There is one factor common to all types of businesses, no matter in which market they operate. This factor is money, there is no company that does not need money to spin its operations. However, it is still very common to find small and medium sized companies that do not do the correct budget and financial planning.
Budgetary and financial planning is nothing more than a provisioning of resources for the activities to be carried out. Every business owner has plans to improve and expand their business, but many do not know how this will be done. In this article, we will address the issue of budget and financial planning, explaining the concepts and their application.
The concept of budget and financial planning
As stated in the introduction, budgeting and financial planning is a provisioning of resources for the activities to be carried out. This plan can not be carried out indiscriminately by the financial manager, since it must take into account the operational plan of the company. The plan should be done in a sectorized way, clearly describing how much resources will be made available to each area.
Good budgetary and financial planning should align the return of each activity to the cost of the capital attached to it. You should also look for informational clarity so that everyone knows what is being spent and where. All budgetary and financial planning should contain the sources and destinations of resources.
Once the planning of the year is defined, the budget allocated to each area can be passed on to the managers. It is important that the values are informed in the plan format, so the manager will know the total available per month.
Reasons for good budget and financial planning
In addition to organizing the company’s finances and conducting good management processes, budget and financial planning helps in other key areas of organizational success. Let’s list below, some reasons to perform a good budget planning.
- Crisis Management
When we speak of crisis, we are not referring only to the economic-financial question. Organizational crises can be operational, legal, procedural, and even financial.
The crisis management must be done on the basis of existing resources, otherwise the complication possibilities will be increased. It is important to have a mapping of the current resources, which can be adapted to raise more resources to solve the crisis. If there is no prior planning, the company may be out of control during the crisis.
- Business Expansion
There is no way to expand the company without good budget planning. It is necessary that the financial manager direct resources for the operation and for the expansion actions. If there is no correct separation of values, the company will not be able to calculate the return brought by the improvements. Without the correct return calculation, it is unlikely that viable investments will be made.
- Sustainable growth
Companies with well-planned budget planning can enjoy sustainable growth. Growing sustainably means financing the company’s expansion with resources generated by its own operation. When a company always resorts to external funds to grow, it is not growing in a sustainable way, but rather through contributions from third parties.
- Operational longevity
Another reason to carry out the budget and financial planning is the search for operational perenniality. This perenniality is a consequence of sustainable growth, mentioned above. Companies that grow in their markets and have healthy finances, can remain for long years in activity.
How to do a budget and financial planning?
The first issue that needs to be raised for budget and financial planning is the prorated operating cost. The prorated cost allows the manager to know how much each area will need to operate under normal conditions.
Next, you must evaluate the investment plans and distribute the resources proportionally to the consumption in the key areas of the organization. Defined how much resources will be consumed, it is necessary to verify how much can be extracted from the company’s own cash generation.
If the resources generated by the company’s cash are not sufficient to fulfill the entire plan, it may be necessary to raise external resources. The collection of external resources should be done as little as possible and at the lowest available cost. Once all the resources are available, the company can execute its plan normally.
What are the biggest mistakes of managers in financial planning?
The two main mistakes of budget and financial planning are the underestimation and overestimation of costs. If the manager underestimates the amount to be spent in the year, ie plan to spend less than the reality, there will be financing problems throughout the operation. Otherwise, when it overestimates the expense, it may be that the company pays for excesses in financial expenses.
Although the two mistakes are quite damaging to the company, the underestimation of costs is almost always more harmful. This is because, when the resource is needed and is not available for use, you will need to take out emergency credit. Short term loans and no collateral are always more expensive than those made within the planning.
Good and bad examples of business budget planning
There are, everywhere, examples of success and failure in business planning. Let’s use two companies that have their accounts openly published in the financial market.
The first firm is Apple, the company meticulously plans how much it will spend and where the resources will come from. Today, the company has more than 100 billion dollars in cash and does not have to resort to bank financing.
The second company is Petrobras, despite having a monopoly on the fuel market, its planning is not well done. The consequence is the constant variation of your results.
Obtaining adequate resources for the application of budgetary and financial planning
When the resources generated by the operation are not enough (which is perfectly normal), you can use credit. Using credit is not bad if leverage has positive effects on the profitability of the business. For the operation to be a success, one must choose simple and inexpensive modalities.
Fintechs such as Biz Capital, has done a fantastic job in granting credit for working capital and also for business expansion. The loan can be requested online and the release is simple and without red tape. The main facility is the cost of credit, which is generally lower than in traditional banking institutions.
Budget and financial planning is the tool that will ensure the regular operation of the company throughout the year. Its execution is essential for the correct management of the organization’s finances. Only planning well done, will allow the company’s perennial growth.
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