A lot of people think that financial planning should be undertaken only when you have the necessary resource to spare for it i.e., surplus money. What they don’t realize is that finance planning is for everyone, from individuals living life paycheck to paycheck to any type of organized setup whether a non-profit, small business, or large corporation.
If the aim is to achieve stability today and in the future a sound finance planning process must be understood and adopted.
Financial planning experts have a formalized process through which they provide insight and methodologies to their clients, both big and small, to develop a custom fiscal plan. But that isn’t to say that such plans are only left to professionals.
With a bit of investigation, you can uncover reading material as well as tools dedicated to the art of fiscal planning. Such tools only require the input of facts and figures and they give you forecasted financials.
By inputting different scenarios, you can even test the sensitivity of the plan to variables. These are ideally best suited to small and medium enterprises rather than individuals but there is no restriction on use.
What is Finance Planning?
If you want to take the fear of uncertainty out of the finance equation, monetary planning is the way to go. What it does, summarily, is forecast and determine the application of cashflows to competing opportunities in any lifecycle.
There’s a lot more going on in the finance planning process than simple forecasting which is why some people find themselves too overwhelmed to take on the process by themselves.
Even in such cases, if the relevant personnel work closely with the experts and gain an understanding of the process the first time around, they will be able to implement the learning in successive planning rounds.
What you’ll need to start off with is a holistic view of your situation or the situation of the organization you’re planning for. With this broad vision, you can begin setting milestones you wish to achieve a year (or 5 /10 or even 50) from now.
These ought to be realistic milestones instead of wishes so that what you want is achievable with your means and abilities.
Then comes up drafting the action plan and having it agreed upon by concerned stakeholders. Nothing left now than to implement the finalized plan and monitor it for deviations with the progression over time. There may need to be adjustments in line with unforeseen circumstances but that is all part of the game.
Planning well today for your present and future will make the bumps along the way that much smoother and lend you the confidence to deal with contingencies much more efficiently and effectively
Finance Planning Process
Financial planning may seem intimidating but it need not be. It is a logical process and if done with sufficient time and forethought, it can make life a lot less complicated. In this article, we have done the legwork of gaining insight from professionals and examining material on the subject to bring you the best way to plan your monetary future.
The following steps are adopted by professionals for formulating financial plans:
- Consider the Environment
- Discuss Goals and Prioritize
- Evaluate the Current Scenario
- Develop & Agree on an Action Plan
- Execute the Action Plan
- Follow Up of the Plan
Step 1) Consider the Environment
When setting out on the course of divining your financial plan, you need to understand the circumstances surrounding your concern in-depth.
When the plan is on an individual basis, consider things like the number of dependents, what the health situation is like and how it might need to be supported in the future, lifestyle expenses that would need to be maintained and accounted for, and those that could be replaced for better alternatives.
Ask yourself about any assets that belong to you or could come under your ownership as a result of inheritance or job situation.
For organizations, the idea remains the same but some considerations may be different. Whether the concern is a small business or non-profit, things like the regulatory environment, manpower and values would apply on a larger scale and will need to be carefully understood before going any further.
Tax framework and how the entity deals with risk are other areas that vary between organizations and affect the roadmap for financial planning.
Step 2) Discuss Goals & Prioritize
In this phase, you need to list down all the things you aim to achieve personally or professionally. Start with the big things like retirement or succession planning but don’t ignore the things you may believe are small.
As long as they are linked to you financially (and most things are) you should jot it down. The greater detail you have the better you can incorporate it into your plan and avoid being caught by surprise.
Once you have a list of goals, consider the time horizon linked to them. For example, expansion to 2 more locations would be a decade-long goal than say renovations on the existing setup. Similarly, an individual may consider purchasing a home later than they would owning a car.
Before finalizing the goals, discuss them with major stakeholders like business partners or spouses so you can garner support from all segments. This way everyone feels part of the process and is willing to participate more devotedly in any action plan conceived.
Step 3) Evaluate the Current Scenario
The prevalent income versus the current expenditure, monthly or annual will be taken into account. You will also need to make provision for bigger anticipated expenses associated with lifestyle changes like getting married or expansion plans for small businesses.
A detailed survey of all assets would be required to highlight opportunities such as money lying idle or assets that are sitting redundantly. Or even money drain venues like lack of tax planning or running a credit card debt which accrues a higher rate of interest.
Having a clear picture allows you to evaluate the changes that you can affect to work towards the goals you have envisioned for yourself and your future. Depending on your risk appetite and the time horizon of your goals, you can assess which expenses can be curtailed and which assets can be better engaged in high-risk, high-reward opportunities as a result of an optimized finance planning process.
Step 4) Develop & Agree on an Action Plan
Having collected all the data and deliberated all the variables it is now time to sit down and decide how you will accomplish the vision you have in mind. A financial plan needs to be drafted so that you have clear actionable steps for your journey.
Part of developing an action plan would be to have a budget and forecasted financial statements for at least a year ahead. It doesn’t matter of your goals span decades or months. You will need to refresh these financial projections every year to keep you on track and help you identify deviations.
The rest of the plan involves coming up with actionable steps that don’t just focus on your future but also support a healthy and happy lifestyle in the present. So, every single penny saved does not need to be invested or stashed away in funds. Money for marketing for the business or vacation with the family will be built into the financial plan.
Step 5) Execute the Action Plan
This may seem like the easy part but actually what appears good on paper usually hits a few snags when implemented practically. The motivation is strong when the plan is off to a fresh start but as time goes by only the really dedicated can keep up with financial plans. However, to see any sort of benefits it is essential to be committed to long-term goals.
This is where discussing and agreeing on goals and action plans with partners comes to help. When you have a team that is on board with the plan, the whole team will be able to hold each other accountable for steps taken.
Although it takes discipline to follow a financial plan, even those who are prone to frequent deviations are better off than those working without one at all. This is because having put so much thought into the financial planning process, the former still has a clear vision of what they are working towards. As opposed to the latter who may easily get swept up with the day-to-day troubles with no concrete plans for the future.
Step 6) Follow Up of the Plan
A clear financial plan is no guarantor of future events. This means that at the most inopportune times, life may throw a wrench in the works of even the finest plans. Or you may have designed the projections with certain assumptions and those may not have materialized as you expected. But this is no reason to put a full stop to the plan and call it a day.
What this merely needs is a review of the situation followed by some acceptable course correction measures. Even outside of deviations, the finance plan should be periodically reviewed to measure results against expectations. This helps keep everyone on track and refreshes the purpose of such plans in each mind.
Conclusion
The finance planning process is pretty similar to riding a bike. The first time is always the hardest and you don’t get it exactly right. But as you keep practicing it becomes second nature and easier with every subsequent attempt.
The long-term rewards are worth all the trouble though. Being able to retire with a healthy savings account or achieving your goals of stability and expansion of your small business or organization does make a little yearly planning worthwhile.