BUSINESS PLANNING: THE FINANCIAL MANAGER'S ROLE

Article by  Morningside Chartered Accountant: David Roberts

A business plan serves as a guide for management to run a company. In the words of Benjamin Franklin one of the founding fathers of the United States “By failing to prepare you are preparing to fail.”

A business plan is the instrument through which management takes a company from where it is to where it wants to go.It goes without saying that to achieve this end management needs to understand where they are and then decide where they want to go and when.

A SWOT analysis forms an early part of most plans so that management can evaluate where the company is falling short, where it is excelling, the possible business threats it’s facing and the possible opportunities that are available to it.

The next phase revolves around deciding what you would like your company to achieve in the short, medium and long term. Central to this process is defining your company’s vision which expresses the company’s main ideas and values and which needs to be understood and accepted by all. Thereafter, in the light of the knowledge that has been gathered, measurable objectives need to be formulated and strategies, tactics and time scales to achieve these goals agreed upon.

The final phase of the plan involves expressing it in financial terms. An understanding of the company’s market place including its products or services, its customers and its competitors is obviously critical to the preparation of a successful plan.

Not surprisingly most company business plans, while seeking to involve all departments and facets of the business, have a strong marketing and sales bias. Especially in the case of SME’s the financial manager often only gets involved at the tail end of the plan when he is called upon to put the “numbers” together. However, the financial management role should in fact go to the core of most business plans and, in the case of smaller and medium sized companies, the financial management input is often not given sufficient weight within the planning mix.

So what role should the financial manager play?

1. An important part of any business plan is the allocation of resources. Thorough planning allows financial resources to be used wisely. The end goal of most plans is to maximise returns on capital invested either in the short or long term. No company has unlimited resources in terms of finance, facilities or human capital so it is important to decide which opportunities and or projects to exploit. Productivity needs to be maximised and resources not wasted. The financial manager should have the expertise to gauge the likely effect of different planned decisions on the return on capital employed.


2. “What if” scenarios thus become an important part of the preparation of many plans and the financial manager should be able to express these in financial terms (likely capital required, likely returns etc.). He should also assist in envisioning and evaluating the possible risk factors associated with different scenarios (in this case the famous saying “it’s not what we can make but rather what can we lose” applies.)


3. As previously mentioned every plan culminates in a financial forecast which is normally the financial manager’s role to prepare. The forecast should include a monthly income statement, balance sheet and cash flow statement. Capital expenditure needs to be evaluated prior to inclusion and working capital levels carefully monitored and calculated. Receivables are normally under the direct control of the financial manager but inventory levels may need to be interrogated with other departments. It is the financial manager’s role to keep working capital levels to a minimum without interfering with business efficiency as outlined in the plan. The financial forecast forms the basis for financial reporting during the plan year.


4. Any good business plan will include expected outcomes that must be measurable. In the words of Tom Peters, the famous business practices writer: “What gets measured gets done.” As part of the plan, numbers should have been assigned to the desired outcomes and timelines should have been set. These goals normally involve various departments within the business and could relate to sales targets, promotional activities, distribution plans, production capacity changes, human resource plans etc. as well as including the abovementioned financial outcomes. It is important that the plan includes accountability for the achievement of all goals which should be allocated to individuals within departments. The financial manager is responsible for accurate and timeous financial reporting and he should be proactive in analysing and investigating variances and discrepancies that arise which he should report on at the earliest opportunity. However, in small and many medium sized companies, the financial manager may be responsible for all the company’s information systems in which case he should be active in ensuring that the systems have the capability to produce the outcome information required by other departments.


5. It is the financial manager’s role to ensure that there are adequate funds to meet the cash flow needs of the plan. He may need to investigate financing options before the plan is finalised. He may also look at alternatives and make recommendations on finance options for the purchase of various assets, facilities etc. It is a well-known fact that it often costs more to achieve business objectives than was initially planned so the financial manager needs to have contingency plans in place in case more money than planned is needed.


6. Before the plan is finalised the financial manager should consider whether or not there are any taxation benefits to be derived by handling any aspects differently.

In conclusion financial managers should make the effort and take the time to understand the business they’re involved in and be active in every stage of the preparation of the plan so that he or she can make useful and valuable inputs throughout the planning process.

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