Financial planning: what it is and how to do it in your company

The process of organizing, managing, tracking, and evaluating a company’s financial situation is known as financial planning. This entails, among other related tasks, forecasting investments, figuring out costs, identifying and reducing waste, and considering methods to boost profitability.

The financial health of an organization should be one of its pillars. This applies to companies, government agencies, and NGOs, whether for-profit or not. Money is part of what allows an organization to function, which is why every manager should know about financial planning.

Starting to apply financial planning methodologies in your industry depends on studying theory, practice and tools. The article I prepared below covers the basic knowledge, a complete step-by-step guide and free digital tools for you to use.

What is financial planning?

A company’s financial planning is a crucial step in managing its finances. It is through financial management methods, tools and processes that your company can continue to operate healthily. Without it, you cannot manage your company.

It is a very broad term that encompasses numerous processes, actions, and operations within a company. Industries, government agencies, public-private companies, and even non-profit NGOs depend on finances to function. Therefore, financial planning is an important step for the health of any organization.

Differences between corporate and family financial management

It is very common for people to draw parallels between corporate financial management and family financial management. This is a very common mistake.

We can use the comparison occasionally to illustrate an argument, but the spheres and resources of the two scenarios are super distant.

If you run your business or your home the same way, one or both of you will have problems. A business is responsible for more and more complex accounts, but it also has access to different financial resources—credit, partnerships, tools—than a home.

This difference is extremely important, including for the most basic lesson that every entrepreneur should learn: do not mix household bills with company bills.

Combining the two leads to disorganized accounts, problems with tax declarations, unrealistic planning, and a lack of control over transactions.

Why is financial planning important?

A company’s finances are what keep it running. Therefore, financial planning is what keeps an organization healthy.

The purchasing employee will buy more raw materials, the production manager will use up the machines without worrying about maintenance costs and the sales person will go home thinking that the target has been reached – while his company is in the red.

And it’s not enough that your account at the end of the month is fatter than it was at the beginning. The organization may even be making a profit, but if you don’t know where the money is coming from, at some point your accounts will be in the red and the company will collapse.

Financial planning and control allow you to understand what is really happening in your accounts and take control of your transactions.

How to conduct a company’s financial planning?

A company’s financial planning relies on simple step-by-step explanations, as you will see below. However, the set of processes and actions are complex and depend on the reality of your organization.

You can read the tutorial and tips below as a recipe for a well-made cake, with the common ingredients and steps for each cake. However, your business, like any other, requires cakes made with specific flavors, ingredients and tools – which are dynamic and unstable.

Even unexpected events should be included in your forecast: it is part of planning to have tools and methods to deal with unexpected events. This will become easier to understand as you read the text below.

Check it out:

Step by step

Know and map your current situation:

1. You need to analyze your company’s financial situation, general situation and the most important related information. How much cash do you have? What are your profit margins?
2. Also identify strengths and weaknesses, opportunities and threats through a SWOT Analysis Matrix to get an opinion on your company’s internal and external scenarios.
3. This data will allow you to start planning based on the reality of your company so as not to set unrealistic objectives, actions and goals.

Set realistic goals and objectives:

1. Dreaming big is good, but you need to keep your feet on the ground. Once you know your situation, understand where you want to go in the short, medium and long term.
2. These objectives should be divided into general (expansion goals, for example) and specific (expected revenue by the end of the year)
3.  These goals and objectives are linked within larger plans and must be controlled by their performance indicators and KPIs , the key performance indicators.
4. You will use the intended results as a guide to plan actions and guide your teams.

Prepare for all possibilities:

1. Your steps, actions and methods should be planned according to your goals, but things almost never happen as expected.
2. You will come across obstacles and opportunities along the way that will bring more expenses, investments, problems, solutions, in short, different situations (for better or for worse) than what was initially thought.

Set your annual budget

1. It is important to define which resources will be available and invested throughout the year in each area of ​​your company so that you can achieve your goals and objectives.
2. It will also be necessary to make this definition for other time periods (monthly, half-yearly, biannual, etc.), but which specific period depends on the nature and reality of your company.
3. Having a defined budget will show how much your business needs to earn, the spending limit to be defined and the necessary investments, as well as adjustments.
4. Use financial management tools to help you, such as working capital , cash flow and a financial dashboard .

Define your action plan:

1. Now you will decide how you will put into practice everything that has been planned so far, by carrying out these steps:
2. Consider the defined objectives
3. Make a map of the necessary actions
4. Create a feasible schedule with time for unexpected events
5. Delegate work according to the responsibilities of each manager and employee
6. Set goals and tools to track performance in real time
7. Document in real time what was planned, what was done, and what actually happened; this data will be important at the beginning of the next planning cycle.