What Is the Financial Planning Process? A Step-By-Step Guide

The business financial planning process plays a crucial role in ensuring the long-term success of a company. It empowers businesses to set out a framework within which they can optimize their strategy and meet their organizational goals.

This article aims to demystify the process of financial planning and explain how it works. It covers the different components of business financial planning and lists the seven core steps to follow to make sure you implement it effectively.

Table of Contents

• What Is the Business Financial Planning Process?
• Types of Business Financial Planning
• What is the Goal of the Business Financial Planning Process?
• Why Is Business Financial Planning Important?
• What Planning Time Periods Should You Consider in Your Business Financial Planning Process?
• What Are the 7 Steps Involved in the Financial Planning Process?
• Example of Business Financial Planning Process
• 4 Tips For the Business Financial Planning Process and Mistakes to Avoid
• How to Evaluate Your Business Financial Planning Process
• Do the Best For Your Organization With the Right Business Financial Planning Process Solution
• FAQs About the Business Financial Planning Process

What Is the Business Financial Planning Process?

Let’s begin by establishing a business financial planning process definition. Essentially, it’s a key component of the financial planning and analysis (FP&A) strategy used by companies to try to maximize their profitability in both the short and medium term.

It involves collecting and evaluating business-critical data in order to develop accurate forecasts for crucial indicators like cash flow and liquidity. Based on this information, managers can make plans to optimize resource allocation and balance the budget.

Types of Business Financial Planning

Although the practical steps of financial planning are similar regardless of how far in advance you’re trying to plan, the focus can change slightly depending on the timescale. To that end, it can be useful to categorize business financial planning into several different types.

Operational Planning

Operational planning is about the here and now. It looks up to around twelve months ahead, and for that reason, it tends to involve a good amount of granular detail about income and cash flow on a week-to-week basis.

Strategic Planning

A strategic financial planning process deals with the opposite end of the timeline. Its purpose is to develop strategies for a business five years or more from now. Because it’s not possible to make reliable forecasts about operational metrics like sales figures over such a timescale, this tends to focus more on things like long-term capital requirements.

Short-Term Planning

Essentially another name for operational planning, this digs into the detail of short-term business needs. Managers can choose to focus on daily, weekly, or monthly figures depending on the individual metric being analyzed.

Long-Term Planning

Depending on how you define “long-term”, this could either mean strategic planning as outlined above, or tactical planning, which means planning for business outcomes on a two-to-five-year timescale.

What is the Goal of the Business Financial Planning Process?

The financial planning process aims to hit one overarching goal: the deployment of all available resources as effectively as possible to maximize profitability. This means the following:

• Understanding how best to invest any available cash
• Finding ways to cut costs without jeopardizing operational effectiveness
• Optimizing efficiency in everyday operations
• Using data to make decisions about how to improve future performance

Why Is Business Financial Planning Important?

The financial planning process delivers a number of key advantages to any business. Here are a few of the most notable ones.

1) Enables Clear Goal-Setting

Getting to grips with the fine detail of your company’s financial performance allows you to set goals that are both ambitious and realistic. This means you can push to maximize profitability in a controlled way.

2) Helps Prepare For The Unexpected

Good corporate budget planning always builds in some contingency in case the unexpected happens. But it also makes it less likely that you’ll be blindsided by unforeseen events, because you’ll have considered as many eventualities as you can think of in advance and already built them into the plan.

3) Boosts Transparency

Having a robust financial business plan makes sure all stakeholders understand your short and long-term goals. It encourages accountability across every aspect of your operations and encourages investor confidence.

4) Improves Overall Performance

Accurate business financial planning ensures better long-term performance. That’s because it allows you to allocate your resources more efficiently so you can optimize them and get better results.

What Planning Time Periods Should You Consider in Your Business Financial Planning Process?

The stages of financial planning should ideally span several discrete time periods. We touched on this when we discussed the different types of financial planning, but it’s worth mentioning that these are not either/or choices. If you can, your planning should encompass:

1-12 months: short-term planning that focuses on daily, weekly, or monthly performance indicators. This is for fine-tuning your immediate budget.

12-24 months: medium-term plans that emphasize how your strategy is set to evolve within the next two years. If there are any changes expected in the business environment over this timescale (e.g. upcoming developments in regulation or compliance rules), these should be factored in.

2-5 years: over two years ahead, your planning should be centered on making sure your business will be well capitalized so it can stand up to future challenges.

5-10 years: this kind of long range planning is all about your company’s vision. It should be shaped by input from all different departments of your business and reviewed on an annual basis.

What Are the 7 Steps Involved in the Financial Planning Process?

There are seven key steps in financial planning that form the basis of a comprehensive financial business plan. Following these financial planning process steps gives your company the best chance of achieving all business-critical objectives.

1) Set Clear Goals

First, you need to know where you’re going. Set clear, measurable goals for profit margins, cash flow, and other crucial business metrics. You’ll probably find you’ll need to adjust these as new data comes in. That’s fine; at this early stage, you just want a baseline to work from.

2) Forecast Sales

For your sales forecast, you want to pay attention both to the short and medium term. Predicting sales in the short term helps with things like setting cash flow goals. Planning sales further ahead – up to five years ahead, say – is instrumental in securing finance for further business development as this is something investors will look at when deciding whether to get on board.

3) Determine Capital Requirements

You need to be certain that you have sufficient financial resources to cover your capital needs over the next few years. For new businesses, this includes any start-up costs you need to budget for. But even established businesses will also have to cover the cost of any fixed assets and inventory. Establish where you’ll need to source the money from for this (e.g. borrowing or equity).

4) Think About Investment Options

One of the many financial planning steps you need to incorporate into the process is considering how you’ll invest any surplus cash to maximize returns. Assuming your business is performing well, getting this step right can make a big impact on your long-term profitability, so it’s crucial not to neglect it.

5) Draw Up a Liquidity Forecast

Liquidity is the amount of cash a company can generate to meet its short-term liabilities, so it’s a vital element of any financial business plan. Cash flow problems can inflict massive damage on businesses that are otherwise well run, so it’s crucial to have confidence your company will be able to pay its expenses on an ongoing basis. Make sure you have a liquidity plan in place that covers the whole of the coming twelve-month period.

6) Consider Worst-Case Scenarios

No matter how solid your business model, there are some things that are out of your control. An economic downturn or a big new competitor launching in your space, for example, have the potential to hit sales hard. Always include some room to maneuver so that if the worst happens, you have a backup plan up your sleeve.

7) Review and Adjust

Finally, stay nimble by reviewing your plan regularly and adjusting it as necessary. Compare actual figures with your projections to check how closely reality matches your forecasts. If there’s a significant disparity, explore why that is and fine-tune your financial business plan to make it more accurate.

Example of Business Financial Planning Process

Here’s a quick financial planning process example in the form of a sales forecast template. As you can see, you project sales for each month for each product. Often, this kind of forecast will also include data from previous periods for comparison purposes.

As the actual sales figures come in, you would compare them with projections and amend your forecasts accordingly.

4 Tips For the Business Financial Planning Process and Mistakes to Avoid

Financial planning processes can seem quite challenging to implement, but as long as you follow these tips, you should be able to avoid making the most common mistakes.

1) Use appropriate tools: Don’t simply try to do everything manually on a bundle of disparate Excel spreadsheets. There’s far too much room for human error to creep in, and if all your spreadsheets are linked together, one mistake can cascade through the whole thing, undermining your plan. Instead, consider using a dedicated business planning solution.

2) Make sure projections are realistic: You have to take care that your forecasts are as accurate as possible. For instance, in your sales projections, don’t forget to account for phenomena like seasonality. Just assuming never-ending growth is unlikely to be justified and can throw off your whole plan. Similarly, make sure to account for things like repair costs in your capital requirements plan.

3) Keep on top of accounts receivable: When it comes to forecasting cash flow, it’s easy to make the mistake of being overoptimistic if you don’t take into account late payments. There are two sides to preventing this becoming a problem. First, build in some contingency for late payments in your forecasts; second, develop strategies for encouraging customers to pay on time (e.g. by offering discounts for early payment or applying penalties for late ones).

4) Don’t forget tax: You’ll need to factor both gross and net values into your planning. That’s because while values net of tax will go on the income statement of your financial report, gross values are what you need for accurate liquidity planning. You’ll also need to take a range of other taxes into account such as corporate income tax. Overlooking these in your planning could lead to you overestimating the company’s cash position.

How to Evaluate Your Business Financial Planning Process

Evaluating your planning process involves a regular assessment of how well it tracks actual results. It also means finding ways to be able to respond flexibly to challenges. Consider your plan from all angles including:

• Establishing backup sources of funding should they be needed
• Developing ideas for future investment
• Regular monitoring of the company’s current cash position

As long as you keep a close eye on these factors, you won’t go far wrong.

Do the Best For Your Organization With the Right Business Financial Planning Process Solution

Take full control of your company’s financial business planning with OneStream’s budgeting and forecasting software. It’s a versatile solution that allows you to leverage powerful predictive models to seed business-critical data directly into your budget projections – with no need for extensive technical knowledge.

But don’t just take our word for it. If you’d like to know more about how OneStream can empower your teams to create financial plans that truly deliver for your business, reach out to one of our experts today to request a demo so you can see for yourself.

Did you know OneStream also offers a weekly live demo webinar every Friday for 1 hour on a specific topic? Check out our resources library, too.

FAQs About the Business Financial Planning Process

What Is a Business Financial Plan?

A business financial plan is a set of data-driven forecasts developed around your overall business goals. It incorporates projections for crucial metrics including cash flow, sales, costs, and capital requirements over both the short and long term.

How Often Should a Business Financial Plan Be Reviewed?

It depends which part of the plan you’re talking about. Short-term elements of the plan such as cash flow should be reviewed on a weekly or monthly basis, whereas long-range factors like forecasts for capital requirements several years ahead only need to be revisited annually.