What is Financial Planning? Why is Financial Planning Important?

‍In this sections we’ll break down the four essential strategies for perfecting your personal and company’s financial planning:

• Evaluating your historical spend

• Building your P&L

• Setting and then sticking to a budget

• Proactively track your spend

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From there, we’ll cover some of the biggest challenges of implementing financial management, as well as how to overcome them as a business owner.

Use: Finance Calculator to acurately evaluate your finances

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Here are four proven financial planning strategies for success

1. Evaluate your historical spend and historical revenue

Evaluate and track your historical and current expenses accurately. All financial statements are historical. The numbers from previous balance sheets can tell you a great deal—where you failed, where you succeeded, and areas you improved or need to improve. Your previous numbers act as a barometer, a weathervane that lets you see where your company was at financially in previous quarters or years.

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This financial information gives you the context necessary to evaluate your current situation and see the areas where you’re succeeding or falling short. You can use it to judge your current performance against previous years and current targets. From there, you can set new goals and benchmarks toward increasing profitability.

2. Build your profit and loss (P&L)

A key component of your financial statements is your P&L, also known as the income statement. These statements aggregate that historical revenue and expense data and act as a financial summary of your business performance.

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These statements act as a summary of your income and expenses, letting you know whether you were profitable or operating at a loss in that given month. 

• Revenue (sales)

• Cost of goods sold (COGS)

• Gross profit (revenue minus COGS)

• Expenses

• Net profit (gross profit minus expenses)

3. Set a budget and stick to it

A budget helps you:

• Set guidelines to manage your spend

• Understand where you have key financial dependencies and predict what you’d need to continue to fund your operations

• Make wise financial decisions to meet your business goals

• Stay on track to maximize your bottom line

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Specifically, a finance manager needs to be acutely aware of what gross profits and operational expenses currently are and what they will become. That way, a responsible planner can minimize all deductions from the top line to maximize the ultimate bottom line—net profits.

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To set a clear budget with your team, start by asking the following questions:

• What are the projected sales for the period?

• What are the direct costs of sales? Materials, Implementations

• What are the operating expenses, including overhead expenses? Payroll, including commissions; marketing; meals & travel; rent; utilities

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The previous year’s figures—which you should already have on hand—can be used as indicators of likely sales and costs, helping you create the most realistic budget possible.

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The majority of budgeting work typically takes place before a new financial period. That said, budgeting often can and should be an ongoing process.  On a monthly or quarterly basis, the finance team should conduct a budget to actuals analysis to see how the company’s actual spend in the previous period compared to what was originally projected, and then measure what can be adjusted.

4. Proactively track your spend

• Real-time visibility over spend data – Know who is spending what, where, and how much in a moment.

• ‍Empower managers to oversee their team’s spend – Managers can keep tabs on their team’s spending habits as they occur. These figures can be compared against your budget and P&L sheets to gauge your financial situation.

• ‍Customizable view of spend – Don’t wait for the end of the quarter to see how much you’ve already spent. Powerful tools allow you to take a topline view of your company’s spend or zoom into a single user or transaction.