In general usage, a Financial Plan can be a Budget, a plan for spending and saving future income. This plan allocates future income to various types of expenses, such as rent or utilities, and also reserves some income for short-term and long-term savings. A financial plan can also be an investment plan, which allocates savings to various assets or projects expected to produce future income, such as a new business or product line, shares in an existing business, or real estate.
In Business, a Financial Plan can refer to the three primary financial statements (balance sheet, income statement, and cash flow statement) created within a Business Plan. Financial forecast or financial plan can also refer to an annual projection of income and expenses for a company, division or department. A financial plan can also be an estimation of cash needs and a decision on how to raise the cash, such as through borrowing or issuing additional shares in a company.]
While a financial plan refers to estimating future income, expenses and assets, a financing plan or finance plan usually refers to the means by which cash will be acquired to cover future expenses, for instance through earning, borrowing or using saved cash.
Business Financial Planning
Financial Planning is the task of determining how a business will afford to achieve its strategic goals and objectives. Usually, a company creates a Financial Plan immediately after the vision and objectives have been set. The Financial Plan describes each of the activities, resources, equipment and materials that are needed to achieve these objectives, as well as the timeframes involved.
The Financial Planning activity involves the following tasks:
- Assess the business environment.
- Confirm the business vision and objectives.
- Identify the types of resources needed to achieve these objectives
- Quantify the amount of resource (labor, equipment, materials) required
- Calculate the total cost of each type of resource
- Summarize the costs to create a budget
- Identify any risks and issues with the budget
Performing Financial Planning is critical to the success of any organization. It provides the Business Plan with rigor, by confirming that the objectives set are achievable from a financial point of view. It also helps the CEO to set financial targets for the organization, and reward staff for meeting objectives within the budget.
The budget of a company is compiled annually. A finished budget usually requires considerable effort and can be seen as a Financial Plan for the new financial year. While traditionally the Finance department compiles the company’s budget, modern software allows hundreds or even thousands of people in the various departments (operations, human resources, IT etc.) to contribute their expected revenues and expenses to the final budget.
If the actual numbers delivered through the financial year turn out to be close to the budget, this will demonstrate that the company understands their business and has been successfully driving it in the direction they had planned. On the other hand, if the actuals diverge wildly from the budget, this sends out an “out of control” signal and the share price could suffer as a result.