Planning as a concept, I have always defined it simply:
• Planning is projecting into the future.
• It is trying to determine in advance what we hope will happen in the future, and in which each of the “thought” events should occur in compliance with a predetermined process.
In this sense, Financial Planning tries to glimpse the economic events that are expected within the framework of the company's commercial activities for a predetermined period.
The foundation of financial planning must be supported by budgets.
An attempt will be made to project the income and expenses of the company for a given period, in order to anticipate the determination of the money needs, for that same period.
On the other hand, financial planning is aimed at ensuring that economic resources are used appropriately.
The sound management of any company is guided by a constant concern for the employment conditions of its capital and its performance.
The notion of "Financial Plan" could range from the simple cash flow forecast (over a longer or shorter term) to the complete financing plan that would cover several years.
The financial plan is normally deduced from the concrete plans that determine the objectives of the purchasing activity and the means for achieving it (sales, production, investment plans, provisions on operating expenses and income).
The Cash Budget is the most common and most used. It is designed for short or long periods, but generally not exceeding one year. An attempt is made to quantify future actions regarding the behavior of money (Income and Expenses).
Processes:
A sequence of administrative and accounting processes is common and recommended to try to establish serious and reliable results:
1. Projection of sales and the behavior of cash flow with respect to how they are carried out: Cash and / or credits.
2. Projection of the purchases necessary to meet the demand of our customers, to meet their needs in the best way possible. We must adequately record the commitments made with the payment thereof, in the case of cash and / or credit purchases.
3. Establish the necessary expenditures for operational and non-operational expenses, necessary to carry out our business activity and the form and frequency of how we are going to economically face these obligations.
4. Group all the information in a general summary table, which shows us the month-to-month behavior of income, expenses and the costs and expenses necessary for the normal operation of the company, with a final vision of the money that we could count on. to start each monthly period.
5. With all the information described above, related to sales, purchases, costs and expenses and with the summary of cash behavior, we can perfectly process a financial projection that allows us to glimpse what would happen in a given period in the future, for example, in six months or one year.
6. The analysis of the “monthly balances” of the cash flow, as it is due to a projection over time, will serve as a guide to determine the cash needs month by month, and the actions that would be taken to supply us with the necessary money, using to bank loans and / or extraordinary permanent or temporary contributions by the partners.
Likewise, it will be important to make projections on:
1. The financial statements that will result from the planned actions.
2. Plan the Final Inventory, adding the Purchases to the Initial Inventories and deducting the Cost of the Goods sold.
3. Plan Accounts Receivable from clients adding Credit Sales and deducting Collections.
4. Plan Accounts Payable to suppliers, adding Purchases to the initial balance and deducting the projected payments.
5. Project each of the balance sheet accounts.
In this sense, we can prepare fixed budgets, in which the activity is given as fixed and variable budgets in which variations in the activity of the company are foreseen.
Use of forecasts:
Financial Forecasting has a dual use;
1. They allow to analyze the planned actions and, 2. Control the results as they are obtained, comparing them with the Budget, which is taken as the standard or basis for this comparison.
Needs and resources:
The first activity should consist of the establishment of the encrypted inventory of the needs for a given balance of activity in a given period.
It is, therefore, a matter of making, first, a complete inventory of needs, so that it is as true as possible from these two points of view:
A poor appreciation of the degree of availability or unavailability of funds will be reflected as dangerous when it comes to executing the plans, as could be the case of some loans considered feasible and that may turn out not to be in the short or medium term..
A bad classification of needs could lead us to decisions with false bases.
Importance of the financial plan:
1. The financial plan is a necessity for every company, small or large; because very often, due to a "treasury error", profitable companies have failed or have seen their personality transform.
2. Making a financial plan involves planning beyond a few months and making choices. The planned objectives and the decided elections constitute, finally, the Company's policy.
3. Following a financial plan implies using your capital in the most profitable way and using that of others (bankers and other Lenders) not only in a profitable way, but also economically, that is, adjusting the uses as much as possible to the needs.
4. Finally, a financial plan must include the necessary “securities” to face the unforeseen events inherent in industrial or commercial activity.
Advantages of financial budgets:
1. Each of the areas of the company will be subject to a budget operating rule.
2. As all plans are included within the budgets, losses produced by involuntarily duplicating some work are avoided.
3. It allows to make the changes or adjustments that are considered convenient in the plans of the company in the lapse of the time contemplated in the validity of the budgets, to put them in tune with the financial possibilities, before it is too late to make the modifications necessary.
4. When the company needs a bank loan, budgets can be very useful for the bank to examine the progress of the business, even though many times it does not need to appeal to this procedure.
5. Through financial budgeting, reckless expansions will be avoided.
6. It allows to properly inspect and control expenses
7. It is the only procedure to calculate in advance the cash that will be needed to continue with the activities of the company.
Sources of working capital:
The main sources of Working Capital are:
A. Sources of Long-Term Working Capital:
1. Capital contributed by the partners
2. Long-term loans.
3. Accumulated profits invested in current loans.
4. Sale of immobilized capital that is not necessary for the running of the business.
B. Sources of Short-Term Circulating Capital:
1. Commercial credit motivated by:
a) Deadlines authorized by suppliers
b) Effects payable
c) Other commercial acceptances
2. Bank loans
a) Without guarantee
b) With guarantee
3. Bank acceptances
4. Sale of securities in the free market.
Long-term working capital sources:
Avoid, as much as possible, being at the mercy of banks for a long time and in this sense their use should be regularized.
If falling into the hands of banking entities turns out to be a problem for the healthy management of the company's finances, what should not be said of the situation of having to resort to loans not regulated by the financial system, which are highly onerous.
The long-term sources should be those that provide most of the working capital, because it is not convenient for any type of company to be at the mercy of bank loans or other sources that are difficult to renew and that in some cases may fail.
The development and / or growth of the company over time, with adequate planning, will indicate the capital injection needs and the best decision will be related to obtaining additional contributions from the partners or opening up to the participation market and, As a last option, resort to banks.
It is also common to make the mistake of investing in non-productive fixed assets, using cash that could serve as working capital, to finally have to resort to bank loans. These loans, which are usually short-term, can generate difficulties for their payment at the time of maturity, if an adequate cash flow is not guaranteed, not committed, in other actions.
Another important source of capitalization corresponds to the accumulation of profits. What is not delivered as dividends or participations must be invested in the business, or kept as available, in medium or short-term investments, making part of the working capital.
The working capital can also be increased by selling those fixed assets that are no longer considered necessary for the normal course of business.
Sources of short-term working capital:
The short-term working capital needs in most cases is related to the greater volume of the business and decreases when it is lacking; This results in resorting to bank loans or to the free market to obtain the amount of the increase, while in other cases the credit granted by the suppliers with whom the company negotiates will suffice.
Commercial loans that provide working capital:
When the supplier grants us credits when the company buys raw materials or merchandise on credit, we are providing ourselves with working capital. Sometimes, in the face of intelligent purchases and subject to our sales capacity, when the invoices reach their due date, the company already has the money available to cancel them, without the need to take any money from its available.
Bank loans as a source of working capital:
The obtaining of resources by the banking entities should not be considered as current circulating capital, but rather as special, since the banks are not available to supply us with the regular circulating capital to avoid excessive immobilization of the amounts loaned.
When we have to resort to bank loans, we must be sure that our sales projections and merchandise stocks are liable to be converted into cash at the maturity of the loans. It must be borne in mind that compliance with the payment of bank obligations will be an important basis to continue counting on them, to cover our needs in the short and long term.
Working capital in the commercial paper market:
The discount of collection documents delivered to financial institutions may well be another source of short-term financing. (Factoring).
It is not frequent for small and medium-sized companies to resort to this type of practice when their suppliers may be involved in transactions with financial entities, since they fear reflecting an image of decapitalization and generating distrust, in relation to the economic solidity of your customer.
However, it is still a good practice when the company requires capital in the short term and this action could be less expensive and faster than resorting to bank credit management.
Circumstances that indicate the need for working capital:
There is no fixed rule, much less magic, to determine the necessary working capital in the company for a given period, without first not going into analyzing the different factors that have an influence on the behavior of cash.
The needs of companies are not always the same and these are closely related to intrinsic or extrinsic circumstances of each of them, in relation to their type or class. For this reason, the following factors should be considered in the establishment of working capital.
1. Company activity related to the constant demand for its products or services
2. Behavior and collection of accounts receivable and debtors.
3. Renewal or transfer of warehouse stocks
4. Relationship between purchase and sales terms
5. Intermittent nature of the business. Seasonal sales.
6. Normal rate of increase in business volume.
7. Adequate business relationships with banks.
Advantages of having sufficient working capital:
1. Security and trust in the administration and running of the company.
2. Solvency or economic liquidity will save you the inconvenience of "going out to get" money to cover our obligations.
3. The ability to make some cash payments on the purchase of merchandise, taking advantage of discounts, saving financing interest and increasing the profit margin on sales made.
4. Take advantage of buying in times when the market is more favorable in prices.
