Financial planning has become an increasingly popular subject in many households. This is because individuals and households benefit as much from good financial planning as corporations and businesses do.

There are entire professions devoted to financial planning in both the corporate and personal setting. 

Because of its wide adoption, financial planning is an essential concept that everyone should have a basic understanding of. In this FAQ we will cover what financial planning is, why it is important to both businesses and individuals, and how a financial plan is created.

What Is Financial Planning?

Financial planning is the process of creating and implementing a financial plan. That is, any plan that documents the current financial status of an individual or business, and their corresponding long-term financial goals.

In the corporate setting this is done by financial planning and analysis professionals and in the private setting it is often done by certified financial planners (CFP). 

A financial plan should be a comprehensive package that is created bespoke for its intended audience. The primary purpose of a financial plan is to act as a guide to assist in achieving long-term financial goals. 

The heavy emphasis on long-term planning is especially important to note, as the overall financial plan helps to spin-off short-term actions. This is the way a financial plan helps its users reach their goals, whether corporate or personal.

Why Is Financial Planning Important?

When we discuss why financial planning is important, it is important to note that the benefits extend to both personal and corporate finance. One of the best things a business or an individual can do to enhance their chances of success is garner clarity around their financial status. 

The process of financial planning demands that goals are set in order to provide the plan with context. If the plan is going to act as a roadmap to financial success, then a definition of success needs to be provided. This is one of the primary reasons financial planning is important. 

As previously mentioned, financial plans provide a roadmap that spins off actionable steps to take to achieve financial targets. This is another benefit of financial planning. It not only forces  goals to be created, but it provides a set of actions that can be taken to accomplish them.

In doing this, the financial plan helps to identify performance standards and metrics that can be used to monitor and make adjustments. Finally, financial planning helps to align individuals with goals. 

How To Make A Financial Plan

While businesses and individuals go about making financial plans differently, the end result and basic premise are the same for both. The process takes financial goals and converts them into an actionable process, resulting in a projection of the future that meets the goals and objectives established.

In the context of business, a financial plan follows some basic steps. The business financial planning process typically begins with reviewing the strategic plan and ends in monitoring. 

Step 1: Review The Strategic Plan And Make A Budget

The first step is to always take into consideration the overall plan for the business. The strategic plan will define the goals and objectives for the business and result in a set of resource demands that the business will need to meet in order to execute on its strategy.

Understanding these resource needs will help to decide the financial demands of the business. For example, the strategic plan might entail expanding distribution centers, hiring new staff, and upgrading equipment. Each resource demand on a business has a monetary impact and the financial plan is a response to these monetary impacts.

The result of reviewing how the strategic plan influences the financial plan of the business is a budget. The budget should act as a roadmap for achieving financial goals.

Step 2: Forecast Future Results

Using the budget as a guide, create forecasts that show what will likely happen if the budget is followed. Consider various external forces in this process. Be sure to include a forecast of financial statements as well. Forecasting should also help to identify if financing will be required at some point in the future.

Step 3: Create Contingency Plans

Often referred to as scenario planning, create a series of plans that cover various potential impacts and outcomes. This will help to provide information on the need for emergency funds or other financial safety nets that may be required.

Step 4: Monitor The Plan And Adjust When Necessary

Throughout the year be sure to compare actual results to projected results. This is sometimes referred to as variance analysis. Be sure to track relevant financial metrics and be ready to make adjustments to the plan when required. 

Using DataRails, a Budgeting and Forecasting Solution

DataRails’ FP&A software replaces spreadsheets with real-time data and integrates fragmented workbooks and data sources into one centralized location. This allows users to work in the comfort of Microsoft Excel with the support of a much more sophisticated data management system at their disposal. 

Every finance department knows how tedious building a budget and forecast can be. Integrating cash flow forecasts with real-time data and up-to-date budgets is a powerful tool that makes forecasting cash easier, more efficient, and shifts the focus to cash analytics. 

Regardless of the budgeting approach your organization adopts, it requires big data to ensure accuracy, timely execution, and of course, monitoring.

DataRails is an enhanced data management tool that can help your team create and monitor cash flow against budgets faster and more accurately than ever before.

Learn more about the benefits of DataRails here.