Financial planning at its core is all about balance: financial planners manipulate various factors to ensure a business has enough capital to cover debts and expenses. For a company to operate, it must have working capital to keep machines running, raw materials stocked, and product reaching the shelves. As Houston Chronicle writer Julie Davoren points out, "The movement in working capital sometimes creates large voids or deficits of cash that threaten a business." A company must deal with these threats in order to function.
Although strategies for capital management are interwoven and much more amorphous, financial management processes fall into three broad categories: short-term financial planning, medium-term financial planning, and long-term financial planning.
Short-Term Financial Planning
Short-term financial planning is most concerned with the present. These "plans have a higher degree of certainty compared to long-term plans," and tend to be adaptable to a company's current situation. Further, "elements of working capital have the largest impact on their short-term cash flows" (Davoren). Some examples of working capital elements are raw materials, completed products, cash on hand, debtors and creditors.
For effective short-term financial planning, capital managers must routinely monitor such elements and forecast possible future scenarios for the company. Given that short-term planning usually deals with current-year scenarios, forecasting tends to be less speculative and more accurate.
Medium-Term Financial Planning
Medium-term planning deals with midrange plans -- those the company may implement after a year, but earlier than long-term financial planning. In the Houston Chronicle's small-business section, writer Bert Markgraf views medium-term financial planning as preventive maintenance: "Medium-term planning implements policies and procedures to ensure that short-term problems don't recur." If measures introduced in short-term financial planning fix the corresponding problems, the company may use the same measures for medium-term plans to ensure its business success.
Long-Term Financial Planning
The Government Finance Officers Association (GFOA) views long-term financial planning for businesses as inclusive of the same skills needed for short-term planning: "Long-term financial planning combines financial forecasting with strategizing." The association recommends paying attention to a number of elements to ensure the efficacy of long-term financial planning as well.
The GFOA sees long-term financial planning as consisting of five elements: Time, Scope, Frequency, Content and Visibility. To qualify as long-term financial planning, the GFOA recommends at least a five- to ten-year plan. Although the GFOA deals primarily with governments, its advice applies equally to businesses, too.
The scope of long-term financial planning is also an important factor. Capital managers need to look at not only a span of time, but at the scope of operations as well. What will a particular financial plan encompass? Will the analysis include all assets and liabilities? Capital managers address these concerns on a daily basis and frequently revisit earlier decisions.
Frequency refers to how often the company will revisit long-term financial planning. Because long-term planning looks to the future, the circumstances that informed the plan may change. A sound long-term plan will undergo periodic revisions to accommodate these changes.
Given that the GFOA deals with elected officials, transparency is an obvious concern in long-term financial planning. Businesses should be concerned with this visibility as well. While not all information within a privately held corporation can be shared freely, employees should understand its long-term financial planning goals. This understanding facilitates the coordination of all departments toward common goals.
Long-term financial planning relies on many working parts, and these parts function together in intricate ways. Capital managers must learn the complex workings of markets and socioeconomic factors that contribute to volatility in business. Because of the technical nature of these processes, many capital managers choose to pursue graduate education, and some of them find an online MBA program to be the best option for gaining this education.
An online MBA program enables working students to pursue a degree while immediately applying the knowledge acquired to their professions. Given the number of flexible options for those pursuing graduate instruction in financial management, many are choosing to bolster their resumes in this way.
Learn more about the UTPB online MBA program with a concentration in Finance.
Sources:Government Finance Officers Association: Long-Term Financial Planning
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