Financial plan

What is a financial plan?

A financial plan is a management tool that shows the financial resources required to carry out the objectives proposed in a business plan.

A financial plan is made up of:

• Profit and loss report.
• Balance of the exercise. If it is a going concern, the balance sheets of the last 3 years must be added to analyze its evolution.
• Cash budget composed of the sales forecast, the personnel budget and the operations budget, costs, administration and finances.
• Break-even analysis. The volume of sales in physical and monetary units that must be generated to cover fixed and variable costs.

What is a financial plan for?

A well-formulated financial plan serves to:

• Determine the viability of a business, by detailing the levels of income and expenses that are required to achieve the set goals.
• Set how much financing It is needed and when it will be needed, as it reveals when a cash shortfall will occur and how much it will be.
• Present solid and orderly information to potential investors about the financial flow of the company.
• Analyze the different scenarios that could arise according to the change in variables of the external environment (inflation, GDP, exchange rate, etc.).

How to make a financial plan?

Creating a financial plan is a process that requires a series of steps involved:

1. Current situation analysis: once the general strategy has been established, the present state of the company must be analyzed and the actions to be taken to reach that desired other. This projection must be reflected in the financial plan, including the sales that are expected to be obtained in the future, profitability, the need to take on a debt, etc.
2. Necessary funds: once the actions that will position the company have been analyzed, the necessary capital to be able to carry them out must be determined. Generally, planning covers a period of 5 years.
3. Capital estimate: the resources available by the company throughout the planned period are established, estimating the amount and sources of financing (internal and external) at the times when they are required.
4. Resource control: the use of capital is systematically monitored during the projection, to avoid deviations and optimize the application of funds.
5. Analysis of external factors: the external variables that may impact on the project, such as inflation, exchange rate or GDP, must be considered. Various scenarios and possible courses of action will be proposed for each of them.
6. Compensation system: for the implementation of the actions carried out to be successful, a performance-based compensation system should be considered. The financial incentive must be specific, clear and quantifiable for all employees of the company.

Example of a financial plan

Here is a simple example that allows you to understand the relationship between the different reports involved in a financial plan: