Financial planning is essential for the business to achieve the necessary objectives and targets. To formulate a financial plan, we will generally have to do the following:
a) Work out the Company policy, profit targets, and long term plans.
b) Prepare forecasts for sales, production, stocks, costs, capital expenditure, and cash.
c) Compile these separate forecasts into a master forecast.
d) Consider all the alternatives available and select the plan which gives the best results.
e) Review limiting factors and the principal budget factor.
f) Prepare individual budgets and finally the master budget which includes a forecasted profit and loss account, and balance sheet.
There are numerous considerations to look at when determining the financial plan, breaking them down into sub-categories will help me explain how each is relevant.
Short, Medium and Long Term Plans –
The Company’s Board of Directors will have determined the direction the Engineering Company needs to be heading in. The objectives are set by the highest officials in the Company to ensure clear orders are given to all members of staff. This motion is the Company’s Long Term Plan, and it could be achievable in a time frame such as 3-5 years or even more. From this Long Term Plan, smaller stepping stones need to be identified, to ensure the Company is maintaining the same direction whilst completing projects.
So for example a Company may be aiming to increase its profit margins over a five year period ensuring profit can be generated in the future. To do this the company may need to upgrade its facilities to improve the quality of products, ensuring that more revenue can be generated from each unit. This would be based across a time period of 3-4 years making it a middle term plan. Then individual products may need to be redesigned in the short term, 0 – 2 years.
Short, Medium and Long Term Plans do not have fixed time periods and are completely determinable by project itself.
This type of planning is often used in the various sectors of an engineering company, so for my example above it may be set by the Customer Services sector.
This will allow financial budgets to be set accordingly, as financing all of the Short Term Plans should cover the costs of achieving the Long Term Plans. It is however, likely that the Short Term Plans will not all happen at the same time, so it is important to note that finances do not have to be delivered entirely at the start.
Strategic Plans –
Strategic Plans generally cover the company as a whole, and will include all of the Long Term Plans of all the sectors.
A common strategic plan for most companies is to be the best at what they do, and beating all of the other companies who provide a similar service. The way they will do this is by being at the cutting edge of technology for example, by heavily investing in something which could provide the best service.
The company will predict future trends in the markets and customer requirements and then base their planning on this. So for example a book publisher will print millions of copies of a new book, with the prediction that they will sell. If they do not then the publisher has created a deficit which may create devastating consequences for their company. On a similar basis an engineering company may invest in building new facilities based on future demands, if these demands to not arise then the engineering company may find themselves with financial difficulties.
Financially a company will invest money that has been accumulated from profits on other products, to ensure that the future development of others is capable. However sometimes companies will use loans to produce new facilities, where a deficit caused by lack of sales would result in the company potentially becoming bankrupt.
Operational Plans –
Operational Plans should establish the activities and budgets required for each part of the company for the next 1-3 years.
The Op Plans should ask four basic questions:
o Where are we now?
o Where do we want to be?
o How do we get there?
o How do we measure our progress?
The plans should be prepared by the people who will be involved in the implementation of the tasks. Also it is likely that there will need to be interdepartmental discussions, as the processes from one department are likely to have an impact on other departments.
The Op Plans will enable the required actions to be considered and therefore put in place. This will mean that financially the budget will be set up accurately from the outset, preventing wasted expenditure as well as time.
Financial Objectives –
The main financial objective is for the company to make money. Unfortunately it is more complicated as this process will need to be broken down into smaller requirements. The company may be facing a time of financial recession, so the objective may be to keep earning a stable income throughout this time. Other objectives include an increase in revenue in a year, or even an increase in share dividends. The aim of the financial objectives is to make the company financially stronger within a certain time period (usually within a financial year).
Organisational Strategy –
Using organisational strategy the company will decide which areas require financial support at certain times. For example the Design phase will occur at the beginning of a project, with the marketing of the finished item not beginning until the product is nearly or entirely finished. This will allow for money to be freed up to the desired departments at the required time.
It is important for companies to have this area running as efficiently as possible, so that the when one project has moved past the design phases, it can be replaced with a new project with a new budget.
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