While the strategic planning season for mature corporations usually takes place at the end of the prior fiscal year, many earlier stage companies are still putting together their financial plans for the current year. A properly prepared financial plan will consider all the functional needs of a company based on its projected revenue and profit goals. This financial plan will also identify the key financial and non-financial measurements that should be tracked throughout the year to ensure that the company is on course to meet its goals.
Start-up companies may struggle in preparing a realistic financial plan before they have a significant track record. In these cases, it is often helpful to enlist the support of someone with experience in your or a related industry. As a company matures, the financial history will provide the basis for building a more realistic financial plan.
The Key Functions of a Company Include:
•
Operations and Information Technology
Operations and Information Technology•Sales and Marketing
Sales and Marketing•General and Administration
General and Administration•Human Resources and Recruiting
Human Resources and Recruiting•Research and Development
Research and DevelopmentFor most companies, Operations is where their core competencies reside and where they add value in the market place. If a company intends to grow, it must consider how the increase in revenues will impact its operations. The operations portion of the financial plan should answer questions like: how many more employees will be needed to increase service offerings or product deliveries?; how will this affect facility requirements and costs?; how will growth affect our investment in information technology?; how will the access and cost of direct expenses be affected?; and how will other overhead costs be affected? One of the key financial metrics to monitor in your financial plan is how future growth will impact your gross margin.
The Sales and Marketing plan includes the costs associated with identifying new prospects and converting them into clients or customers. Sales and marketing costs are usually managed as a percentage of revenues, and they are normally comprised of the costs of sales and marketing compensation, trade shows and events, brochures, websites, advertising, public relations, and promotional activities. Companies should analyze their prior year sales pipeline to project this year’s sales activities. They must understand what marketing and sales activities must be undertaken to generate the number of leads and issue the number of proposals needed to hit their revenue targets.
General and Administrative (G&A) expenses include general corporate and management expenses that must be borne by all entities. G&A expenses are usually managed as a percentage of revenues. These costs include administrative compensation, professional fees, insurance, taxes, and related expenses. A lower G&A expense to revenue ratio will indicate greater efficiency within an organization.
In order for a company to grow it must be able to attract and retain talented employees. Accordingly, the financial plan must include salaries (and planned salary increases), competitive benefits, and the costs associated with recruiting new employees. These expenses are generally the most significant costs a firm will incur. While Human Resources and Recruiting are usually considered part of the G&A expense of a firm, most firms are beginning to manage these expenses separately as they have become a mission critical function.
The Key Components of a Financial Plan Include:
•Revenue Projections
Revenue Projections •Direct Cost Budgets
Direct Cost Budgets•Annual Staffing Budget
Annual Staffing Budget •G&A, Overhead and Fringe Budget
G&A, Overhead and Fringe Budget•Sales and Marketing Budget
Sales and Marketing Budget •Capital Budget
Capital Budget•Projection of Financing Requirements
Projection of Financing Requirements•Overall Budget
Overall Budget•Tax Plan
Tax PlanHow Can I Begin to Build My Company’s Financial Plan Today?
•Review last year’s financial reports on an accrual basis
Review last year’s financial reports on an accrual basis•Identify and track the company’s key financial and non-financial metrics
Identify and track the company’s key financial and non-financial metrics•Project this year’s revenue based on expected changes in financial and non-financial
Project this year’s revenue based on expected changes in financial and non-financial metrics•Build an annual staffing budget
Build an annual staffing budget•Project functional and overhead expenses based on growth and past metrics
Project functional and overhead expenses based on growth and past metrics•Determine the capital asset and financing needs necessary to execute the plan
Determine the capital asset and financing needs necessary to execute the plan•Utilize the information generated above to build this year’s annual budget
Utilize the information generated above to build this year’s annual budget•Estimate the cash needs for tax purposes
Estimate the cash needs for tax purposesTo be successful, companies must have a clear picture of past financial results in order for them to project financial performance in the future. A quality accountant will provide a business with accrual based financial reports, help them monitor business metrics, and assure that the business is in compliance with tax laws. This information allows finance professionals to project future financial results and ensure that a company is on the path to success.
Source: Ted Rose is the President of Rose Financial Services, based in Rockville, MD. If you have any comments or questions, he can be reached at info@rosefinancial.com or 301.527.1130.
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