Stages in Plans and Projections
A business financial planning process would typically follow the steps described below:
- A 12-month profit and loss projection.
- A 4-year profit and loss projection.
- A cash flow statement.
- A breakdown analysis.
- A projected balance sheet.
All the above in turn would cover at least the following:
- Costs and prices.
- Cash flow monitoring.
- Record keeping.
- Setting up financial reserves and contingency plans.
- Availability of long term or emergency finance.
A 12-month P&L projection would state the major assumptions on which the company has relied to estimate the income and expenses; but these assumptions should not be born out of air and would have some basis from historical performances. In this the sales projections would be indicated by making an annual sales forecast.
A 4-year projection of the financials of the company is something similar to a perspective plan in that it does not look at the present but extends the company's horizon to a future date; this would be beneficial when the company is looking at raising venture capital. Subject to other things being equal, it can be said in general that while the 12-month projection would be useful for working capital (cash-credit) facility, the 4-year projection would be useful for raising term finances.
Projected cash flows represent your cash accruals from sales, immediate or within a reasonable time, and the outflow that goes toward recurring expenses. It would in the process give you an idea of the adequacy of working capital and also plan the methods to your financing the shortfalls that may arise out of delayed receipts or unanticipated increase in the costs. A cash flow statement is critically different from a profit and loss statement in one respect: It never takes into account depreciation.
A break-even analysis would take into account your sales, fixed and variable costs, and the ultimate picture as to whether you would be incurring profits or losses. It gives a warning signal should there be a likelihood of losses or motivates you to work harder if prospects of making surpluses are brighter.
A projected balance sheet sums up all the above and would take into account any historical changes that have taken place between the previous actual one and the present projected one due to changes in the business environment. For calculation purposes what you need to note is that while the fixed costs are expressed in dollar terms, the variable costs would be given as a percentage of total sales.
It may thus be concluded that in essence financial planning can be reduced to a set of spreadsheets/QuickBooks that furnishes you the financial future of your company and in the process improves your insight into the inner financial working of your company.
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