How to carry out financial planning and don´t die while trying to

In this new blog post we are going to talk about long-term financial planning. The reference below to a biblical quote does not imply that Holy Week has made us esoteric, mystical or more Christian: but we did find it interesting that such a concept was so clear since ancient times and we wanted to share it.

«Because which of you, wanting to build a tower, does not first sit down and calculate the costs, to see if he has what he needs to finish it?»

From your role as CFO, Finance Analyst or even Planning and Management Control Manager, it is very likely that you have already experienced the benefits of managing the company’s finances in an orderly manner. Systematically maintaining a long-term financial planning process is a valuable asset to any organization. It allows you, mainly, to align the operation and decisions based on the goals and objectives of the company.

From your role as CFO, Finance Analyst or even Planning and Management Control Manager, it is very likely that you have already experienced the benefits of managing the company’s finances in an orderly manner. Systematically maintaining a long-term financial planning process is a valuable asset to any organization. It allows you, mainly, to align the operation and decisions based on the goals and objectives of the company.

Along these lines we are going to analyze some elementary points on which long-term financial planning should be based. We will also reflect on the main obstacles that arise in its preparation and we will see how we can automate threads and tasks of this management.

Financial planning or financial plan?

Financial planning is a process that outputs the plan, with financial objectives of an organization and the approach to them. This plan of approach is expressed at two levels: at a high level (strategy) and at a low level (tactics). It is only through the effective combination of both tools that the company will be able to achieve its goals in the short, medium and long term.

A financial plan is nothing more than a statement of what is going to happen and how the business will respond to it. There is, therefore, a large number of variables that are unknown a priori, for which we must frame them within certain guidelines. This framework provided by the plan will contain the vicissitudes of business change or growth.

Two major aspects that go through a company’s financial plan are financing strategies and investment policies. To the extent that the guidelines for these two large variables are expressed within a long-term plan (generally we speak of long-term in a period of 2 to 5 years), the chances of success will be greater.

Benefits of systematizing the long-term financial planning process

Planning for the finances of a long-term business has many positive aspects. According to Bradford Jordan, Randolph Westerfield and Stephen Ross (Fundamentals of Corporate Finance, 2008), the main advantages it provides are:

• Helps avoid surprises. By considering the variables in an optimistic, a probable and a pessimistic scenario, having this plan documented will allow us to know what to do if things go very wrong and we have to make urgent decisions.
• It facilitates the links between the investment and spending proposals for the different operating activities of the company and the available financing options. In other words, each undertaking or development that the company proposes will be made visible in the financial plan and the source of its financing will be analyzed.
• It facilitates the reading and analysis of options. By comparing different scenarios, investment and financing options can be explored, as well as evaluating the impact of decisions on the company’s stakeholders.
• It allows to control the progress of the organization against the predefined goals. Not only in terms of profitability, but also in aspects such as market share, financial leverage measures, among others.

It is clear that having set the north of where we want our company’s finances to go and we have outlined an operating framework, in the future the entire company will be able to move with greater consistency. In this way it becomes easier to make business decisions, manage financial risks and optimize coordination between the areas of the company that interact with each other in new projects.

On the other hand, there is a risk that we over-plan and paralyze the operation at a certain point or, as usual, end up with an extremely rigid plan that later becomes an obstacle for the organization when it comes to adapting to big changes. .

Main obstacles to efficient long-term financial planning

In our surveys in Latin American SMEs, we have found that the main obstacles when carrying out an efficient long-term financial planning process are endogenous. For example, a recent in-house study of a thousand small and medium-sized companies in the region showed us that 43% of CEOs considered that they «depended more on the IT area.»

In turn, 78% confessed to believing that the quality of the data on which the analyzes were carried out was of low quality, while 58% described the process of collecting and integrating data from the business operation areas as a problem. .

One last fact that we share here about this sample is that 8 out of 10 respondents defined as «utopian» being able to make a long-term financial analysis based on complete information, which considers complex variables and varied scenarios.

In Latin America, a region marked by unstable economic contexts, the restriction of «playing» with different future scenarios is a fatal blow to the health of an SME. LATAM’s small and medium-sized businesses need to be able to set financial goals based on hard data, but with variable analysis options.

The main difficulty of our companies is then revealed: the lack of a tool that simplifies the different phases of the creation of a financial plan. By the latter we mean:

• the task of data collection (obstacle number one, because it involves different systems, different files and collaboration between areas),
• consolidation (grouping and cleaning of data) within a database,
• the time allocated to make or fix errors in graphics, presentations and insights that facilitate the decision maker’s reading and, finally,
• the presentation of these data in an entertaining way, friendly for users who are not experts in finance and who require speed of interpretation to be able to make decisions.

These phases of the long-term financial planning process were supported for a long time by large Excel spreadsheets, with complex interrelationships and, in the best of cases, sui generis customizations in Macro or Visual Basic functionality carried out by the IT department. or by super users in the finance area.

Those typical spreadsheets were passed from generation to generation, improving their usefulness over time and their adaptation to the business. However, the evolution of software has also transformed corporate finance.

At a time when more than half of the Latin American unicorns are fintech companies, LATAM SMEs must put on the table the option of hiring an ad hoc software tool for financial planning and management control of the company.

The aforementioned evolution has a name: FP&A, or Financial Planning and Analysis, in its Spanish translation. Join us to see how an FP&A solution can help you improve long-term financial planning processes.

Why should you hire FP&A software?

The adoption of FP&A software for financial planning processes optimizes the operation of the finance team and the work of the CFO or Management Control Planning Manager, depending on who is in charge of the work.

The main virtues of this type of computer system are:

• Improves the integration and communication of the areas during the data collection phase. As we have seen, this is often the most dramatic point for process improvement.
  An FP&A tool speeds up data recording in the different departments of the company. In this way, later collecting the information will be a dynamic step, much simpler and faster.
• Empower finance department by giving them tools to do data cleansing and modeling without relying on IT or anyone else.
• It facilitates the assembly of graphs, views, reports, panels and all kinds of visual tools so that an agile reading by who must analyze the information. In addition, the quality of these presentations is superior to those of non-specific tools such as Excel.
• Finally, and in this lies perhaps the most radical difference against Excel, it allows, stimulates and enhances the automation of tasks. You know more than anyone the large number of repetitive tasks that exist in our companies. Here the question is: in the context of long-term financial planning, what is the most valuable way in which the CFO or planning manager can spend their time? Doing the same report, modeling the same information, or collecting the same data month after month? Or keeping a fresh mind to sharpen your eyes on analysis, improve your recommendation, or simply spend time innovating the process to make it more efficient?

The conclusion on long-term financial planning

We hope that in this note we have provided you with a different vision of what long-term financial planning represents for an SME and how technology can obtain a substantial improvement in the process.

It’s true: implementing new software for a routine that has been around for a long time in the organization is not easy. In addition to the logical cost of licensing, there is a cost of data migration, cultural changes in staff, induction of staff, etc. At Plika we know this, but we are not going to stop saying that the return on investment in implementing a FP&A tool that automates tasks and oils financial management mechanisms will be more than beneficial for your company.