The Do’s and Don’ts of financial planning

Financial planning is a “key component” of managing and driving business performance, and yet it “continues to be of limited value and mired with conservatism” for many companies.

This is according to global auditing firm PwC. In its report Financial Planning: realising the value of budgeting and forecasting, PwC mentions some of the ways that financial planning has become ineffective in many companies despite its obvious importance. If you’ve already undertaken this kind of activity for your business, or are anticipating doing so, here are a few do’s and don’ts that could help ensure the financial planning process in your company is effective and relevant.

The Do’s

1. DO: Ensure that you plan to the right level of detail. “The optimal level of detail to be utilized for financial budgeting and forecasting has surfaced as a passionate topic for debate for many organizations,” says PwC, which surveyed 220 companies with turnovers of more than $2-billion on the topic of financial planning for its report.

Too little detail defeats the point of the planning, but too much detail can also be counterproductive. As PwC points out, extensive detail in account planning can extend planning cycle times, meaning the information is dated and irrelevant by the time the reports are finalized. Work with your CFO or financial manager to proactively decide on the level of detail that would be most valuable for your company without burdening the system or turnaround times.

2. DO: Consider using continuous forecasting. More and more practitioners are seeing the value in having their financial plans change according to current business conditions rather than basing them on monthly or quarterly projections that were determined some time before. Continuous forecasting requires a more flexible approach, but allows for companies to make more accurate and timely decisions.

3. DO: Embrace rolling forecasts as part of your financial planning approach. According to PwC, rolling forecasts are “no longer an emerging trend, but becoming an established leading practice”.

Techtarget.com describes this as an “add or drop process for predicting the future over a set period of time”. After the first month has passed, it is dropped from the beginning of the forecast and another month is added to the end of the forecast. Rolling forecasts differ from static forecasts which act as a countdown from a beginning point to a specific end time.

4. DO: Link sales and operational activities with the financial planning process. More efforts need to be made in order to make financial planning holistic with the ongoing operations of the business. However, PwC issues a warning to “avoid overburdening the financial planning process and system with detailed customer- and product-level data.” This could reduce flexibility and increase financial planning cycle time.

The Don’ts

Just as there are a few things to actively seek out, there are a few things ways to learn from other’s mistakes. Avoid falling into these pitfalls to streamline your financial planning process.

1. DON’T: Use financial metrics that do not align with the company’s strategies. Your financial goals should complement the goals of the business. If your financial manager is setting independent targets using financial jargon that no one else understands, then it’s unlikely those objectives will be embraced by the rest of the company, and less likely that they will actually be achieved.

2. DON’T: Expect meaningful, transformative financial planning to take place in your company unless it is being driven from the top. As the owner of the business, you need to fully trust the finance executive you’ve put in place to execute the financial planning process, and work closely with him or her to achieve this. Failure to do so will lead to company-wide mistrust of the activity and a perpetuated view that financial planning lacks value.

If finance is not your core competency, The Finance Team can help you identify someone skilled and qualified to help you achieve this task. We draw from a large network of financial professionals who provide their services only as and when you need them. They can help you identify the level of detail to which you plan, and the most meaningful way in which to track, measure and forecast your company’s financial success.