In business management, it is natural for executives and entrepreneurs to be caught up in day-to-day problems and lose sight of the bigger picture when it comes to the companies they manage. Successful companies, however, invest heavily in financial planning to build solid foundations for decision-making and develop benchmarks for measuring business performance.
Financial planning is extremely important in both growth scenarios and cost containment, since it allows the optimization of resource allocation in the most profitable business lines.
The following questions can help you evaluate whether the company has its financial planning under control:
- What is the impact of inflation on my business?
- What is the Company’s financial cycle, the consequent need for working capital, and how can it vary in different scenarios? In each scenario, do I have to contribute with additional capital or raise funding?
- What revenue lines should and can be prioritized at the moment (both in terms of profitability and cash flow)?
- How do the impacts of variations in exchange rate on my business unfold?
- Is the current debt profile adequate, considering expected cash generation? What about in a greater deterioration scenario?
Financial planning answers all these questions. It should cover not only the operational and economic aspects of the business, but also the cash flows, with due calculation of working capital needs and financial cycles. The latter often receive less attention from management, but they can be the difference between sustainability and business development or business insolvency.
Planning also has great value in setting goals for company managers. With this, variable compensation plans and incentives have clear objectives and their impacts can be scaled a priori.
The main benefits of financial planning are:
- Improvement and time reduction in the management decision-making process;
- Definition of the company’s economic-financial objectives;
- Management of financial resources with greater efficiency;
- Performance monitoring, based on a comparison between budget and forecast;
- Appropriate allocation of resources in each project and functional areas of the company;
- Identification of potential problems before they occur, notably liquidity risks and resource allocation in low-return projects;
- Increase motivation and the alignment of the management team with the company’s financial performance;
- Encourage managers to think about the future, anticipating the potential implications of their decisions.
Finally, for effective planning, adherence to the company’s strategic plan and the involvement of leaders from different areas are fundamental. In addition, it is important to make a comprehensive, but not overly detailed plan. The financial model resulting from planning should allow an easy simulation of different scenarios for the key levers (key factors influencing growth, margins, free cash generation) of the business. This way, the tools developed will be useful for managers and shareholders in their decision-making.