Financial Planning for Companies: A Definitive Guide

Financial Planning can be tricky. It somehow ends up at the bottom of the priority list because no one really wants (or knows how) to do it. That is, until there’s a major cash flow emergency, or an urgent liquidity event. Academically, people know that they should be planning better and more often, but few act upon this knowledge, and even fewer are methodical in their approach. We’ve decided to share our bulletproof planning guidelines that ensure you’re covering all bases as you build, tweak, and revise your financial plans. Our bet is that once you have these, you’d plan a lot more often, and that’s a good thing for everyone!

Simple is best. Follow the three steps below, and you’ve covered everything, everytime. In order for this to work, you should go through these steps at least once a month. Why? Because the financial statements (Income Statement, Balance Sheet) that your accountant produces at the beginning of every month represent your most up-to-date financial position, and that’s a great place to start a financial plan.

1. Review Most Recent PerformanceHave a look at your most recent month’s income statement to get a picture of your latest performance. You should do this using two lenses: a) most recent month’s income statement; b) Year-to-Date Income Statement. This means that you’re looking at your latest month in isolation, in addition to your cumulative performance since the beginning of the year.

Examine your Revenues, Costs, Overheads, Gross Profits, Net Profits, Gross Margins, and Net Profit Margins. Compare those to your budget (another word for targets) to refresh your memory on where you stand.

What if you don’t have budgets or targets yet? Make some up, anything will do. Even back-of-the-envelope numbers are a good starting point. Remember, you’re going through these steps each month, so your target-setting skills will improve.

2. Schedule Working Capital Balances

This is where you take a closer look at your most recent Balance Sheet and plan for collections and payments. Your balance sheet will list all outstanding balances of working capital accounts. From there, you will need to schedule their flows over the coming months.

This probably sounds a lot more complicated than it really is! Your working capital accounts include outstanding amounts that you will either collect (eg accounts receivable) or pay (eg accounts payable) in the near future. Planning these accounts simply means that you spell out the amounts to be paid or collected, and assigning a month for when that will happen (i.e. of the $500 owed to me, I’m receiving $250 this month, $150 next month, and $100 in 4 months).

What if you miss your scheduling targets or something changes? Things change, suppliers flake, customers delay, we get it! The whole point of doing this at least once a month is that you’ll always be on top of these changes, re-calibrating your cash outlook as these events unfold.

3. Re-calibrate Future Plans

Now you are in a great place to review and update your business targets (another word for budget). What’s business looking like over the coming month, 3 months, one year? Combine new customer or market information that has recently come up to make changes to your financial forecasts. These changes should encompass everything from sales targets andhiring plans, to loan repayments and expansion plans. Going through your income statement and balance sheet, line by line, is one way to cover everything!

Repetition builds muscle memory. By the fourth iteration you will be closer to mastering the art of forecasting. You’ll be more confident in making strategic decisions, and equipped for any unexpected changes that may come your way. We’ve built our entire enterprise softwareon these principles, so hit us up if you think Robu can help you make better business decisions!

Saad Sahawneh