Financial planning

Financial planning is preparing a financial blueprint of the firm's future operations.

It has twin objectives:

• to make sure funds are available whenever they are needed;
• to make sure the firm does not raise more than it needs. Excess funding is almost as bad as too little, because idle money costs something and earns nothing.

It is usually done for three to five years. Plans for one year or less are budgets.

It begins with a sales forecast. From that, the firm works out how much money it will need, how much it can find internally, how much it must raise from outside, and prepares cash budgets.

Why it matters: it prepares the firm for different situations (say, sales growing by 10%, 20% or 30%); it avoids business shocks and surprises; it coordinates the various functions; it reduces waste and duplication; it links the present with the future; and it makes evaluating actual performance easier. It is part of financial management, not a substitute for it.