“In planning for battle, I have found that plans are useless, but planning is indispensible.”   --Dwight Eisenhower

Planning is imperative for any situation, but financial planning requires a certain fluidity and finesse. Without solid preparation, lack of direction will cause a manageable situation to devolve into loss and crisis. What good planning consists of is simple: lucid communication, peer engagement and consistent methodology.

Successful plans must communicate clearly and concisely to investors and management, while simultaneously acting as a check on instinct and guesswork. A good plan must earn the buy-in of management by engaging them in the initial planning process, spurring debate and questions about reasonable resources. A strong plan includes a clear system of accountability and an expenditure approval process that is supported by the CEO.

Process Overview, Buy-in, and Accountability
For initial preparation, creating a reasonable timeline for the planning process (including revisions and approvals) is vital. When this timeline is complete, the CEO needs to make people strictly adhere to what is agreed upon. After doing this, schedule time for a full review of all areas of the budget and financial forecast by senior management. In this discussion, individual salaries can be excluded, and executives need to make the case for their resource needs. For this purpose, an offsite meeting can be useful.

Common Mistakes:
A common scenario: the CEO verbally approves expenditures that are outside the plan. Executives use such approval to make an end-run around the plan. Plans may change, but expenditures outside the plan have to be looked at in the context of the whole plan. Following the process is crucial.
Another simple mistake is delivering seat-of-the-pants projections in any context regardless of the assurances by the recipient. Today they understand you are “just ball parking” or looking at a “what-if” scenario. Six months from now they’ll think your projections were actual promises to deliver those numbers. CEOs get bullied by the Board, and CFOs get bullied by the CEO. It is the job of the CFO to refuse to present unsubstantiated numbers.

Get the Big Picture
To obtain a reasonable idea of the “big picture” one must orient themselves and their team. You must bring the management team’s expertise to the forefront in considering industry outlook (economics, technological and legal or regulatory issues). Questions should be asked: What does your customer base or potential customer base look like? What will they be buying and when?

One should take a look at competition, current pricing, and expected forces for price degradation and/or price support. Gross margins are a strong indicator of where to invest in the business and should be analyzed. Understanding of how costs vary with revenues and which expenses will be cut if revenues do not materialize according to plan is critical. One should benchmark the plan against public market companies with a similar business model. Constantly looking at ratios, margins, and financial statement presentation will aid in attaining the larger objective behind the plan.

Common Mistakes:
Both cash flows and operating budgets must be fully understood in an integrated model. Forecasting P&L without supporting balance sheet and cash flow statement is a blunder that should not be made.

When the Big Picture Changes – Putting the Process to Work
Always leverage your work. This includes instituting a monthly process to update the forecast and review the prior month’s budget-to-actual with each executive. Incorporate key cost and revenue drivers into a management dashboard that is reviewed weekly.

Common Mistakes:
Do not delay the delivery of bad news. Always think carefully about informing the Board early when unfavorable variances to the plan seem likely to emerge. This builds trust and credibility, and allows the potential benefit of ideas or assistance from Board members. Do not pin your hopes on a breakout Q4, or one or two big deals.

TacticaI
Constantly plan for unknowns and contingencies. One should always have a Plan B and make sure that the backup plan is consistent with the chart of accounts to allow budget-to-actual comparisons. To ensure good housekeeping, always keep a file copy of each final presentation along with copies of all supporting detail for future reference. Knowing what who said to whom, when and why is key. Finally, consider outsourcing non-key revenue or cost driver positions.

Always consider the audience. Tailor your presentation accordingly: avoid acronyms and jargon, state key assumptions clearly and use charts and visuals whenever possible. When it comes to divulging pertinent information, share the relevant portion of the budget with all managers to the lowest accountability level. Make sure the sum of the sales force targets exceed the plan. Institute a monthly meeting with each executive to review the forecast and the prior month’s budget-to-actual results. Obtain explanations you will need for your variance analysis for the CEO and Board when called on to summarize the findings.

After doing this, ensure the accounting side of the house and the planning side work in concert. By seeing the forecast, accounting can accrue and plan cash better. Financial planning and analysis staff will need accounting’s help to do a proper variance analysis and to forecast accruals and cash balances. Together, they should produce the budget-to-actual reports that the executives review each month with the CFO or his/her lieutenant.

For the purchasing process, always have a handle on the PO process. Also, understand where your forecasting was weak and why, and take the time to apply a little historical analysis to improve the next forecast. This can be as simple as looking at lead times, new customer set-up times, or volume estimates.

Common Mistakes:
Do not present an overly conservative plan to investors-always recognize the 50% cuts they will make. Conversely, presenting explosive revenue growth at some unrealistically near term point in the future is unprofessional and impractical.

If it is February and the sales force does not have a comp plan, think on your feet. Do not roll forward unused funds without questioning, take a step back and look at what would be the appropriate expenditure of the funds. Always be able to answer the question, “How much do I have left in x account?” Do not finance blindly and accept sales forecasts from the sales team without applying historical analysis to determine their likely accuracy. “It was the VP of Sales' responsibility” is a good answer for the Board if you want to find yourself looking for a new job. Lastly, budget for promotions, merit increases, and bonuses.

Conclusion
Financial planning and forecasting is one of the most crucial tasks for a management team to ensure transparency and the long term viability of the company. Put good habits into place early and often and your company will run like a well-oiled machine.