6 Reasons Why Business Financial Planning Matters
Dwight Eisenhower knew what he was talking about given that he oversaw planning and management for the largest amphibious military operation in history, which is D-Day. Just briefly, D-Day involved 6,000+ landing ships and other vessels carrying 176,000 troops onto five different beach landing areas (Utah, Omaha, Gold, Juno and Sword). This does not include the paratroopers dropped behind enemy lines nor the hundreds of planes required to drop them into position.
Obviously, D-Day required a monumental level of planning and coordination, but all successful military operations are contingent upon successful planning. Have you ever heard that quote that goes “amateurs talk tactics, professionals talk logistics” (I believe this quote is attributable to General Omar Bradley?) Just as the military is with logistics, successful businesses have a solid operational and financial planning foundation.
Given all the evidence regarding the importance of planning, I am always surprised to see how little thought and importance my clients place on financial planning for their businesses.
Fallacies For Not Taking the Time to Generate Financial Plans
- I do not want to be constrained by a financial plan —The purpose of financial planning is not to constrain businesses but to get everyone on the same page. Regardless, plans can be changed, that is why we have forecasts. No plan is cast in stone.
- It takes too long and is outdated once the ink dries — Unless the business is so dynamic or there is a detrimental level of customer concentration, then planning should be able to iterate and evolve right along with business circumstances.
- Everyone ignores it — This is an easy problem to solve. I tell business owners to link bonus compensation to achieving plan targets, which instantly resolves the issue.
- It is difficult to gain ownership — Typically apathy toward planning results when plans are generated in the C-Suite without any input from line management. If you want more ownership, then increase the number of participants in the planning process.
- Reporting actuals vs. plan is nearly impossible — Generating financial plans in Excel is generally not conducive to the integration of actual financial results, unless you have a really good Excel jockey on staff. There are a number of software tools that are actually better planning tools than a spreadsheet application and more readily facilitate the integration of actual results with plan data. More on this in a later post.
If you are experiencing any of these issues, the root cause maybe the importance placed on closing your books in a disciplined fashion. You should note that successful companies place a high importance on how many days it takes to close the books. Ford is able to close their books in 4 days. If a huge multi-national firm can close their books in 4 days, why cannot a midsize business close their books in three weeks? How about two weeks? Is there really any reason a midsize business cannot close their books in five days? Really there is no good reason.
Below are 6 reasons for creating financial plans, some of which are corollaries to the reasons why businesses do not create financial plans above:
- Just going through the rigor imposed as part of any planning process adds value, especially as business owners attempt to articulate exactly what differentiates their offering from the competition’s offering (aka value proposition). Also, time should be spent on determining business drivers and key performance indicators. All of which provide important feedback regarding the effectiveness of the company’s strategy.
- Creating a framework that generates valuable insight into both how well management understands its business model and generates feedback that can produce corrective actions.
- Facilitating alignment of employee goals and actions with business strategy.
- Providing evidence to external stakeholders of professional management capability.
- Generating data about operating efficiencies which helps management implement continuous process improvements. A focus on process improvement also fosters more thought around quality assurance, that can increase customer perceived value.
- Creating better cash flow management tools that reduce the chance of unexpectedly exceeding available cash on hand.
Just as Dwight Eisenhower harnessed the power of planning to successfully launch D-Day, you too can use financial planning to more effectively manage your business. If you would like to learn more about ways a CFO advisor can help your business intelligently grow profits, please use the links below to contact us via email or call (747) 224-1297.