9 Ways Financial Planning And Analysis Can Help Your Business
Good financial planning will make a careful assessment of your business goals, environment, and resources and use this information to make projections both about future revenues and possible risks the business might face.
Even though things might pan out a little differently on the ground, if you’re thorough with your working information and figures when you’re planning, then reality typically tends not to fall too far away for some, if not most of your projections. So, to get this right you’ll need a dedicated team of experts and the best FP&A tools (Financial Planning and Analysis).
It can help you adjust to foreseeable changes in conditions or priorities that will influence the decision-making process. Here are nine ways financial planning and analysis can help your business survive long term.
1. Predict Cash Flows Accurately
By estimating expected incoming cash receipts and outgoing expenditures, you can properly forecast outflows so there are no unpleasant surprises when the bills come due. If you’ve already taken steps to improve your profitability, better financial planning can help you to make informed decisions about how and when to spend your money.
2. Set Meaningful Goals And Benchmarks
Having a good handle on the finances of the business allows you to produce reports that highlight key milestones or financial targets, so that progress can be measured and management incentives devised accordingly. Setting financial targets using detailed information from your company’s plan will ensure everyone knows what’s expected from them, making it easier for team members to work together cohesively towards a common goal.
3.Measure Performance Against Plans
Using historical information as a guide, planners can calculate how close a company keeps its budget every quarter – which means future deviations from the plan are highlighted early so they can be fixed before they become big problems. The numbers can also be used to compare a company’s performance against its peers, helping management to identify problem areas and find the best way forward.
4. Identify Problems Early
A financial plan acts as a great diagnostic tool for spotting potential issues in the future. If revenue from product X is expected to go up by 20% per year over the next five years because of a patent expiring, but in fact, it drops off sharply, it’s likely something has gone wrong with this forecast and further investigation is needed. By having a clear picture of where the business stands now and what changes are happening all around it, you’ll be well-equipped when surprises come along.
5. Compare Your Progress Towards Goals With Competitors
When reports highlight how a company is performing against its key rivals, it becomes easier to spot problem areas and opportunities for improvement. For example, if you’re losing market share or failing to meet objectives, your competitor stopped selling the same product six months ago – which might be a great opportunity for you if you can find an innovative way to sell it!
6. Identify Potential New Markets And Revenue Streams
When planners can compare historical financial data with published reports from competitors, they can pick out businesses that are doing well in certain sectors but not so good in others. If this happens, you can look closely at their strategy and marketing approach and compare to yours. There may be room for development where you least expect it.
7. Find Ways To Cut Costs Without Affecting Sales
Using financial data over some time, you can calculate the average cost per unit sold for each product. By subtracting this figure from the list price, you arrive at an estimated profit margin – which can be used as a benchmark for future pricing decisions or by suppliers looking to increase their margins.
8. Evaluate New Business Opportunities
As well as keeping track of past activity, planners can estimate how long it’ll take specific initiatives to start generating revenue and how much cash they’ll generate in return. Find out what customers are willing to pay for your product and multiply that by the number of units you expect to sell – next week’s sales forecast is now only a few days away!
9. See Where There Are Gaps In Your Customer Service
Financial reports can tell you how customers are interacting with your business. If they’re spending more money on different products over time, it usually means it’s becoming easier to buy them; if they’ve stopped buying altogether, it might be because there’s a problem in the delivery process. By using financial data to understand these changes before they become big problems, you’ll be able to make proactive decisions that keep customers happy and loyal.
Financial planning and analysis is a powerful tool that companies of all sizes can use to help build a stronger future. By using historical data as a benchmark for understanding changes within the business environment, managers are better placed to prepare for whatever might come along, whether it be a new market opportunity or a potential competitor on the horizon.