Financial planning is a type of financial analysis of which goal is to predict financial situation of the object in the future. There are two main trends where financial planning can be applied: in corporate finance or in personal finance. Those two applications are completely different; however, some main rules stay the same.
Planning for Companies
Need For Planning
Financial planning is a necessary function for companies to survive. Every larger company in its financial department has a function of financial planning. Some companies even have sustainability department which is also evolvement from financial planning but considers more risks from environment.
Companies with hundreds of millions investments in their capital and thousands of employees cannot risk their future blindly. The stability is very important and this is one of the main financial planning goals. Another goal is financial efficiency. Only when company is aware about future’s income and expenses can manage its finances efficiently, and having corporate expense management makes it easier. Efficient finance management is very important for every company trying to achieve higher earnings and financial planning is a necessary part of company’s finance management.
A decent financial planning of business normally is made in budget form which includes forecasts of main financial statements. Usually companies are planning their finances for the current next year. Strategic financial planning may include more years of financial forecasting but strategic financial planning is based on main financial indicators but do not include full budget with all the details which usually are estimated for the next year financial budget.
A professional financial planning is a hard task and financial analysts that are doing this job has to be real finance experts and to know not only about corporate finance and accounting but also nuances of the company and industry niche as well. Of course, it requires many years of experience. If financial analysis will be performed by unskillful financial analyst then it will be worthless or even worse: it may lead in to the wrong direction and create additional losses or expenses.
Normal financial planning of a company should include full projections of an income statement and balance sheet for the current and next year (cash flow statement will be naturally linked to the changes in balance sheet or otherwise). It is very important that financial planning would help to manage cash flows and also would help at efficient working capital management.
As a rule financial plan is performed on a computer using some Excel spreadsheet or a specific financial planning software program. Anyhow, every financial plan should start from market research including analysis of economical environment impact to the company. Every company is a part of a global economy and financial system and cannot survive independently. That’s why financial planning of a company should incorporate impact of financial and economical environment.
It is hard to describe the financial planning process of a company exactly because every company runs different business and estimating for every business is different. For example, financial planning of construction companies or similar companies, that income is based on contracts, can predict their income in relations to those contracts. But in another example, the prediction of retail company’s sales will be completely different. It will be based on retail sales of the past according to changes in environment, new stores, closed stores, marketing plans, new products, investments and other.
Expenses are easier to estimate than sales because they are mostly controlled by the company while sales depend mostly on the market. Cash flows from investing activity should be planned conservatively while financial income and expenses are also more or less predictable indicators.
Financial planning for companies is a partly a science and partly an art as well as asset management and most of the results depend on professionalism of a person that creates the financial plan.
Personal financial planning is much simpler than planning of corporate finance. The goal of a financial planning for individuals is to take control of person’s (or family’s) finances and to secure comfortable retirement.
Financial planning do not requires much of a time for calculations but still requires a person to think a lot about that and in some way has to change the life of a person. Personal finance is very important in life of every individual and one must know that if he cares about money, he should take care of financial planning.
One may think that financial planning is an extremely useful investment tool in a life and everyone should make a financial plan in his life. However, personal financial planning has disadvantages too.
Advantages of personal finance planning:
- Control of income and expenses may increase your savings and make you richer.
- Control of the risk of becoming insolvent.
- Investments provide for you financial security which can be important in case of a job loss or some other serious misfortune.
- Good financial planning allows for you to reach some extra goals (for example, around the world trip).
- You may seek for early retirement.
- Life looses a lot of its charm when all income and expenses are calculated.
- The time that is spent for planning could be spent for trying to increase the income.
- Many people are breaking their financial plan sooner or later. Then they spend all their savings irrationally.
As you can see, there are serious advantages and disadvantages of financial planning and not every person is in reality suited for such scheming. It is hard to imagine some young freelance artist that calculates his income and expenses on a spreadsheet every Saturday night…