What is financial planning in business?

The net worth of a company. To learn the organization's overall financial health, a company's net worth is important.

Operating costs and current cash flows. This compares the expenses it takes to run a company with the amount of money it is bringing regarding the sales of its products or services.

Estimated liabilities and cash flows. Another very important element of financial planning involves forecasting liabilities and cash flows. This is crucial because many business goals are set for the long term. Companies need to make accurate predictions in these areas to plan properly in financial terms.

Financial goals and targets. Financial goals and targets are also paramount to the financial planning process. This should include targets of expected revenue within certain periods. This part is important because it helps the company gauge its financial performance over time and make adjustments if necessary.

Companies use a few different types of financial budgets to keep track of their finances and execute financial planning.

Here are two of the most common financial budgets used in business:

• Master budget. A master budget is a budget that displays all of the information of an organization's revenue-generating activity, focusing on an overview of profit and expenses.

  Professionals use data and information from a company's operating budget to determine a company's master budget. Master budgets reflect the following items:

  • Cash inflows

  • Cash outflows

  A company's cash flow statement determines these items and estimations included on a company's balance sheet at the end of an accounting period.

• Flexible budget. A flexible budget allows for adjustment throughout a fiscal year, depending on profits and cost changes during the fiscal year. When flexible budgets are utilized, organizations first account for the fixed expenses and costs they expect.

  These should be costs and expenses that they believe won't change over a fiscal year. Next, they allow for any fluctuating variable costs or expenses and finally review costs periodically over the year to make live adjustments.

  Flexible budgets require accountants or accounting departments at companies to use their imaginations and create hypotheticals for potential and unexpected costs.

  A flexible budget helps companies to adjust to their needs throughout a period as different key factors change, including things like:

  • A high increase or decrease in the demand for specific products and services

  • Seasonal hikes in labor costs

  • The development of new technology and its added value to a business