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A financial plan is a forecast of future performance for a business, usually prepared using spreadsheet software.Small businesses can benefit greatly from taking the time to do a financial plan at least annually.Even in smaller companies, the financial models created to predict future revenues can be complex.
The accuracy of the financial plan depends on the quality of information used in the assumptions for the financial models.
Creating realistic assumptions for key variables such as projected unit sales and pricing is critical.
The plan helps a small business owner to better manage cash flow by preparing for situations that could result in cash shortages, such as seasonal fluctuations in revenues.
The financial plan is normally prepared as part of an overall business planning process, during which goals are set and strategies are chosen to help the business grow in the upcoming year. Strategies depict the course of action you want to take. Determine the assumptions you want to use for key variables such as unit sales, number of customers, and prices for your products or services.
Strategic planning determines the course of action the company will take: the tasks scheduled to be accomplished, as well as who is responsible for their timely completion.
Financial planning takes the actions described in the strategic plan and converts them into dollars.Some businesses also prepare a long-range financial plan for as long as five years in the future.The long-range plan is useful for companies whose product development plans require a long time to complete.Consumer behavior is especially hard to predict -- how well customers will respond to both the company’s products and the price being charged.Changes in cost factors can also cause significant variances.The process of financial planning in business is designed to forecast future financial results and determine how best to use the company’s financial resources in pursuit of the organization’s short- and long-range objectives.Because planning involves looking well into the future, it is a highly creative thinking process as well as an analytical one.A business should prepare a financial plan once a year.This will include developing a forecast profit-and-loss statement for each of the next 12 months.The financial plan shows the revenues projected to result from the implementation of the strategies and the expenses required to implement the action steps.Senior management and marketing and operations personnel are heavily involved in the strategic planning process.