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Steps involved in Financial Planning Process
What do you understand by Financial Planning?
The financial planning process is a systematic process of planning and forecasting. The finance managers usually take into account various inputs, place them in the modeling, and derive the outputs. Financial planning is an unavoidable process for every firm in order to face stiff competition in the market and grow simultaneously. Without having a proper plan, the company cannot have an ideal vision, and therefore, the management cannot define a subtle growth path.
The inputs that are used in the financial planning process act as variables of growth for a company. Modeling acts as a process of establishing relationships among variables, and therefore, it is important to use modeling as a resource for the future growth of the company. The outputs of the company show the outcomes of the financial planning process.
Steps Involved in Financial Planning Process
The financial planning process of companies can be broadly divided into the following three steps −
It is important to check the financial condition of a company in the present as well as it was in the past to build a proper financial plan. The financial plan is based on these inputs. It is notable that to build a financial plan, there must be a foundation on which the plan can be based.
Usually, the inputs offer an insight into the future growth of the company. The present growth rates, market share, and intensity of competition determine the growth rates that need to be considered in the financial planning process. In order to build a dependable financial plan, a company must use these factors correctly so that the future growth prospects are as accurately forecasted as possible.
The Model establishes relationships between financial variables and offers equations that can be used to forecast growth opportunities.
For example, fixed assets and net working capital may be linked to sales. These factors change proportionally with sales. When fixed assets go up, sales go up. Sales also go up when net-working capital increases.
Hence, a ratio related to fixed assets, and net-working capital may be found in relation to sales of the company. Similarly, dividends may be expressed as a ratio to profit after tax (PAT) provided the pay-out norms of a company are available.
The model is a very important part of the financial planning process. Ratios must be selected properly and caution must be taken in making a relationship so that a dependable relationship is formed. It is not easy for a company to forecast growth and profitability even after accurate relationships among financial variables are formed because it is simply hard to replicate the future. However, a good model is able to do justice to the financial planning process if it is formed ideally.
After appropriate model equations are formed, they must be applied to inputs to get the financial outputs. These outputs are obtained as projections or proforma financial statements. An ideal output would show the investments and funds requirement, provided the relationships of growth and revenue forecasts are made appropriately.
It is notable that it is the output that matters the most for the organizations.
Nevertheless, the processes that stay behind the curtains, inputs, and modeling, are the factors on which the outputs are based. Therefore, inputs and modeling must be as accurate as possible. Once the equation formed is found to be applicable, the outputs would come out as correct as desired. Therefore, inputs and modeling should be accurate in all aspects of the financial planning process.
Financial planning is important to provide a set direction to give growth to a company. Managers may understand whether the equations formed are working well from the derived outputs. Therefore, the steps involved in a financial planning process have their own merits and are relatable to one another.
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