Significance
Financial planning in business requires proficiency in using spreadsheet software. Even in smaller
companies, the financial models created to predict future revenues can be complex. Research and data
gathering skills are also important. 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.
Time Frame
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. 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.
Potential
Each month, actual financial results are compared to the numbers in the forecast, and efforts are made
to identify and analyze significant variances. These variances may require an adjustment in strategy to
get the enterprise back on track toward its revenue and profit goals. Variance analysis shows when the
competitive environment has changed significantly from what the company expected.
Warning
Financial planning in business is difficult because so many variables affect the company’s financial
results, and each of them is hard to predict. 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. For example, the negative effects of increases in the costs of
fuel can be severe for some businesses. Many start-up companies face the additional problem of having
a business model that has not been tried before, so there is little data available on which to base the
financial plan.
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