Financial planning strengthens controls, enables resource efficiency and tracking of income & expenditures. It also allows the business to adjust its strategy by revealing the differences between targeted performance and actual performance.
Planning is an essential tool to help businesses achieve sustainable growth and success. It guides investment decisions, showing which projects are prioritized and how they will be financed and also helps to set the financial objectives of the business.
For assessing financial risks and creating plans for unforeseen circumstances, planning is also crucial. It ensures effective communication with stakeholders and offers transparency and credibility.
During the planning preparation, it's crucial to consider various assumptions that can significantly impact the financial projections and overall planning of a business. These assumptions can shape the process and ensure its accuracy and relevance:
- Inflation: Factoring in potential inflation helps maintain the purchasing power of funds and accounts for rising costs of goods and services over time.
- Fluctuation: External factors like currency exchange rates or global economic conditions can impact revenue and expenses, requiring careful consideration.
- Sales Growth: Anticipating future sales growth is essential for estimating revenue and aligning resources accordingly. It's important to analyze market trends and consumer behavior to make informed projections.
- Pricing: Pricing involves how much to price products and services. Pricing strategies should be flexible and planned to keep pace with market changes.
- Cost of Production Materials: Changes in unit prices due to volatility, availability fluctuations, and unforeseen supply chain disruptions can collectively affect gross profit margin.
- The Number of Employees and Compensations Planning: As the workforce expands, consider expenses to accurately reflect the financial impact of new hires. Addressing salary hikes for also existing employees ensures a realistic representation of their effect on the budget.
- Change in Office Costs: Be attentive to potential changes in rental rates, office layout, or equipment that should be accounted for in the budget.
- Change in Marketing Expenditures: Adjusting marketing investments based on business strategies and market dynamics ensures accurate expense planning.
- Change in Corporate Taxes: Tax regulations evolve, affecting the company's tax liability and influencing financial outcomes.
- Needs for New Purchase of Property, Plant, and Equipment: Future capital expenditures for essential assets like machinery and facilities should be considered.
- Potential Sales of Fixed Assets or IP: Selling assets or intellectual property can generate revenue, influencing budget projections.
- Changes in Days Inventory Outstanding: Shifts in inventory turnover rates impact working capital and related carrying costs.
- Changes in Days Sales and Payables Outstanding: Altered payment terms and customer or supplier behavior can impact cash flow, requiring adjustments in accounts receivable projections.
- Provisions and Bad Debts: Setting aside funds for potential write-offs due to uncollectible debts maintains financial prudence.
- New Loans and Interest Expenses: Incorporating new loans or debt refinancing considers interest expenses and repayment schedules.
