FINANCIAL PLANNING PRINCIPLES | 11 RULES
There are many different approaches to financial planning: you can do business in a risky way or prefer a conservative policy, use scenario planning or make plans from targets – and so on. However, whatever your views on the formation of financial plans, there are some principles that should be followed in any case.
Financial planning principles ( financial planning )
Read in the article:
1. The principle of unity
2. Principle of participation
3. The principle of continuity
4. The principle of flexibility
5. The principle of accuracy
6. Principle of efficiency
7. The principle of solvency
8. The principle of return on investment
9. The principle of timing balance
10. The principle of timing
11. The principle of marginal profitability
Financial planning principles: basic methods
According to the principle of unity , the whole enterprise should be perceived as a single entity, the activity of which should be aimed at fulfilling one common goal.
Any of the company’s divisions will periodically have their own needs – this is completely normal, because even with close collaboration, they remain independent to one degree or another. And yet, when the marketing department demands to hire three people and the logistics department insists on upgrading the equipment, we must not forget that ultimately the actions of every element of your business must be directed towards solving strategic problems.
At the same time, it is worth paying attention to the business processes in the company. Individual activities are related to each other in one way or another, so when planning financially, it is important to keep track of how changes in one aspect affect others
PARTICIPATION ( financial planning )
Bringing the principle of oneness to life may seem like a highly non-trivial task, but fortunately, it is greatly simplified by the principle of participation . Its essence lies in the fact that each center of financial responsibility, each subdivision or department (and sometimes even each employee) must participate in planning in one way or another.
This, of course, is not about letting anyone else make changes to your financial plan. However, the more your subordinates are involved in the budgeting process, the more detailed and thoughtful the financial plan will be – and the more accurately it will be executed.
In order for your company to operate consistently and smoothly, there is the principle of continuity , which suggests that planning must be carried out systematically. That is, financial plans should be drawn up according to a certain schedule and regularly adjusted, and each new plan should be a natural continuation of the previous one.
The principle of flexibility is to maintain some room for maneuver. This means that when planning, it is not worthwhile to involve absolutely all the financial resources at your disposal – otherwise, if something suddenly goes wrong, the company may simply not have enough funds to solve the problems that have arisen. And it’s even better if, in case of possible difficulties, you have not only free funds, but also plan B.
Here, however, we must not forget about the economic feasibility of maintaining flexibility: not having any airbag can be too dangerous, but keeping huge reserves for a rainy day is not at all profitable.
Despite the fact that financial planning should take into account all kinds of risks and prepare for any surprises, the plans themselves should be clear and detailed – this is exactly what the principle of accuracy says . Your financial plan should not have general guidelines and abstract wording – make it as specific as possible. It would be quite appropriate to describe in detail absolutely all the activities planned for the reporting period, indicating the timing, expected results and responsible employees. Drawing up such a plan, of course, takes a lot of time, but the chances of its successful implementation grow exponentially.
EFFICIENCY ( financial planning )
Finally, the principle of efficiency means that financial planning should be beneficial in and of itself. That is, the implementation of your plans should bring the maximum economic effect. And the process of financial planning itself, of course, should pay off by its results.
The specific principles of financial planning are inherently somewhat different from the general ones. They are much more closely related to real financial activities. At the same time they are simpler and more unambiguous.
According to the principle of solvency , your company should be able to deal with its current obligations at any time. In financial planning it is necessary to ensure that by the time the time comes to pay the bills. The company has the required amount on its account.
This principle of financial planning, however, cannot be called absolutely immutable. For example, if you see an opportunity to conclude an extremely profitable deal, for the sake of which you will have to delay the repayment of accounts payable, you may well do it. A temporary breach of the company’s solvency is possible – but only if it occurs deliberately.
RETURN ON INVESTMENT
The principle of return on investment is that to finance capital investments. It is worth using the cheapest sources, and resorting to loans only if this will increase the return on equity.
TIMING RATIO ( financial planning )
The principle of the ratio of terms suggests that the choice of an external source of financing should be made based on the payback period of investments. For investments with a long payback period, long-term loans are suitable – and vice versa. Accordingly, for example, financing non-current assets with short-term loans can ultimately cost your company a lot.
BALANCING RISKS ( financial planning )
The previous two principles of financial planning are complemented by the principle of balancing risks , which implies financing the most risky investments from own funds.
And the last one is the principle of marginal profitability. According to which it is worth choosing those investments that can provide maximum profitability.
FINANCIAL PLANNING PRINCIPLES: BASIC METHODS ( financial planning )
In the practice of financial planning, the following methods are used:
- Economic analysis. Allows you to determine the basic patterns, trends in the movement of natural and cost indicators, internal reserves of the enterprise.
- Regulatory. The volume of costs and resource requirements are calculated by multiplying the norms and standards by the planned volume.
- Balance sheet. Its basis is the forecast of cash receipts and costs for the main balance sheet items for a certain date in the future.
- Discounting cash flows. This is a tool for predicting the size and timing of the necessary financial resources.
- Method of optimization of planning decisions. It boils down to drawing up several options for planned calculations in order to choose the most optimal one.
- Economic and mathematical modeling. Allows you to conduct a factor analysis of the relationship between financial indicators and the main factors that determine them.