Financial Planning – A Quick Guide 

When it comes to business planning and asset investment analysis, financial planning is one of the most important aspects that need to be considered and analyzed. Financial planning aims to give the investor or the entrepreneur a financial outlook of how their venture would profit and grow.

The business plan as a whole is a critical document that analyzes the project at hand and sets parameters for its goals and vision. As such, the business plan is a comprehensive document that incorporates all the vital and necessary aspects of the business, starting with the “why” and “what,” and finishing with the “when” and “how.” It incorporates all the “divisional” plans that make the business, like the marketing plan, human resources plan, business environment and competition, financial plan, growth plan. It sets up the long-term and short-term goals, tasks, and conditions, and also organizational culture guidelines. Although these plans are included in the business plan, it is imperative to understand that they need to be full plans analyzed and written separately. In the business plan, we bring the bottom lines or the summaries of those plans. It is also crucial to understand that no sub-plan can stand alone. All the sub-plans are connected and affect each other, setting the parameters for each other. The business plan is the “fusion reactor” that melts all the components into one logical, methodical, and strategic block.

It is important to understand that financial planning as a whole holds a very wide spread of parameters and considerations. However, not every two business ventures are the same, and the financial planning for each project can vary in parameters or depths depending on the nature of the project.

Financial planning isn’t merely a calculation of incomes and expenses – it goes beyond simple accountancy or superficial numbers. In essence, financial planning should give a lookout of the business in its first three to four years and, besides the obvious numbers of profit, it evaluates risks and financial stability, estimates its sustainability and growth. It’s aimed at evaluating the validity of the business idea and its ability to expand beyond the startup shape and form, and it gives us the parameters for our risk management.

Many small business owners and entrepreneurs make the mistake of reducing financial planning to its basic form. I found that the main reasons for this approach are caused either by a lack of knowledge or the claim of simplicity in planning. What they are missing out on are very important insights and contributions of a professional comprehensive financial plan. A comprehensive financial plan can attract investors and convince banks to grant loans and credits, which can be very beneficial in the first stage of the startup, by exhibiting the profitability of the business, its financial advantages, sustainability, and strength. It also sets the horizon of the business and its validity for expansion and growth, and it highlights the “bottlenecks” and risks in our business plan and our assumptions for the project.

In general, the financial planning should be pointed to three stages: 

1. The startup stage: this is the stage that requires the initial investments and requirements for the business. Depending on the business type or nature, this stage can vary, but usually, it is within months. It’s important to note here that the exact timeline and needs of this phase can significantly differ based on the scale of the operation, market conditions, and the strategic goals set for the venture. 
2. The operation stage: this the main stage in which the business operates, basically it is the maintenance of the business in its core operations. The operation phase is where the business really starts to find its footing. The duration and approach of this stage can be influenced by the type of business, the competitive environment, and how these elements shape the operational strategies.
3. The expansion stage: this stage is occurring parallel to the operational stage and is aimed at the expansion of the business, either within its physical space and amounts of employees or in the form of expanding into other branches or subdomains in the industry. The move towards expansion is guided by the business’s strategic objectives, market demands, and the financial health of the enterprise, highlighting the need for a strategic approach to scaling up.

For more insights on this read my other article.

When coming to make financial plans, we need to strive to attain as much data as we can concerning all the costs of the business stages, such data of variable and fixed costs, taxes, interest, deficiency, startup costs, salaries, materials, and more. This data should also include the revenues and cash flow expected. The more accurate the data is, the better the financial plan will successfully predict the business’s validity. However, it is not always possible to have all the data in exact numbers or statistical references – this is why we use assumptions and margins in our plan and data.

Assumptions are very important for our planning. Since we cannot know for sure what cash flow we will have or from what components of our project it will come, it is crucial to set up assumptions for the planning process. These assumptions are not solely restricted to cash flow but also to uncertain or unknown factors in our expenses. It is much harder to set up assumptions than collecting data. Our assumptions need to be realistic and down to earth, while at the same time can reflect as closely as possible the realistic future data. That’s why the research and analysis process before even starting the financial plan is so important.

In our research for data assumptions, we need to deeply research the market, competitors, financial environments, legislation, regulations compliance, market demands, and market segment as well as inflation considerations and various taxes. Our research should bring us closer to the estimation of how much funds we will be pouring out from the business or from the startup budget and how much cash flow is expected to come in. The more researched and down-to-earth our assumptions are, the better lookout we will have on our project’s identification of core guidelines (such as the return on investment period) and therefore better examining its financial validity.

It is also important to understand how the financial planning should be divided into stages of years and each year into quarters. The financial system is built quarterly and yearly, and it is imperative for our planning and forecast to fall in line within this system. Also, it is crucial to include and take into consideration in our quarterly and yearly forecast all the requirements and assumptions from the other core sub-plans we discussed earlier. For example, if the market analysis plan is predicting a 2% segment, we cannot use a 5% segment for our financial plan. They are all connected, feeding and being fed by each other. Another example is that the financial plan needs to take into consideration the expansion plan set by the business’s goals, understand, and calculate its impact on the overall financial requirements and forecast.

Lastly, the financial plan needs to take and lay down the policy for dividends, profits, executive salaries, stakeholders, and investors’ communications and updates, and growth contribution. These are all part of the comprehensive financial plan, and they set up the policies regarding financial management in the company.

In summary, the financial plan is a crucial analysis stage in any entrepreneurship, and it’s imperative to be approached with a solid understanding of the business and its domain in the market. A good financial plan can save a lot of suffering and disappointments down the road, and it can boost the business’s success by attracting investors and collaborations.

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