financial planning Archives - The Finance Team

Who should be responsible for your company’s financial planning?

The cornerstone of any successful business is a well-executed, thoughtful financial strategy. And all financial practitioners will agree that a financial strategy begins with financial planning. Indeed, financial planning is the very first principle of financial leadership in any organization.

According to smallbusiness.chron.com, planning “helps an organization chart a course for the achievement of its goals.”

The process “begins with reviewing the current operations of the [business] and identifying what needs to be improved operationally in the upcoming year.”

From a financial perspective, that means looking back on your accounting practices throughout the last period. How did your financial forecasts measure up against your actual results? Did you come in over or under budget on special projects throughout the year? Did your company make more or less profit than expected?

“From there, planning involves envisioning the results the organization wants to achieve, and determining the steps necessary to arrive at the intended destination.”

This stage of financial planning involves looking forward at the bigger picture for the year ahead. Where does the company hope to find itself in a year’s time? Do you want to grow the business? Does the company want to increase its market share? Do you have plans to introduce a new product to the market, or to open up the business on new shores?

Once you have determined the greater goals of the business for the year, contemplate what steps will help to achieve them. Will you plan to increase your margins, and if so, on what products? Will profits grow, and to what extent? Will revenue increase? Once answers to these questions have been determined, they need to be whittled down to basic steps. How will greater margin be achieved? What exactly needs to happen in order to boost sales volumes? and so forth. The basic steps are then translated into operational to-dos: things that will affect the way the business is run on a day-to-day basis.

It’s clear, then, that the financial planning process affects the business at several levels. It requires being looked at from a birds-eye view as well as a detailed one. So who should be responsible for its inception?

From the first perspective, it involves strategic insight. The plan is derived from a strategic position: a vision of where the business is going, based on its opportunities and strengths. This insight is required from senior management – someone who has a handle on the “bigger picture” intentions of the business. From the second perspective, it involves operational insight – how to translate big picture ideas into workable steps. This means input from middle management, to understand how decisions will affect the oversight of operations in the business. Lastly, it requires perspective from general workers in the company. The ideal financial planning scenario involves feedback from grass roots level as to how proposed operational changes will affect their day to day duties.

With this in mind, the person responsible for overseeing financial planning in your organization needs to have insight at all levels. You need someone with strategic vision, operational insight and experience from the ground.

Companies that don’t have the internal resources to meet all of these levels of insight for the purposes of financial planning are turning to external assistance to get the job done. Specialized financial executives have the know-how and experience to view the business at all of these levels. They help companies derive meaningful plans for the short term by setting goals both strategically and operationally.

If your company needs assistance in creating a solid foundation for the business through financial planning, The Finance Team can provide it. Our network of highly qualified, experienced finance professionals are well situated to provide your company with planning insight at all the levels that it is needed.

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January 22, 2015 / No Comments /

Five secrets to getting your financial planning right

Financial planning for your company can be a virtual minefield to navigate. If you are importing goods, the fluctuations in the exchange rate and the volatility of the Rand can make you feel like you are on a constant roller coaster ride. Changes in employee taxation legislation or something as simple as petrol price increases and e tolls can have the power to change a successful business to one that is left scrambling at the end of every month to honour financial commitments that the business has, not to mention paying their staff. Here are five secrets to get your financial planning right.

1. Consult an experienced financial expert to get your financial planning right

Most entrepreneurs know how to create a profit and loss statement and put a balance sheet together. It seems simple enough; money comes in and money goes out for a variety of reason. But has the business done a budget (a realistic budget) that takes into the account all the necessary fluctuations that can occur, that impact the company’s financial status and wellbeing? Entrepreneurs are salesmen (or women) by nature. You started your business because you saw an opportunity where you could provide products and services that would service the market. Bearing this in mind, entrepreneurs need to consult financial experts, such as experienced financial managers or financial directors, to help guide, manage and grow the financial wellbeing of the business. Employing a full time financial manager or financial director may not be financially viable for the business currently. In cases like these many companies are turning to part time financial managers or part time financial directors to help guide them through the quagmire that is financial planning for the business. These financial experts are engaged on a part time basis (three days a week for example) to oversee, create systems and manage the financial planning for the business. These part time experts have the highest qualifications and have had years of experience successfully guiding companies with their financial planning. Companies such as The Finance Team outsource financial experts for this exact purpose.

2. Know how taxation legislation affects your business

Knowing and understanding how the current SARS legislation affects your business is critical. As much as tax is a swear word in most entrepreneurs vocabulary, knowing and understanding how the legislation can help your business is vitally important. There might be tax incentives that SARS offers to companies that you might not even know about. Go and consult with SARS to see where and how the legislation can help you. While this sounds like a great idea, most entrepreneurs and company CEO’s don’t have the time to spend days at the SARS office, this is where engaging a part time or interim resource could be most beneficial.

3. Accurate Cash flow forecast

Your cash flow forecast is the lifeblood of your business. Cash flow is the movement of money in and out of your business. It could be described as the process by which your business uses cash to generate goods or services for the sale to your customers , collects the cash from the sales and then completes this cycle all over again. When developing your cash flow forecast it is critical to take the following into consideration:

How much cash does my business have
How much cash does my business need to operate, and when is it needed?
Where does my business get and spend its cash?
How does my income and expenses affect the amount of cash I need to expand my business?

Again all these questions can be answered by your own or by an outsourced financial expert.

4. Stay on top of invoicing

With all that small business owners have to do in their daily lives, making sure that they get properly compensated may seem like a foregone conclusion, but you would be surprised how many business owners fall behind on invoicing their clients. A few mistimed invoices and some missed payments here and there can add up to thousands of Rands in both income and penalty interest, that will have a negative influence on the business. Make sure you stay on top of invoicing your customers and do not hesitate to send out reminder notices should they not pay up by the invoice due dates. Remember, those who shout the loudest get heard.

5. Be frugal and budget properly

When the business is doing well it is very easy to spend money on unnecessary items. Yes, a Nescafe coffee machine may seem like a fabulous idea at the time, but a kettle and coffee granules can do just as well (remember it is not just the machine that costs, the coffee pods, electricity and servicing are costs that are incurred over and above the initial cost of the machine). The same goes for expensive office space, furniture and related costs, these may seem very affordable currently but will you be able to afford these if the company has a bad six months? Once you are tied into lease agreements you may only be able to make changes after 12 months (If you are lucky). What seems affordable now may very well not be in six months’ time.

Considering all these items listed above my biggest secret is to get the right advice and guidance to get your financial planning right. You wouldn’t consult a plumber when you need a tooth extraction, the same goes for your business – always ALWAYS consult a financial expert with the appropriate knowledge and experience as early as possible if your feel you are in need of help.

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September 17, 2014 / No Comments /

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.

July 23, 2014 / No Comments /

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

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May 20, 2014 / No Comments /