Companies are getting their financial planning wrong

Taking ‘control’: the first step to effective financial planning

For many business owners, raising the topic of ‘financial planning’ precedes an awkward silence or the acknowledgment that this function is somewhat neglected.

After all, it’s difficult to plan your company’s finances if you’re unsure when the next deal is coming in, or where it will stem from, for that matter. And many entrepreneurs are not finance experts. They’re already wearing too many hats to spend any more time on financial planning than what’s needed to develop a basic overview of cashflow requirements.

Financial planning is too often scrutinised from a short-term, ad hoc point of view. This is especially true of small and medium enterprises (SMMEs), where the strategic focus is often on company growth using whatever capital is available, rather than on producing tactical financial goals being linked to the direction of the business.

However, many do not realise that financial planning for their business is an ongoing process, crucial for steering the business towards their goals. This should not be a bi-annual or monthly event. Instead, financial planning should be a constant activity inherently linked to the control of the business.

Strategic financial planning: giving meaning to budgets

Business owners and executives need to appreciate that financial planning and control are integrally linked. The two functions should be connected to the implementation of the firm’s strategy. And the measurable by which this is done is through the thoughtful generation of that oft-dreaded word: budgets.

According to University of South Africa business management professors GS du Toit, BJ Erasmus and JW Strydom, a budget is a “formal written plan of future action, expressed in monetary terms and sometimes also in physical terms”. Its objective, say the scholars, are to “implement the strategy of the business and to achieve the goals within limited resources”.

In other words, not only do budgets set out the parameters of the ‘dream’ per se, they also are a means of measuring – and controlling – whether that dream can be realized.

Pinpointing centres of control

A budget becomes little more than another stress-inducing spreadsheet if it is not linked to a control centre. This is true for a business of any size – from a two-man consulting company to a multi-million rand manufacturing plant.

Du Toit, Erasmus and Strydom point out that strategic financial planning starts with identifying and assigning responsibility to the following areas:

• An income centre: In order to carry out your vision, you will need cash. Where will this come from and how much will you need, how often and for how long? Quantify these and assign them to your ‘income centre’.

• A cost centre: To carry out your objectives, your company will incur costs that may not immediately translate into rands. Any function that is being performed for which the primary purpose is not the generation of income, can be considered a cost centre. An example may be money you spend on market research. Be honest with yourself in appraising what these are. These functions are important, but it’s no use blinkering yourself to their cost on the business.

• A profit centre: This is where – and how – you expect to bring in the money! Of course, income here should exceed costs.

• An investment centre: Here, you measure the profit in terms of the assets – or investment – used to produce it.

Use these centres to identify ‘control points’ within your business. At the heart of effective financial planning is the acknowledgment that budgets are the implementation of long-term business strategy; and that centres of control need to be made accountable in order for the process to be an effective one.

Ultimately, companies need to get their financial planning right. One way to achieve this is to outsource the financial division or financial management to specialised financial outsource companies.  These outsource providers are able to provide companies with highly qualified and experienced financial specialists that can assist companies with their financial planning. These specialists can be engaged on a part time or interim basis and allow companies the flexibility to get their financial planning right.

 

About the author:

Richard Angus CA(SA) is the CEO of The Finance Team who have a team of highly qualified and experienced company financial planning experts that are available on a part time or interim basis. For more information visit www.thefinanceteam.co.za or email richard@thefinanceteam.co.za

Picture credit: drwealth.com