Regular “fire-fighting interventions” while seeking funding, or the importance of financial management planning

Author: Андрей Бойко

“Only having a plan, you can expect super planned surprises”

Have you ever heard such phrases from financial managers:

  • to complete the project, we need to find quickly 3 million dollars;
  • proceeds from the sales sharply decreased and only 40% of the company’s administrative expenses are covered;
  • last year, we paid the owner $ 2 million dividends and now we take a loan from bank to pay off the contractors and to complete the project building?

What do they have in common? Thanks to the figures, they provide assessment of the scope of “trouble” for companies. After all, the figures having great power, which can both provide opportunities and display the prospect of falling even the major players of its market segment.

“Mess” could be avoided if the “surprise” element is eliminated, which are usually solved through a long-known but still effective financial planning tool.

Its main goal is balancing between the availability of financial resources and the need for them, the selection of optimal sources of financing and balanced investment in the classical criterion of “profitability-risk.”

Often the decision to start a new project and to develop a separate business line is taken by the owner of the company independently and the task of financial manager is to ensure the availability of financial resources.

In this case, there is no sense to deny the correctness of the problem statement by the shareholder. But did the financial manager do everything to facilitate their lives? After all, the approach ” let’s run we will figure it out” – is fraught with all the same “trouble” at any stage of the project.

“Which positions do you have the most critical deviations in the business plan?” You often hear the answer – “it’s hard to say, cause we did not draw up a business plan”.

The financial function is not just the ability to find money quickly for the prompt payment, but its system which allows you to plan and manage the company’s finances.

The process of financial planning should be permanent. And it does not matter, it’s about the company’s strategy, the budget of the unit or the business plan of a separate investment project.

Strategic planning reflects the company’s targets in 3-5 years, and is also the basis for operational financial plans (budgets) compiling, which are 1 year limited, but more detailed and specified in calculations.

A separate section for planning is business plan development (feasibility study) for project investment (new product or service launch, an advertising campaign, opening of a new business line). It allows you to assess the economic feasibility of the project, the level of profitability and payback period, and also forms the basis for managing future deviations.

Schematically, the financial planning process is illustrated in the figure below:

Can we do without planning? – Of course, and so many live. However, the company must be able to manage or assume the following risks:

  • impossibility of timely pay off their obligations (sudden “cash gaps”);
  • impossibility to promptly optimize its activity in the case of a significant deterioration of market conjecture, the emergence of crisis in the country’s economy;
  • impossibility of the new investment projects implementation without prejudice to the main activity.

Of course, planning itself is not able to protect the company from a crisis in the economy, unscrupulous counterparties or a natural disaster. But it is planning that allows you to think carefully about possible risks, taking into account negative factors of influence, “not to lose” important items of incomes and expenses. And this is a significant part of success!

This way, the planning process determines the periods and the amount of “cash gaps” by the financial manager! It means, it can determine in advance the ways and tools of their neutralization.

You must agree that “fire-fighting interventions” is much easier when you know in advance the time of its occurrence and the “fire object” itself!

Therefore, our advice – start planning your activities!

Андрей Бойко

Project Manager

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