Summary
The financial planning process is one of the most important aspects of the operations and subsistence of a company, since it provides a guide for the orientation, coordination and control of its activities, in order to achieve its objectives; Today the managers or financial planners of companies must carry out correct financial planning, and rely on certain tools such as budgets that would allow them to solve many problems that are experienced day by day in organizations today.
Abstract
The financial planning process is one of the most important aspects of operations and survival of a company, as it provides a guide to the direction, coordination and control of their activities in order to achieve the objectives; Today managers or financial planners companies must make a proper financial planning, and support of certain tools such as budgets allow you to solve many problems that are lived every day in organizations today.
1. Introduction
In our role as managers in an organization, we are constantly influenced by internal and external forces that incite us to consciously or unconsciously generate changes on a personal, family, social, labor and professional level. When we talk about preparing a financial plan for business, we basically refer to recognizing the existence of variables that positively or negatively affect our future plans.
If it weren't for the large number of companies failing, it would seem ridiculous to ask "Why are plans being made?" However, a fairly large proportion of financial difficulties, especially those typically experienced by businesses today, appear to stem from the absence of plans. To be sure, a large number of failures would be avoided through planning; there are relatively few planned failures, but countless lack plans.
Perhaps the most important reason for planning is that it forces people at all levels to think ahead. If we cannot get people to think about the future, it is very likely that they are living in the past.
The reason for this essay is to be able to delimit the problems suffered by some entities due to the lack of financial planning, and to provide certain tools that would allow to solve many problems that are experienced day by day in organizations today. An example of the lack of financial planning is when a company if being in January and knows that in June it has to borrow additional funds, as it should take advantage of those six months to evaluate various financing alternatives and in this way to be able to negotiate one source or another to obtain funds under the most favorable conditions; If you wait until May to find out you need funds in June, the alternatives are likely to be fewer,Due to the fact that you will discover fewer sources of financing or the institutions that provide you with that resource apply very high interests on that requested money derived from the urgency of the same.
A tool that will allow an entity to achieve the achievement of its objectives is to make a budget, the importance of the budget is that they help to minimize the risk in the operations of the organization, since thanks to the budgets the plan of company operations within reasonable limits and that make it easier for the members of the organization to quantify in financial terms the various components of their total plan of action.
This is where the concept and application of financial planning comes into play, understood not only as a model of financial projections of results, balance sheet and resource flows with their respective indicators; if not also as a set of activities that are developed mainly at the strategic level and to a lesser degree at the operational level.
The purpose of a budget is to plan the results of the organization in terms of money and volumes, control the management of income and expenses of the company, coordinate and relate the activities of the organization and achieve the results of periodic operations.
2. Background
The human being by nature, has always resorted to plans and we have an example of this since very remote times; Robert N. Antony in his book "The accounting in the administration of companies" (Antony, 1976), delimits that the Egyptians to be able to cultivate the land, determined the precise moment of always and harvest; Other peoples analyzed more precise weather situations, one of them being the Phoenicians, who drew up plans, which allowed them to carry out trade in a timely manner.
Years later, the feudal system is established, the Feudal Lord required plans according to his needs, both for protection and subsistence; However, it is until the industrial revolution when when managing, he realizes the benefits that knowing and taking advantage of the plans in companies can pay off, giving rise to various ways of carrying them out, consisting of:
- The one who carries it and executes it mainly in the mind, the one who makes estimates, writes it down empirically on paper, the one who does it on paper, but in an adequate and systematic way.
On the other hand, Joseph Vlaemminck in his book "History and doctrines of accounting" (Vlaemminck, 1961), delimits that the theoretical and practical foundations of the budget, as a planning and control tool, had their origin in the government sector at the end of the 18th century, when the kingdom's spending plans were presented to the British Parliament and guidelines were given on their possible execution and control. From a technical point of view the word is derived from Old French bougette or bag. This meaning was later refined in the English system with the term common knowledge budget, which is called budget in our language.
In 1820, France adopted the system in the government sector and the United States welcomed it in 1821 as an element of control of public spending and as a basis for the need formulated by officials whose function was to budget to guarantee the efficient functioning of government activities.
Between 1912 and 1925, and especially after the First World War, the private sector realized the benefits that the use of the budget could generate in terms of cost control, and allocated resources in those aspects necessary to obtain adequate profit margins during a period of time. determined operating cycle. During this period, industries grow rapidly and the use of appropriate business planning methods is considered. In private companies there is intense talk of budgetary control, and in the public sector a National Budget Law is even passed. The technique continued its continuous evolution, together with the development achieved by cost accounting.
This innovation generates a period of in-depth analysis and understanding of costs, promotes the need for budgeting and scheduling, and encourages technicality, group work, and decision-making based on extensive cost study and evaluation.
3. The financial plan
Based on the latter, what we know as a budget technique appears; RW Johnson and RW Melicher in their book Financial Management (Jhonson, 2002) establish that a budget is nothing more than a written plan expressed in terms of units, money or both, in essence it is a model that represents the effect of several levels of activity (inputs) over costs, income and cash flows (results).
Due to the great problems of coordination and control of performance, large companies are likely to have a more detailed and elaborate budget than small ones. Today many companies have created business financial models that enable management to make far-reaching plans by testing the results of various strategies and activities.
That is why a budget, which we can conceptualize as a tool for planning and predetermining figures based on forecasts of random events and phenomena, seeking as a result the conditions under which a company is going to operate during a given period, monitoring that these conditions are met.
A budget is the one that refers to the integration and implementation of expenses and income that are expected to occur during the planning period.
4. Classification of budgets
Regarding the classification of budgets, different authors on the subject have issued different points of view, so there is no uniform criterion. Manuel Enrique Madroño Cosío in his book “Financial Administration of Working Capital” (Madroño, 1998) defines a classification of the different types of budget plans that can be managed in the entities:
Budgets Classification
Budgets
- Regarding the figures that are budgeted Regarding its execution time Regarding the possibilities of modification Regarding the type of entities that are going to use it
Regarding the figures that are budgeted, they can be classified as:
- Operating Budget: which consists of establishing which are the operations or activities that are going to be developed in the future and their financial impact. The operating budget is divided into a budget for sales, production, purchases, inventory, labor, manufacturing expenses, selling expenses, administrative expenses, other expenses and products, taxes, collective investment accounts. Financial budget: it is the summary of the operating budgets, which are reflected in the Financial Statements; Among the most important of these we have the budgeted statement of financial situation, budgeted income statement, budgeted production and sale cost statement, statement of changes in the budgeted financial situation,statement of changes to budgeted stockholders' equity and cash flow. Capital budget: is a list of possible investments or acquisitions of fixed assets, which should be considered as a project for evaluation.
Regarding their execution time, they can be classified as:
- Short Term: Those who plan administrative management during the organization's normal economic cycle, which in general terms can be said to be 12 months Medium Term: Those who evaluate investment results or projects that generally vary in their term of three to five years and that reflected in one year would not give enough information about the management of the company Long Term: Refers to large projects or investors that definitely could not be classified as short-term or medium-term, fluctuating in a period that is normally greater than five years, to evaluate and control the company's investments.
Regarding the modification possibilities, they can be:
- Rigid: those that cannot be modified, having as a drawback that they can update us or serve as efficient control parameters Flexible: Refers to plans that, as a result of the development of the company's operations, can be adapted to their real needs, allowing elasticity for changes or modifications.
Regarding the type of entities that are going to use it, they can be:
- Public: Those that are used as a measure of planning and control of public management Private: Those to which business management is going to be subject, which are prepared based on profits and subsequently the other concepts are determined.
5. Conclusion
Planning is often the difference between the success and failure of a business. By fostering forward thinking in a coordinated way, the budget process is a useful management tool for all phases of business operations. Not only do budgets make management anticipate the problems to come, they also serve as standards for performance as the business progresses.
There is no established formula regarding the form, detail or periods covered by the budgets. Each budgeting system must be designed for the situation and plans involved. Generally, the budgeting system will be more detailed in the aspects of the operations that are most important to the company. Furthermore, the period covered by the budget will vary according to the nature of the plans involved and the degree of accuracy possible in preparing the estimates.
Long-term budgeting of financing or financial needs is critical to the success of any business organization. The ability to forecast sales is crucial in the effort to determine future financial needs. As sales increase, more investment in assets is necessary to support this increase. This increase in assets must be financed with some combination of short-term and long-term funds.
The culmination of the budgeting process is the preparation of a pro forma balance sheet, which represents the position of the company at some point in the future if the plans set out in the cash budget and pro forma income statement are carried out.. Analysis of this and the pro forma income statement should reveal whether the plans presented in those statements will guide the company along the path desired by management.
6. Bibliography
- ANTONY, Robert. N. (1976). Accounting in business administration ”México., Ed. Hispano Americana.JHONSON, RW and Melicher RW, (2002). Financial administration ”, Mexico, Ed. Continental.MADROÑO Cosio, Manuel Enrique (1998), Financial administration of working capital. México, Ed. Instituto Mexicano de Contadores Públicos.VLAEMMINCK, Joseph H. (1961), History and doctrines of accounting, México, Ed. EJES
