Corporate financial planning: what it is and how to do it

Can a high-growth company predict its future economic situation? The answer is yes, and it lies in a key term: financial planning. This concept refers to the detailed and customised roadmap in which startups set the time frame for achieving their goals and identify the resources available, as well as the economic and financial viability of the business plan.

How to do financial planning, step by step

Financial planning has several benefits: it enables informed decision-making, improves coordination between departments, prepares the business to better adapt to change and helps identify financing needs. Financial planning is an essential tool for attracting investment, as it gives investors the visibility they need to know how and when they will recoup their investment. There are a number of steps that need to be taken into account in order to do this.

1. Analyse the state of the business

The first step in financial planning is to understand the company’s current situation. To do this, the company’s financial reports or annual accounts must be taken into account. This analysis includes:

• Balance sheet. It records the company’s assets, liabilities and net worth. This section includes the company’s income, from direct sales to interest on financial products; and fixed and variable expenses, such as rent or bank commissions. It should also include the financing of the company through solutions such as venture debt or growth loans, and the amortisation of property or insurance.

• Cash flow statement. This shows the amount of cash circulating in the business, where it comes from and where it goes.
• Profit and loss account. Shows the profitability of the company.
• Statement of changes in shareholders’ equity. It shows changes in the company’s net worth.
• Annual Report. It provides additional information to the rest of the financial statements.

2. Set objectives

Once the state of the company is known, it is necessary to define the goals that the company must achieve in the coming years. These can follow the SMART methodology and be specific, measurable, achievable, relevant, and time-bound. Time-bound goals are usually set for their achievement:

• Short-term objectives. Between six and twelve months.
• Medium-term objectives. One to two years.
• Long-term objectives. Up to five years.

3. Define strategies and deadlines

Once the objectives have been set, the company decides how and when to achieve them, always bearing in mind the need to ensure financial viability in the short term. To this end, an action plan should be worked on, in which the measures to be taken to achieve the objectives set and the people responsible for carrying them out are identified.

This is when financial projections are made, based on expected expenses and sales forecasts. It is important to focus on liquidity, avoid high levels of debt and maintain a lean cost policy.

For greater security, this strategy may include the creation of an emergency fund to deal with adverse situations and unforeseen events.

By establishing a forecast between income and expenses, it is possible to estimate the time frame in which the break-even point will be reached. By doing so, businesses know when they will be able to recover the capital invested, which usually comes from investors and banks in the beginning.

4. Budgeting

All financial planning must detail the financial budget allocated to each of the company’s departments (accounting, marketing, operations, etc.) so that they can carry out their activities.

In order to predict whether the company’s expectations are in line with the budget, companies can use forecasting. This quarterly or half-yearly mechanism allows new goals to be set, new trends to be identified and immediate decisions to be taken.

5. Evaluate and review results

Finally, financial planning should include financial control mechanisms. In this way, companies can check whether the capital allocated to each area has been used efficiently to achieve the financial objectives.

When the company meets its income and expenditure forecasts, it is assumed that the financial planning carried out has been adequate. Failure to do so means that the company has not received the expected income or that there has been an unplanned increase in costs.

Financial planning tools

Traditionally, financial planning has been a manual process carried out on a quarterly or annual basis. It is common to use spreadsheets for this task, but this can lead to human error, lack of security or lack of flexibility to know information quickly. This way of thinking about financial planning has changed in recent years under the rule of data.

Now, this process has been merged with machine learning and artificial intelligence technologies to help make it much faster, seamless and connected between the different departments of the company. These advances are reflected in the solutions offered by some of the software that supports this management, such as those developed by leading companies such as SAP, Oracle or Netsuite.

In a dynamic context, financial planning has become an essential step for the survival of high-growth companies. With this foresight, forward-looking companies will be better able to meet the challenges they face.