Introduction
Finances have their origin in the completion of an economic transaction with the transfer of financial resources. It receives contributions mostly from disciplines such as economics, management, accounting, and quantitative methods of analysis. Finance can be defined as "the art of managing money", while financial management "refers to the tasks of the financial manager." Finance contains a set of principles, techniques and procedures, which are used to transform the information reflected in the financial statements of a company, into processed information, usable for decision making.
Financial planning and control processes are closely related to financial management and strategic planning. Financial planning and control involve the use of norm-based projections and the development of a feedback and adjustment process to increase performance. The results obtained from the projection of all these elements of costs and expenses are reflected in the budgeted or pro forma income statement.
On the other hand, sales estimates allow considering the various types of investments that are needed to produce the products. These investments, plus the balance sheet from prior years, provide the data needed to develop the assets column of the balance sheet. These assets must be financed, but a cash flow analysis is also required.
The company's cash flow plays a very important role, since when it is net and positive, it will indicate that the company has sufficient financing. Otherwise, it would merit additional financing. This means that cash flow is the essential element for financial forecasts, because based on it, projections will be made in order to achieve the ultimate objective or goal of any company: profitability.
The Financial Planning and Control subject aims to develop basic concepts on finance, financial planning, financial analysis, working capital, funds and negotiable securities, credit policy and collections, as well as short and medium-term financing, bank loans, financing of assets and investment analysis, and its applications to practical problems that arise in organizations and in real life.
In the same way, today in the global world, the strategic and economic trends that the company must know to achieve long-term sustainability must also be considered. Thus becoming a strategic analysis because, in addition to identifying the strengths and weaknesses of the business, it is necessary to know the impact of environmental factors to differentiate its business opportunities, as well as the threats that could affect it.
Also the interpretation of financial data is extremely important for each of the activities carried out within the company, since through this the executives use to create different external financing policies, as well as they can focus on the solution of specific problems that affect the company, such as, for example, accounts receivable or accounts payable; At the same time, it shapes credit policies towards clients depending on their turnover, it can also be a point of focus when it is used as a tool for the rotation of obsolete inventories. Through the interpretation of the data presented in the financial statements, administrators, clients, employees and financing providers,they can realize the performance that the company shows in the market; it is taken as one of the main tools of the company.
Planning and Financial Control provides the relevant aspects to be considered in an organization, as key elements in the permanent monitoring of its management and objectives to be achieved. Similarly, the strategic planning process and its impact on the achievement of organizational objectives must be analyzed; learns to design a dashboard that allows to control and measure the progress of these strategic objectives, as well as to control the cost of financing, through the evaluation of financing options and the generation of value in an organization, through the determination the optimal financing structure of a company; and to value companies under the method of the present value of projected free cash flows.
In conclusion, the main objective proposed by Financial Planning and Control is to help the executives of a company to determine if the decisions about financing were the most appropriate, and in this way to determine the future of the organization's investments; However, there are other intrinsic or extrinsic elements that are also interested in knowing and interpreting these financial data, in order to determine the situation in which the company is.
Introduction to financial planning and control
1. General and specific objective of financial planning and control
Overall objective
Expose techniques and tools about Financial Planning and Control, as a necessary strategic element to achieve effective and timely decision-making, and to visualize how a business is managed and its impact of this activity on the company, in order to achieve its objectives and goals from the integral point of view.
Specific objectives
- Establish the nature of Financial Planning and Control, as well as its objectives, analyzing the mutual interrelationships between the investment and financing alternatives of the company, as well as the effects of Financial Planning and Control in the management, through control of income, cash flow and other financial statements Analyze and define what is the fundamental information that helps companies make decisions about appropriate economic and financial performance Study the financial strategy of the company and its connection with the strategies established in the integral plans of this; Analyze the comparisons of the subsequent behavior of the financial planning, with the objectives initially established in the financial plan,Using the main indicators that will form the basis for applying financial control techniques in the company.
A job to do
Financial Planning and Control shows techniques and tools to achieve efficient decision-making, which is used for business administration.
These tools can be multiple, for example (to place a simple one), if someone gets a flat tire (rubber) on the road, the person could have many tool options to try to change the tire (rubber), but always there will be the most suitable tool:
A job to do
Planning, control and management control
Planning «is to decide on rationality and intentionality against chance / uncertainty», it is «to make decisions in advance about future courses of action (Anticipate Vs React)», it can also be said that it is «the systematic development of programs oriented towards the fulfillment of previously defined objectives, through a process of analysis, evaluation and selection of the different opportunities that have been predicted ».
On the other hand, control is an activity that is part of the daily life of the human being, consciously or not. It is a function that is performed by previously established parameters, and the control system is the fruit of planning, therefore it points to the future. Control refers to the use of records and reports to compare what has been achieved with what has been programmed, therefore control consists of the set of actions carried out with the purpose that the activities are carried out in accordance with what was planned.
Management comprises the process of techniques, knowledge and resources, to carry out the solution of tasks efficiently, while business management is a term used to describe the set of techniques and experience of the organization, in processes such as planning, efficient management and control of operations and other activities of the organization.
It will always be necessary to bear in mind that management is action to carry out a purpose and that all action is generated by a plan.
Management Control is the activity in charge of monitoring the quality of performance, which should focus on the economic sphere, on the set of measures and on the indicators that should be drawn so that everyone can see a common image of efficiency. Management control is also "the intelligent and systematic intervention carried out by people on the set of decisions, actions and resources, which requires an entity to satisfy its purposes, with the intention of helping to make it successful"
To control management, it is first necessary to have a plan that generates management and after the plan is implemented and management is generated, that management can be controlled.
In financial planning and control, the same thing also happens, you have to have a financial plan that generates performance in this sense and after the management is generated, it can be controlled.
Financial planning concepts and objectives
Financial planning concepts
Financial planning is a tool or technique applied by the financial manager for the projected, estimated or future evaluation of a company.
Financial planning is the projection of sales, income and assets, based on alternative production and marketing strategies, as well as the determination of the resources that are needed to achieve those projections.
For financial planning, the company must define what it expects in the future and must take into account the factors that influence this projection, to establish a projected financial situation in the short or long term, in order to generate financial plans:
Objectives of financial planning
The fundamental objectives of financial planning are:
- Go beyond the operational and get closer to the strategic Help to identify the objectives of the company Establish the actions necessary for the company to achieve its financial objectives Quantify the different strategic alternatives, in order to evaluate the impacts they generate in the financial situation of the company. Promote the analysis of the differences between the objectives and the current financial condition of the company.
Concepts and objectives of financial control
Financial control concepts
Financial Control is the phase after the implementation of financial plans; the control deals with the feedback and adjustment process that is required, to guarantee adherence to the plans and the timely modification of them, due to unforeseen changes.
Objectives of financial control
- Diagnose: it is applied when there are areas with problems and preventive measures are used rather than correction. Communicate: it is carried out through information on the results of the various activities of the company. Motivate: of all the achievements of the company. Through control systems, all employees will have benefits.
The financial strategy of the company and its connection with the strategies established in the company's plans
The vision of one must give a sense of direction to the organization, but not in a utopian way, but its orientation must be strategic, aimed at decisions, plans, programs, projects and actions, and summarizes the values and aspirations of an organization in very generic terms, without making specific statements about the strategies used to make them come true. It must be a stimulus and a direction to follow for the organization's staff, therefore, realistic, comprehensive and detailed, consistent, and shared by all members of the organization.
For its part, the mission of an organization describes the basic purpose of its existence and the nature and line of its business. In addition, it also expresses the strategic objectives of the organization and the distinctive level of the organization with respect to the others.
There is a close interrelation between the vision, the mission and the plans and programs of the functional areas (production, human resources, administration and finance, marketing and sales, etc.), which establishes the connection of the company's financial strategy with the strategies established in the strategic plans of the company.
Financial planning, cash budgeting and proforma financial statements
2. General and specific objectives of financial planning and control
The financial planning process
The financial planning process exposes techniques and tools to achieve effective and timely decision-making, in order to visualize how a business is managed and its impact of this activity on the company, in order to achieve its objectives and goals from the point of view comprehensive view.
According to Weston and Brigham 1992 (Fundamentals of Financial Management), the financial planning process "involves the preparation of projections of sales, income and assets based on alternative production and marketing strategies, as well as the determination of resources to be used. they need to achieve these projections »
Brealey / Myers, 1992 (Principles of Corporate Finance) on financial planning, states that it is a “process of analysis of the mutual influences between investment and financing alternatives; projection of the future consequences of the present decisions, decision of the alternatives to adopt and finally comparison of the subsequent behavior with the objectives established in the financial plan ”.
In conclusion, the financial planning process is a technique that brings together a set of methods, instruments and objectives, in order to establish forecasts and economic and financial goals to be achieved in a company, taking into account the means that are available and those that are require to achieve it.
Key elements and stages in the financial planning process
The financial planning process has three key elements, which are listed below:
Key elements
- Cash planning: consists of preparing the cash budget. Without an adequate level of cash and despite the level of earnings, the company is exposed to failure. Pro forma financial statements: are useful not only for internal financial planning; Rather, they are part of the information required by lenders. Profit planning: this is obtained through pro forma financial statements, which show anticipated levels of income, assets, liabilities, and capital stock.
This process also features seven (7) fundamental stages that are self-explanatory:
- Formulation of objectives and sub-objectives. Study of the scenario, both internal and external, of the company in the planning horizon. Study of the options. Evaluation of said options, in view of the proposed objectives. Selection of the most suitable alternative. Formulation of plans. Budget formulation.
Financial forecast
This expression defines the action of issuing a statement about what is likely to happen in the future, in the field of finance, based on the analysis and other considerations.
There are two (2) characteristics or conditions inherent to forecasts:
- First: they always refer to events that will take place at a specific time in the future; therefore a change in that specific moment generally alters the forecast. Second: there is always a certain degree of uncertainty in the forecasts; if there were certainty about the circumstances that will exist at a given time, the preparation of a forecast would be trivial.
The basic financial statements
The financial statements represent the situation of a company and the results obtained, as a consequence of the administrative and financial transactions carried out in each fiscal year.
The basic financial statements are:
- The balance sheet The income statement (profit or loss statement) The cash flow statement (cash flow)
1.-Balance Sheet
It is the accounting document that informs on a given date the financial situation of the company, clearly presenting the value of its properties and rights, its obligations and its capital, valued and prepared in accordance with generally accepted accounting principles. Only real accounts appear and their values must correspond exactly to the adjusted balances of the ledger and subledgers.
2.-Income Statement (gains or losses)
It is a document where detailed and orderly information is provided on how the profit for the accounting year was obtained. It is made up of nominal, temporary or income accounts, that is, income, expenses and costs accounts.
Financial forecasts
It is a financial projection of the company, which is carried out with the intention of predicting what will happen in a future period. Financial forecasting is one of the most important responsibilities of the financial analyst, as he must anticipate what will happen to the company in the future. For this, it has elements such as the balance sheet, the financial statements and the income statement.
Classification of financial forecasts
The financial forecast focuses mainly on sales, as it is the basis for integrating a whole series of estimates, both static and dynamic. They are comparative tables in a given period in which the economic movement of a company is reflected.
Among the types of forecasts we can mention:
- Subjective or Opinion Methods, Historical Methods Causal Methods Percentage of Sales Method
- Subjective or opinion methods: are those methods based on the opinions of "specialists" in the area to be forecast, which can be internal or external to the company. The judgments of these specialists are more likely to be correct, and the information is obtained through surveys among consumers, opinions of sales agents and distributors, points of view of executives, tests in the market and the Delphi method.: they are based on past events, thereby minimizing the uneasiness related to taking into account only personal opinions. It is up to the one who makes the prognosis to interpret them. Causal methods: they are the forecasts based on the causes that determine the events. The most used causal methods are: correlation,econometrics and sensitivity analysis. Sales Percentage Method: starting from the fact that the volume of a company's sales is a good predictor of the investment required in assets, it is said that sales forecasts are the first stage that is must cover to forecast financial requirements.
Usefulness of financial forecasts
Proforma financial statements allow you to study the composition of the balance sheet and forecast income statement. With them, financial ratios can be calculated for the analysis of these statements; These ratios and the unchanged figures can be compared to actual, current and past financial statements. Using this information, the CFO can analyze both the direction of change in financial position and the company's performance in the past, present and future.
If the company is used to making exact estimates, preparing a cash budget, proforma statements, or both, it literally forces it to plan ahead and coordinate policy in the various areas of operation. The continuous review and analysis of these forecasts keep the company attentive to the changing conditions in its environment and in its internal operations. In addition, pro forma statements can be constructed even with items selected based on a scale of probable values rather than individual point estimates.
The sales forecast
It is an estimate of future sales (either in physical or monetary terms) of one or more products, for a given period of time. Performing this type of forecast allows you to prepare the sales budget and, based on this, obtain the other estimates. It is a key input to the short-term financial planning process and, therefore, to the cash budget. The marketing unit provides such data to the administrative management. Based on this forecast, the financial manager estimates the cash flows that would result from sales income, as well as expenditures related to production, inventory, and sales.
The sales forecast also allows to know the profits of a project (by subtracting future expenses from future sales), and, in this way, determine the viability of the project; which is why the sales forecast is usually one of the most important aspects of the company's plan.
It also determines the level of fixed assets required and the amount of financing necessary, if any, to support the forecast of the level of production and sales.
The sales forecast may be based on the analysis of external or internal information, or a combination of both.
External forecast: they are supported by the relationship established between the company's sales and certain key external economic indicators, such as the Gross Domestic Product (GDP), new housing projects or disposable personal income, etc.
Internal forecasts: they are based on the centralization or consensus of sales forecasts, this through the internal channels of the same company. To do this, the company's salespeople are asked to estimate the number of units of each type of product that they expect to sell.
Combined forecasts: companies generally use the combination of information from external and internal forecasts to prepare the final sales forecast. Internal information provides internal perspectives on sales expectations, while external information provides the means to make adjustments to these expectations, taking into account general economic factors.
Pro forma (projected) financial statements
The financial planning process focuses on the preparation of Pro Forma Statements, which are projected (or anticipated) financial statements, such as the Income Statement, Balance Sheet and Cash Budget. This requires a careful combination of procedures to account for income, costs, expenses, assets, liabilities, investments, capital stock, etc., resulting from the anticipated level of sales or operations of the company.
To prepare the projected (or expected) financial statements, accounting procedures and budgeting methods must be used, which together with the financial statements of subsequent years and considering the forecasts of sales, prices and income and other variables, these statements can be estimated.
Conclusions
Financial Planning involves a series of tools that will allow, based on the corresponding analysis and observations, not only to foresee the probable future of a company, but also to set the primary objectives and goals. There is no perfect plan, but a probable one and possible alternative scenarios can be carried out, which can be adjusted over time to try to obtain the best possible one.
For their part, financial statements are documents that provide information for decision-making in safeguarding the interests of the company, in this sense the precision and veracity of the information that these statements may contain is important. The proforma (projected) statements show the expected income and costs in the future, as well as the expected financial position, that is, assets, liabilities and stockholders' equity at the end of the forecast period, while the flow of funds tries to show the movement of cash.
Through the financial statements, the owners, shareholders or board of directors can obtain information about the financial situation of a company, as well as make use of certain financial forecasting tools, in order to study, analyze what has been done and what they expect or project perform in the future.
The capital structure establishes a combination of its own and third-party financial resources, as well as the financing of this capital in the short and long term, which is used to acquire the assets that the company needs to fulfill its objectives. On the other hand, the entrepreneur or administrator who will have the responsibility of making the financing decisions that the company needs, must take into account the types of financing that he considers necessary, and when choosing, he must do so by the one that represents the most economy for the company, this because there are many sources that the environment offers, both internal and external and the selection of the most appropriate must be based on the risk that the employer is willing to run.
Additionally, control is a very important element within any organization, since it is what allows evaluating the results and knowing if they are adequate to the plans and objectives to be achieved. Only through this function can errors be specified, those responsible are identified and the flaws corrected, so that the organization is on the right track.
The control must be carried out at any level of the organization, thus guaranteeing that the objectives are met. But it must be clarified that the control should not only be done at the end of the administrative process, but on the contrary, it must be carried out permanently, so that in this way, all deviations that are present. Some fundamental elements to carry out financial control in a business entity are based on the balance sheet, the income statement, the cash flow and the statement of origin and application of funds.
With the financial analysis, the reality of the situation and behavior of an entity is evaluated, beyond the purely accounting and financial laws, and this is relative, since there are no two companies that are the same either in activities or in size, each one has the characteristics that distinguish it and the positive in some may not be relatively important in others.
The use of accounting information for control and planning purposes is a highly necessary procedure for executives. This information generally shows the weaknesses that must be recognized in order to take corrective action, and the strong points that must be addressed in order to use them as facilitating forces in the leadership activity.
Although financial statements represent a record of the past, their study allows defining guidelines for future actions. It is undeniable that decision-making depends to a high degree on the possibility of certain future events occurring, which can be revealed through a correct interpretation of the financial statements provided by accounting.
The application of the procedure for the analysis demonstrates the importance of using the aforementioned tools for in-depth knowledge of the financial situation and subsequent decision-making, as well as the determination of costs is an important part to achieve success in any deal. With it, it is possible to know in time if the price at which what the company produces (good or service) is sold allows obtaining profits, after covering all costs and operating expenses of the company.
Bibliographic references
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