A probably angry Lee Iacocca was indicating that finance is something that has to be pre-planned, planned, re-planned and even post-planned. Financial planning in itself does not involve just setting budgets, wage rates or deadlines. It is all about getting to know realistic work schedule, the manner in which they can be executed, back up plans that can be used and the least cost with the help of which the entire project can be executed. So basically, financial planning and growth forecasting, both involve, the answers to the 4 important questions, why, when, where and how (answers have to be cost oriented).
Steps in Long Term Financial Planning
Step 1: Let us take the example of a coffee shop, whereas a financial planner, one has to find legitimate answers to 4 questions, namely:
Why should we be producing a specific item on the menu card? (consider cost of production and sales price)
When should we produce such an item and for what time duration? (bear in mind seasonal costs, inflation of raw material prices)
Where should we produce the item, right in the shop or some production center? (consider transport cost, nature of goods and selling cost)
How should one produce the item, manually or mechanically? (consider equipment and personnel cost)
Step 2: The second step is to assess your business environment. In this step, surveying the competitor's performance, pricing and distribution is an absolute necessity. In such a scenario, you may also prepare a cost sheet of the financial features of production, namely, the money that you would have to invest as a manufacturing cost, its sales cost, and the profit that it would yield. Logically speaking, the sale price should be more than the cost price and the return over asset ratio/return over investment ratio should be healthy. While finalizing these three figures, you will need to take into consideration 3 important aspects.
Average spending capacity of your customers.
Your competitor's quality, quantity and price.
Popularity of the product, potential market, customer retaining capacity of the product, etc.
Though the trend of such products is more experimental in nature, they might become full-time, public favorite products, hence it is also important to make a financial provision to recover losses, that arise in the experimental period, until the product establishes itself in the market.
Step 3: The third and fourth step are more analytical in nature and from the finance point of view, they are also quite expansive. The idea that you need to implement in the third step is allocation of resources in such a manner that you tend to make a genuine profit in sales, during the long run. In this step, you will be using and analyzing cash flow statements on almost a daily basis. The key is to have uniform cash outflows for consecutive days/months/years. Cash outflow is basically all expenses and losses. Losses are quite uncontrollable but expenses are definitely controllable. Hence search for raw material sources, manpower and production processes that will help you to maintain a uniform and low per unit cost for the item/product. For example have regular suppliers, who will supply at an agreed and uniform cost. This uniformity will eventually come in handy to curb and control unexpected losses, and will also help you to keep a good hold over the market.
The second part of the third step is making monetary provisions. This is absolutely essential due to the fact that no business is risk-free. Such provisions include advance to the raw material supplier, insurance, provisions for bad debts, extra services, etc.
Steps in Long Term Financial Planning
Step 1: Let us take the example of a coffee shop, whereas a financial planner, one has to find legitimate answers to 4 questions, namely:
Why should we be producing a specific item on the menu card? (consider cost of production and sales price)
When should we produce such an item and for what time duration? (bear in mind seasonal costs, inflation of raw material prices)
Where should we produce the item, right in the shop or some production center? (consider transport cost, nature of goods and selling cost)
How should one produce the item, manually or mechanically? (consider equipment and personnel cost)
Step 2: The second step is to assess your business environment. In this step, surveying the competitor's performance, pricing and distribution is an absolute necessity. In such a scenario, you may also prepare a cost sheet of the financial features of production, namely, the money that you would have to invest as a manufacturing cost, its sales cost, and the profit that it would yield. Logically speaking, the sale price should be more than the cost price and the return over asset ratio/return over investment ratio should be healthy. While finalizing these three figures, you will need to take into consideration 3 important aspects.
Average spending capacity of your customers.
Your competitor's quality, quantity and price.
Popularity of the product, potential market, customer retaining capacity of the product, etc.
Though the trend of such products is more experimental in nature, they might become full-time, public favorite products, hence it is also important to make a financial provision to recover losses, that arise in the experimental period, until the product establishes itself in the market.
Step 3: The third and fourth step are more analytical in nature and from the finance point of view, they are also quite expansive. The idea that you need to implement in the third step is allocation of resources in such a manner that you tend to make a genuine profit in sales, during the long run. In this step, you will be using and analyzing cash flow statements on almost a daily basis. The key is to have uniform cash outflows for consecutive days/months/years. Cash outflow is basically all expenses and losses. Losses are quite uncontrollable but expenses are definitely controllable. Hence search for raw material sources, manpower and production processes that will help you to maintain a uniform and low per unit cost for the item/product. For example have regular suppliers, who will supply at an agreed and uniform cost. This uniformity will eventually come in handy to curb and control unexpected losses, and will also help you to keep a good hold over the market.
The second part of the third step is making monetary provisions. This is absolutely essential due to the fact that no business is risk-free. Such provisions include advance to the raw material supplier, insurance, provisions for bad debts, extra services, etc.
Step 4: I would like to call this step as retain, sustain and entertain. This step is quite an advanced one, and basically includes many different aspects, that aim at retaining the customers. The first important function of this step is to generate regular data and cash flow statements. With the help of these statements you will realize whether that very item on the menu is proving to be profitable or not. At the same time, you also need to maintain a statement that records cash inflows and outflows over a longer period of time (in months or a quarter). Thus, you will realize what is profitable for your business, and what your customers want.
To sum up the whole theory, it can be said that long term finance planning is a 3 dimensional graph, with customer, product and market being the dimensions. The essence of cost and time are added to every dimension. After all, the key to successful long term financial planning is to facilitate all three dimensions logically, bearing in mind the essence of time and money.
By Scholasticus K