Financial Planning: What is it and why should I have a sound financial plan?

Hello everyone!

It's been 3 weeks since my last post. It's time to write another one.

This second post is about Financial Planning in general, about what it is and why it's so important.

The differences between financial planning for new versus mature businesses

Over the course of the last year, I´ve been talking to many people about the service I want to offer. I was surprised to discover that the people I had spoken with without any finance background believed that my service was about creating financial projections for a business plan.

I realised I needed to more clearly identify my services and today I would like to take a moment to explain the differences between financial planning in the context of:

1. A business plan at the beginning of your business and

2. An Operational Plan (OP) & budget for a more mature business

Please note that there is not a single correct way to perform these activities and they differ from company to company and their requirements. The table describes rather the general differences.

In summary, a financial plan for a business plan is a forecast focusing on company level without any (or with limited) relevant financial information from your past, and thus is missing an important ingredient to ensure a higher level of predictability.

Financial Planning & budgeting for a mature business is much more in-depth and often based on a mix of historical data and assumptions considering your business strategy and your market outlook. Your budget is prepared by various contributors (bottom-up approach) and will thus also serve as targets for these contributors. Significant deviations from these plans will usually require prior approval from management.

Ultimately, these targets can be also used for bonus purposes and for performance analysis (actuals vs. plan).

Value of financial planning & budgeting

So why should you invest your and your employees´ valuable time to prepare a financial plan? Here is a list of potential benefits detailing why a realistic financial plan is so critical:

Pricing

Steering Operations

Risk Management

Financial confidence

Valuation & Funding

I hope this short overview gives you a general idea about financial planning and budgeting and its value.

Please feel free to leave a comment or question in the comments section below. Or reach out to me if you would like to discuss it offline!

See you soon!

Jānis