Corporate financial planning involves creating a standard budget, defining expected rates of return, setting short-term and long-term funding goals, and forecasting costs or sales revenues. Business or financial analysts usually handle these tasks.
Corporate financial planning is a comprehensive business process that defines a company’s financial goals and objectives. Business owners and managers often boil this process down to a few essential factors, including creating a standard budget for all departments, defining expected rates of return for each type of business investment, defining short-term and long-term and forecasting costs or sales revenues for business activities. These activities don’t always involve accountants; business or financial analysts usually handle these tasks.
A standard budget consists of planned expenses for all departments in a company. Each year, owners, directors and executive managers prepare the budget based on past accounting information. Increases or decreases will be discussed at this time to determine how much the company should plan to spend on operations. The default budget helps companies track variances and find out why they occur. Variations are not bad if the reason for the higher spending comes from unplanned demand for goods or services.
Expected rates of return are a corporate finance tool that help define certain expectations in corporate financial planning. This value is also the return on investment for a project. For example, the company might want all business opportunities to have a 15% rate of return. A basic measure for this is the revenue generated divided by the total investment cost. The classic formula for return on investment is the return on investment minus the initial cost divided by the initial cost. Projects below the 15% threshold are generally ignored in favor of other options.
Corporate financial planning typically requires companies to set short-term and long-term funding goals. Short-term financing involves the use or opportunity to use lines of credit or other loans as needed. This helps prevent cash flow shortfalls from an inability to collect accounts receivable or sell inventory to generate cash. Long-term financing options help companies have options for business expansion, equipment financing or other loans available through prior relationships with banks, lenders or investors.
Economic forecasting allows a company to determine which internal or external factors may create business risk. Corporate financial planning focuses on mitigating internal factors such as poor production methods, waste of resources, or inability to acquire new resources from suppliers or vendors. External factors are the taxes or fees associated with entering new markets or releasing new products. Business and financial analysts will look for opportunities that result in the highest return and lowest risk.
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