Numbers People in Action: Finance Planning

August 20, 2009, 4:59 pm

Small Business Finance & Profitability

By William Stong

Another continuation of the suggestion that came in to

“…include a simple but meaningful scenario which you’d have the three Numbers People work through to posting, reporting and interpretation and planning…”

The first article set up the simple scenario, the second dealt with Accountants & Bookkeepers. And then Finance: basic and finance analysis. This article covers Finance Planning: The Basics.

In addition to reporting on the financial numbers after they are posted, Finance also develops and monitors a financial plan to cover what might happen in the future. Assuming a company has an annual plan process, the future numbers that result from such a process is the “financial plan” for the next year. If financial reports are generated monthly, the annual plan is usually a monthly one as well. Most plans also use a summarized level of general ledger accounting lines (e.g., if the general ledger has 10,000 unique accounting lines, the annual plan may only use 2,000 from a higher level in the general ledger accounting hierarchy).

After the approval of the annual plan and the beginning of a new year, actual numbers will begin to be reported. The actual results, of course, may be different than what the plan anticipated. Which may necessitate changes to the future plan to make it more accurate given what has already happen. The results of these “in-year” adjustments to the plan are frequently called “forecasts.”

Finance uses the historical (actual) information already reported to indicate what most likely will be happening in the future. However,

“No man is an island, entire of itself
every man is a piece of the continent, a part of the main…”

John Donne (1572-1631) a Jacobean poet and preacher*

To paraphrase,

“No business function is an island, entire of itself
every function is a piece of the company, a part of the main…”

Planning for a company’s future financial numbers may start with, and be coordinated by, Finance, but the financial function cannot create a fully realistic plan without help from other critical stakeholders in the company and its business.

Creating a realistic financial plan uses three components:

1. What the company’s financial numbers are doing (actual, historical reporting)

2. What the market (in which the company operates) is doing

● the business cycle

● a seasonal cycle (if applicable for the business)

● competitors

● customers

● products

3. The relative position of your company and its product to the market (competitors and vendors; brand positioning)

Finance is hardly an expert in all of these areas, and input is needed from other business functions, either from within the company (if large enough) or from out-sourcing companies that provide these types of services: Economists, Marketing, Sales and Operations.

Next: how the planning process pulls everything together

Bill

William A. Stong

Email: william.a.stong@gmail.com

SBF&P # 40

*: This entry was obtained from:

http://wiki.answers.com/Q/Who_first_wrote_No_man_is_an_island_unto_himself