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?
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
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 ……
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