HOW DO YOU CREATE A FINANCIAL PLAN

if you are able to commit some figures to paper, they will inevitably
turn out to be wrong. So why bother?
Let’s establish a key concept at the outset. If you want to run a
profitable business, you have to start with a plan. There is an adage in
the world of finance called the ‘five Ps’:
Poor Planning Produces Poor Performance
This is one of those sayings that all too frequently translates itself
into reality, so time spent planning is always time well invested. In this
chapter we are going to look at how to bring together all the financial
aspects of a business within a coherent plan that is based on
sound commercial logic.
Why have financial plans?
We have seen that shareholders invest funds in companies in
order to obtain a return on their investment. It follows that in order to
satisfy shareholders’ expectations, businesses need to coordinate
resources to ensure that they meet their targets. This is the role of
financial planning. Creating financial plans, which are more commonly
referred to as ‘budgets,’ provides a control device that can be
used to ensure that the appropriate actions are being taken. If trading
performance subsequently deviates from the budget, this will provide
a signal to management that action may be required to ensure that
commercial targets are still attained.
The bare bones
Budgets are needed to provide a control device that can
be used to ensure the attainment of commercial goals.
Do not confuse planning with forecasting – they are not the same
thing. A plan details future actions that need to be taken to achieve predefined
commercial goals, the most important of which is usually a
profit target. A forecast, by contrast, is an estimate of what is expected
to happen in the future. The distinguishing feature is the objective