Planning financially implies projecting in monetary terms the future results that the company wants to achieve, and identifying the necessary resources to achieve it, the Financial Plan will try to analyze the impact of the various possible strategies of the company and the possible contingencies that may arise.
Some of the advantages of making a Financial Plan are:
- Have the option to foresee the different scenarios that the organization may face.
- Have a report or diagnosis of the financial situation of the company that will also serve as support for decision-making in the organization.
- Mark a basic roadmap for the growth and development of the organization.
Financial Planning Concept
Below we will provide definitions from various authors that can serve to strengthen the concept.
For Diego Francisco Gutiérrez: “ Financial planning will be understood as the activities that must be carried out to ensure the survival of the company and guarantee the owners that their plans will create value in the future ”.
For Pilar Cibrán Ferraz and others: «Financial planning is understood as the quantified information of the company’s plans that have an impact on financial resources».
Pedro Arroyo, Ruth Vásquez, and Agustín Villanueva: «Planning is an activity that involves designing a sequence of activities and identifying the resources required for their development in order to achieve the goals or objectives that an organization wishes to achieve in the future».
Characteristics of Financial Planning
- Financial planning generates the rules for the development, change, and growth of the company.
- He cares about the decisions in the processes of growth, development, evolution, logistics, or diversification of the company.
- It expresses the financial objectives that the company wants to achieve.
- It generates the distribution of the financial resources of the company given the established spending and investment policies.
- It raises some objectives to meet (possible and optimal) to be evaluated later.
Elements of Financial Planning
To develop a Financial Plan and make the best decisions for the management of the organization, it is first necessary to analyze the financial situation of the company for this, elements such as the analysis of financial flows, the analysis of financial information, and the financial diagnosis must be used. and future states or forecasts.
Elements of Financial Planning
Flow Analysis: It consists of the analysis of the movements of money in the company, both incoming and outgoing to maintain available resources for the proper functioning of the company.
Analysis of financial information: It is the analysis of the accounting information of the company, which generally uses management indicators or ratios that will serve to identify the general situation of the company.
The financial diagnosis: It consists of the initial report of the economic and financial situation of the company and where the most relevant indicators of the behavior or performance of the firm are compiled.
Future states or forecasts: It is the estimate of the possible future performance of the company in terms of sales, costs, financial indicators, and profitability that the company may have given conditions.
Development of a Financial Plan
What the financial plan intends is to set some objectives to be met (possible and optimal) to be evaluated later. Financial planning is a very important weapon that organizations have in decision-making processes.
In general, a Financial Plan should have the following components:
Basic Components of a Financial Plan
Mission and Objectives: Given the market where it is located, it consists of the declaration of the goals that are proposed.
Company Diagnosis: It is the concrete explanation of the current situation of the company
Strategy: Definition of the actions that will be taken by the Management to achieve the stated objectives.
Strategic Plan: It is the detail of the strategy including the tactical plans.
Control and follow-up: Basically, it is how the plans will be verified to be effective.
Although obtaining this financial strategy is the ultimate goal of planning; This does not occur with vague observations, made above the financial situations of the company (financing and investment), it is only presented after an extensive analysis of all the effects, both positive and negative, that can occur for each decision. taken concerning financing or investment.
These decisions must be taken together and not separately since this could lead to problems by not taking into account decisions that have consequences for other sectors of the company.
There is no perfect plan. To reach a plan close to the optimum, trial and error processes are carried out.
As no theory leads to the optimal financial plan, planning is done through trial and error processes, before finally deciding on a plan, various strategies can be formulated based on different future events.
When a large number of plans are projected, planning models are used that allow future consequences to be foreseen, although they do not give the optimal plan, they do make the task simpler and more abbreviated and can bring us closer to it.
Requirements for good Financial Planning
Good financial planning should lead the manager to take into account the events that can disrupt the good performance of the company or at least hinder it, to take measures to counteract these effects.
All the analyzes and observations lead us to think that planning is not just forecasting since forecasting is taking into account the probable future, leaving aside the improbable or surprises (desirable or undesirable).
- Optimal financing
- Control development of the plan
The Requirements for Effective Planning are:
- Forecast: The probable and the improbable must be foreseen, be it beneficial or detrimental to the company.
- Optimal Financing: There is no optimal plan. “Financial planners must address unresolved issues and manage as best they can, based on their judgment.” Balancing debt, income, costs, cost of capital, rate of return, etc., is not easy, but it is the task of the financial director of a firm.
- Look at the Development of the Plan: Observe if the path that has been taken has been viable and if not, try to make the necessary modifications. “… long-range plans serve as benchmarks for judging subsequent behavior.”
Another point in which the financial planner must be careful is not to get too involved in the details because items of great importance within the strategy can be overlooked.