Financial planning refers to analyzing and determining the means by which a business would achieve its stated objective and would enhance the shareholder value. A financial plan is created from the stated goal or objective of a company articulating the processes, resources and elements that are required to achieve the objective.
The activities of financial planning are as follows:
- Assessing the Business Environment:
- Business environment in which a company operates in is the key to succeed in the industry and the planning steps begins with analyzing the business environment by identifying its key risk elements and advantages.
- This provides a lucid picture to the managements to set an objective of the firm which would be in line with the prevalent business environment.
- Confirm the business vision and objectives
- Upon studying the business environment, the management needs to set and confirm the business vision and objective to give a direction to the company and give a practical assessment of the expected achievement from the business.
- Identify the types of resources needed to achieve these objectives
- The next step in the process is to identify the type of resource required for achieving the stated objective.
- The resource identification can be done internally or by an external consultant; however, the identification of resources is crucial before making any business decision.
- Quantify the amount of resource
- Upon identification of resources, the management needs to quantify the amount of resource, such as labor, equipment, material and so on to achieve the objective.
- The resource quantification is also carried out in order to ensure that there is no supply side constraint in allocation of resources. If there are any constraints, then the resource is typically replaced with an equally effective alternative to avoid any future delays in the planning process.
- Calculate the total cost of each type of resource
- The costing of each type of resource is done to evaluate the total operating cost involved in achieving the desired result.
- If the cost is exceeding of the indicated budget by the senior management, then the processes are relooked to ensure an effective allocation of resource to reduce any costs in the process.
- Summarize the costs to create a budget
- Subsequently the costs are summarized in the form of direct material cost, indirect costs, fixed overheads, variable overheads, Selling General and Administrative overheads, which lead to creation of a financial budget for the process.
- Identifying risks and issues associated with the budget set
- Study of the budget thus finalized is critical for identifying any risk involved in the budget or in the process. Upon identification of risks in the budget, suitable mitigates are worked out by consulting the top management to effectively execute the project.
Budgeting is an integral part of financial planning, which refers to making a detailed financial plan that quantifies future expectations and actions relative to using existing resources and acquiring new resources. Budgeting provides benchmark to compare actual results and to accordingly develop the corrective measures.
Different types of Budgeting that is undertaken in an organization are as follows:
- Financial Budgeting for an organization refers to forecasting income statement, balance sheet and cash flow statement for future years.
- Capital Budgeting refers to the planning process in which a company takes a decision for its long-term investments, such as investment in plant and machinery, investment in fixed assets, investment in new projects and so on.
- Sales budget refers to forecasted sales volumes and is influenced by previous sales patterns, current and expected economic conditions, activities of competitors and more.
- Productions Budget (which has direct correlation to sales budget) refers to setting up production targets in line with the forecasted sales keeping in view the existing inventory levels.
- Cash budget refers to forecasting all the future cash receipts and cash payments of a business for a specified period.
- Marketing Budget refers to planning for different forms/mode of marketing required for a specific product/entire organization.
- Project Budget refers to planning the budgeting activity for a specific project, such as forecasting project-related revenues, expenditures, capital investments and more.
In organizations, financial planning and budgeting activities are at times outsourced, however, the strategic planning activities are kept with the top management to ensure that the financial planning is done in accordance with the stated objective of the company. Furthermore, certain decisions support activities requiring customized analysis, such as Mergers and Acquisitions, Tax policies and more are directly dealt by in-house financial planning teams to ensure smooth execution of processes under the supervision of top management.