Business Financial Planning Definition:
In the words of Wheeler, “The overall assessment, acquisition, and conversation of capital funds to accomplish important objectives of a business enterprise including the financial requirement is called business financial planning”. Business financial planning is the most important ingredient if you wish to accomplish your business goals. Specifically speaking about business, a financial plan includes balance sheet, income statement, and cash flow statement. These three basic financial statements are developed within a business plan itself.
The business financial plan includes annual projection of income and expenses for a company, division or department. Failing of small business firms is a common sight in business industry. The primary reason behind the downfall is lack of sufficient planning and funding. To sustain in today’s competitive era one has to have a comprehensive and viable financial plan for their business. A financial plan can also be an estimation of capital requirements and a decision on how to generate the fund, such as through borrowing or issuing additional shares in a company.
Assessment of the business environment is the top priority of financial business planning process. Business environment refers to factors affecting the company’s operations and functions. The factors are basically of two types – internal and external and they are the employees of the company, valuable customers, management staff, supply and demand and business regulations. Any strategic business financial plans or business financial planning is developed in accordance to the kind of business environment.
Visualizing the business goals and objectives is necessary to gather the sufficient amount of funding and allocate prime resources beforehand. Only after you’ve a clear vision of your goals, you can proceed in the right direction. You have to set short term goals at first and utilize your capital optimally. It also involves managing of debts and equities (if required)
Next task of business financial planning process is to identify the major resources that will help you achieve these objectives. Business financial planning example – For instance, a person starting a business of clothing line will definitely require raw materials, labors and machineries to work on. Also you’ve consider the benefits of investment in particular resources and whether or not can you work without utility resources.
Now, once you’re through with above tasks, you’ve to quantify the amount of resources and calculate the total cost of each type of resource. Further summarize the costs to create a budget that will include the accounting fee, registration and license cost, equipment and initial working capital. It is important to prepare a rough draft of the initial budget so you can work on how much you’ve to apply for loan, and how much you’ll spend from your pocket.
Considering the level of risk involved in your business and evaluating the factors that influence it, you can predict or forecast your annual sales and expenses. In order to estimate the value you can compare the annual sales revenue to cost of goods sold and fixed cost of doing business. Calculating likely margins is also recommendable; once you’ve done it you might as well run a test on your pricing model for certainty. Doing so will help you give a confidence that your finances will be in your favor.
Business Financial Planning:
In this lesson, we will learn about how to develop a successful business financial plan. There are various different ways to analyze business plans. For example: business finance plans includes forecasting, projection, estimations, etc. If forecasting done correctly based on the historical data and future business plans. It will lead towards successful business. A great and successful business finance plan is the key to become successful business man. Let’s understand in detail.
Business Financial Plans – Cash Flow Forecasting:
One of the three key aspects of business financial planning is cash flow forecasting. Think of the cash flow forecast as an “early warning system”. Management of cash flow is crucial if you plan to expand your business. Not only does cash flow forecasting help you in identifying potential shortfalls in cash balances beforehand but it also makes sure that you’ve enough capital to pay your employees, suppliers and meet other demands to ensure coherent functioning of your business.
Also this business tool will help you assist in managing and checking on the customers who aren’t paying their debts on time. As an important discipline of business financial planning—the cash flow forecast is an important management process, similar to preparing business budgets. Also it happens that external stakeholders like banks or any foreign investor may require a regular forecast. Certainly, if the business has a funding or a bank loan, the stakeholder will want to look at the cash flow forecast at regular intervals.
Business Financial Plans – Balance Sheet Projection:
This should be a snapshot of what your business finance will look like after 12 months. Business’s actual, historical financial positions are shown by past balanced sheet. A projected balance sheet displays potential changes in future asset investments, outstanding liabilities and equity financing.
You can only turn a company’s projected revenues, operating expenses, interest expenses, taxes and its net income into a favorable balance sheet by linking the receivables to your revenue growth assumptions.
Effective projection of a balance sheet aims to build default assumptions. It incorporates the very features that enable forecasters to sensitize away from those default assumptions.
Here is the list of balance sheet lines and how it should be projected as a planning of business finance.
1. Accounts receivable (AR)
- Grow with credit sales (net revenues).
- User should be able to override the model with Days Sales Outstanding (DSO) projection.
- (DSO) = (AR / Credit Sales) x days in period.
2. Prepaid Expenses:
- Grow with SG&A (may include COGS if the prepaid are cycled through COGS).
- Grow with cost of goods sold (COGS).
- Override with inventory turnover (Inventory turnover = COGS / Average inventory).
4. Other Current Assets:
- Grow with revenues (presumably these are tied to operations and grow as the business grows).
- If reason to believe that they are not tied to operations, straight-line projections.
5. PP&E (Property, Plant and Equipment):
- PP&E – beginning of period (BOP).
- Positive capital expenditures (grow historical with sales or use analyst guidance).
- Negative depreciation (function of depreciable PP&E BOP divided by useful life).
- Negative assets sales (use historical sales as guide).
- PP&E – end of period (EOP).
- Intangibles – BOP.
- Positive purchases (grow historical with sales or use analyst guidance).
- Negative amortization (amortizable intangibles BOP divided by useful life).
- Intangibles – EOP.
7. Other Non-Current Assets:
- Straight-line (unlike current assets, lower likelihood these assets are tied to operations – could be investment assets, pension assets, etc.).
1. Accounts Payable:
- Grow with COGS.
- Override with payables payment period assumption.
2. Taxes Payable:
- Grow with the growth rate in tax expense on income statement.
3. Accrued Expenses:
- Grow with SG&A (may also include COGS depending on what is actually accrued).
4. Other Current Liabilities:
- Grow with revenues.
- If reason to believe that they are not tied to operations, straight-line projections.
Business Financial Plans – Break Even Point Estimation:
Finally you have to estimate a break – even point as a part of your business finance plan. A break – even point is (BEP) is a point where capital cost is equal to revenue. There is no net loss or net gain. At break – even point, the firm pays all its debts and owes no money. But at the same time, it has zero marginal profit. After Break – even point, the entire revenue generated accounts as profit. So you have to work out on how many sales you need, to reach break – even point.
- Tutorial Course - Financial Planning Basics For Beginners -
» e-Learning Chapter 1: What is Financial Planning? Definition, Benefits and Importance
» e-Learning Chapter 2: Different Types of Financial Planning Models and Strategies
» e-Learning Chapter 3: Determine Financial Goals – Assessment, Budgeting and Goal Setting
» e-Learning Chapter 4: Benefits of Top 5 – Key Steps Involved in Financial Planning Process
» e-Learning Chapter 5: What is Optimism Bias – Definition, Effects on Financial Decisions
» e-Learning Chapter 6: What is Personal Financial Planning? Definition, Examples, Process and Template
» Currently Reading: What is Business Financial Planning? Definition, Examples and Process
» e-Learning Chapter 8: What is Financial Planner? Definition, Scope and How to Become a Financial Planner
» e-Learning Chapter 9: Your Rights and Responsibilities as a Financial Planning Client
» e-Learning Chapter 10: Strategic Planning and Execution of Financial Plan
» e-Learning Chapter 11: Financial Backup Plan or Emergency Financial Assistance
» e-Learning Chapter 12: Top 10 Worst Financial Mistakes to Avoid or Common Errors in Financial Planning