Why Your Company Needs a Financial Plan

Financial planning involves determining the company’s short- and long-term goals by analyzing the present state of its finances. It is important to note that financial planning is not a one-off thing but a process that requires the prudent use of a company’s financial resources to achieve its objectives and goals. Therefore, to maximize profit and achieve its goals, a company must take financial planning seriously.

According to a study by Elizabeth Wasserman, while drafting a business plan, the financial aspect should constitute the plan’s core. It is essential in accessing finance from investors or financial institutions. According to her, while a marketing plan is critical for steering a company to success, a business should substantiate these plans with figures.

A company will properly channel its revenues and profits to its goals with a financial plan. Because profit is critical in every business, financial planning ensures that profit is not wasted or utilized without due diligence or accountability.

Financial planning ensures that the company’s finance is not run blindly as it charts a path for a company to achieve its financial goals. It then ensures this path is duly followed. It also ensures that the company sets realistic goals that will help generate more profit in the long run.

Further, a financial plan helps the company ascertain the extent of its financial capability concerning its goals. Knowing a company’s financial capabilities related to its goals creates clarity about what more needs to be achieved financially, spurring the management or employees to be more motivated and committed.

Financial planning also helps a company to make better financial decisions. It helps a company identify its goals and makes the right decisions to achieve these goals. Similarly, it helps the company cut down on unnecessary expenses by spotting savings beforehand. For, example financial planning helps a company take account of and avoid over-inflated costs from the past.

Self-assessment is key in every business endeavor; it helps the company determine whether it has performed well or underperformed. Financial planning helps a company properly assess its performance by comparing actual outcomes and financial standards.

Further, a financial plan is key in drafting realistic and efficient budgets. An effective budget reduces waste, inefficiency, and loss while maximizing profit. When a budget is prepared correctly, the company can distribute and allocate resources to generate more revenue.

Under a financial plan, the company utilizes an overall budget subsequently broken down and shared within departments and teams. A good financial plan will ensure that the budgetary allocation to a particular team or department is proportional to such a department’s importance or productivity level.

A company can efficiently manage its cash outflow and inflow with necessary financial plans. Financial planning tailors the company’s expenditure to its cash inflow, creating a balance in its revenue and spending.

The business world is fickle and subject to contingencies like economic meltdown, financial crisis, unfavorable government policies, or financial fraud. While some of these situations are unpredictable and often unforeseen, some are pretty predictable. Therefore, one of the importance of a financial plan is to help the company avoid, maneuver through, and mitigate the effects of these risks.

For instance, the Covid-19 pandemic resulted in an unforeseen financial crisis. Consequently, most companies and businesses have handled this by regularly reviewing their financial plans every month and quarter.