Financial Planning Hints & Tips

Financial planning is important because it:

• Helps you run your business more effectively

• Speeds up decision making because you have a better understanding of all the implications

• Helps you avoid or minimise problems

• Helps you demonstrate tight control to other stakeholders e.g. banks, shareholders

• Helps you sleep ……………..!

But it has to be “good” planning, not just done for the sake of it

• Put financial planning and cash-flow planning at the centre of your business

• Ensure good financial disciplines are in place as standard

Understand your Audience and their needs

• External – for example bank or venture capitalist or business angel or private investor – they sometimes need different information and approaches, so make sure you understand their objectives

• Internal – for example internal investors, board, management team or staff – your objectives might be motivational, getting their buy-in, support etc.

• The Financial Plan needs to look professional and be credible – your audience must believe the financial plan is rigorously prepared and can be achieved

• If previous financial forecasts have been accurate show them as well as the actuals achieved – this gives third parties confidence in your forecasting ability

• It’s important to understand what you are trying to achieve

• Trying to estimate your Funding requirement?

• Return on investment calculations?

• Planning in order to obtain a company valuation?

Time Periods

• Try to project for to 5 years if possible but it might be less depending on your audience and circumstances

• Forecast by month ideally

• Include historical data if available, to set the scene for the forecast. Historical data is your starting point for key assumptions

• Spend time making sure the key assumptions are realistic

Where to start?

• Identify all the material headings you need to forecast

• It makes life easier if you forecast using the same headings as used in management accounts

• Bundle some smaller headings together

• Make simple assumptions initially (refine later) and build the model logic – this is critical to let Excel do the work; try not to hard code all data, use formulae and create linkages ….

• Don’t forget to include VAT, Corporation Tax, Dividends – they all affect cash!

• Balance Sheet – forecast fixed assets, debtors etc. Cash will be the balancing number

Record your major assumptions -

• Make sure your assumptions are recorded and are realistic. Poor assumptions = poor forecast so research them and make sure they are reasonable

• Continually review and revise as you get better information, and improve the logic of how important data is calculated

Key Metrics

• Include a dashboard so you can easily see Key Performance Indicators (KPI’s) important to your business e.g.

- Change in order book each month - Percentage increase in sales each month - Change in cash balances forecast each month - Increase/(decrease) in working capital requirement

• Consider using graphs to summarise important data – it’s easier for people to understand

• Trend data important – are the trends getting better/worse?

• If worse – decide what you are going to do about it ……

Other tips

• Prepare a “Base Case” model that you feel is realistic

• Spending time thinking will help you understand the dependencies

• Learn from the process, prioritise areas of importance

• You can make business decisions with more confidence

• Once the Base Case is fixed then flex some key sensitivities to see what effect they have on say your Funding Requirement e.g.:

• Sales are reduced by 20% or delayed by 3 months

• Debtor days increase from 30 days to 45 days

• Rent review 25% higher than you hoped

• Pick sensitivities relevant to your business

• Financial planning is critically important

• It’s not just for the bank, it helps you run the business!

• Don’t kid yourself, it has to be credible

• Helps you sleep at night – you have control

• Don’t treat this exercise as one-off, update it regularly and learn from the corrections you’ve had to make

• Takes time to set up but not long to update each month

• Adopt an approach of continual improvement

• Others can help, but the owner/CEO/FD must take responsibility

John Panczak MA (Cantab) ACA

If you need any help with these or any other business-related issues please get in touch