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The Financial Planning Process: Developing an Annual Business Financial Plan

The annual financial planning process is a very important time for financial and non-financial professionals working at businesses of all sizes.

One of the more stressful times of the year for many individuals working in a corporate environment is the time of year when the financial planning process occurs. While the time frame and time of year when this process occurs can vary, the purpose and process behind it is usually very similar among businesses, both large and small. This type of business plan is usually completed on an annual basis.

What Is a Plan?

A plan is an instrument used by a business to derive other documents throughout the year, such as the business budget. The plan is also used to judge performance. While the exact contents of the plan may vary by business, most plans will have schedules that show what sales, gross profit, cost of goods sold, and operating expenses are expected for the coming year. This is a series of documents that many businesses use to judge performance. Generally, a business will compare actual sales, gross profit, and costs and expenses to what was set in the plan.

The annual plan for a business is not to be confused with something very different, the business plan. A business plan is a document that includes everything from a company’s mission statement, to the plan for how and what the business will be doing. This is a document that is generally not completed yearly, and in fact may only be done once.

Why Do Businesses Complete Financial Plans?

A business will plan for several reasons; most notably the plan helps the business to create cash and capital budgets. A business will also require an annual plan in order to have a base to judge performance by. This is why the annual plan is so important, as anything from bonuses to the security of management positions may be based on meeting the goals set in the plan.

Also, in a large company where plans are put together by each business unit, the plan may be used to help determine which companies are performing well and should be expanded, versus which will not be performing up to the company’s standards and should be divested.

Steps in the Business Planning Process

The following steps are involved in the business financial planning process. The steps involved may vary by company, and some professionals may only be involved in some of the steps depending on their positions within the company.

  • Current data is gathered, including sales, costs, and expenses for the last 6 to 12 months. Depending on the type of business this may be by product line (or by product) in a manufacturing business, or by service or job in other industries
  • Data is trended to identify the likely sales numbers for the next 12 months if there are no major changes in the business. This process can be completed through trending or regression analysis in Excel or a similar program
  • Known changes are added as adjustments (such as standard cost changes or new product lines)
  • The data gathered and trended from sales, gross profit, costs, et cetera are pulled together so that financial managers can look at the overall numbers to make sure from a high level that everything makes sense
  • Items are adjusted based on the high level analysis
  • The plan is presented to higher level management and may be adjusted due to strategies that are planned for the next year
  • The plan is put into place and actual numbers are compared to it over the next 12 months