. Therefore, turnover planning remains only an estimate, even if it is as precise as possible. This approximation, however, allows you to monitor, in the weeks, months, and years following its implementation, whether your turnover is evolving in line with expectations or whether there are deviations to which you must react.
Capital requirements planning
Capital requirements planning is another subcategory of your financial planning. In this way, you determine your company's capital needs over the next few years. Capital requirements include set-up costs (initial phase of businesses), fixed assets, or inventory, but It's also good to plan for any losses. If you supplement your capital needs planning with financial needs planning, you will also know where to find financial resources to cover the capital needs. These usually come from equity and external capital.
Investment planning
The amount of investment you plan depends on your business model. For example, a freelancer invests less in basic equipment than you if you want to create a delivery service or a start-up in e-mobility. But beyond the creation phase, the investment plan allows you to incorporate the investments that may be necessary for the following years to expand your business. Write down in your project the months in which you want to invest so that the money is available.
Liquidity planning
Liquidity planning complements the other categories of plans. All factors that impact the account balance are constructed into this plan. These include tax arrears and prepayments, debt repayments, loans, etc. The aim is to ensure the solvency of the company at all times in the future because a company that lacks liquidity risks insolvency. All future capital requirements stem from liquidity planning. Therefore, this part of the planning is one of the most important for companies. Liquidity planning should embrace a horizon of six to twelve months and, if possible, include the last two years to provide food for thought.
What should be taken into consideration in the financial planning process?
All schedules complement each other: They are derived from each other or interact. If you have made mistakes in one of the plans, these can repercussions the others. Therefore, you have to be very attentive to each plan and carefully check the figures.
In your financial planning, other plans are projected income statement, projected balance sheet, income statement, cost planning, profitability calculation, and profit margin calculation. It's up to you to decide which plans you want to include in your financial planning process. In principle, the profitable strategy considers as many factors as possible. Click here for more information.
The five benefits of financial planning
- Prepare for emergencies: The ideal scenario does not involve an emergency since, thanks to your financial plan, you identify in advance where the difficulties lie and can react to them.
- Shorter reaction times: If an unforeseen event occurs despite everything, you can react to it quickly thanks to the overview of the company, which allows you to understand the irregularities better.
- Allows stable, even long-term planning: The prerequisite is to draw up your financial plan over several years and update it systematically. You will then secure your situation in the long term.
- A clearly defined strategy and objectives: If you know the financial situation of your business, including the long term, you can use it.
- Improves transparency in the company: Not only do you know at all times where your company is, but you can also offer more security to your investors.
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