5 Common Financial Planning Mistakes
What is financial planning in business and life? This is a way of thinking aimed at providing resources in time with everything necessary and desirable in order to move towards the goals as quickly as possible and develop. To do this, you need to combine finance with time management.
In this review, the CEO of Advance SOS and an accomplished financial specialist, Nick Wilson, was looking forward to sharing his best financial advice and knowledge on financial planning. “It may seem that you are just setting up payout schedules and controlling income schedules, but it’s not,” Nick stated. Nick Wilson is a founder of AdvanceSOS with more than seven years of experience in finance.
AdvanceSOS is a lending service that has an easy and fast application that helps people in emergency situations reach direct lenders and get 300 dollar loan at AdvanceSOS even with a bad credit score.
So after reading this review, you will have a complete idea of financial planning mistakes and how to avoid them.
Do you use financial modelling in order to foresee the necessary financial resources at least within six months, although this is not enough? Do you plan profit and its growth as a task that must be completed? And how do you connect the provision of financial resources for all projects in the company?
If you have a well-established management accounting system, then everything should be fine. If you also use financial modelling, then you should generally bathe in money living on the hog. Look at your “Profit and Loss Statement,” and you will see where you have overspent, where are unexpected incomes, what financial results did certain marketing or PR actions lead to. Find out if your income grew at the same time as an increase in the number of people in the state. At the same time, you will see how this affected the net profit.
Are you the owner who needs financial literacy that you implement in your personal life? Undoubtedly! Only having been in the role of a personal accountant, having studied and understood the basics of financial management as applied to your family, will you be able to demand from the accounting department the documents necessary for making strategic decisions. In addition, you will be able to notice discrepancies or ask the right questions about the situation.
Does an ordinary employee of your company need the ability to manage his personal finances? Of course! Only a financially literate employee will be able to support your strategic ideas and consider their time as an investment in future personal income. This will increase only if personal efficiency increases. “A financially illiterate person will never understand the idea of ”time = money,” and after all, it is key to any success, personal and team,” clearly stated Nick Wilson, CEO of AdvanceSOS.
Mistake 1. Approving a Deficit Budget
For example, the cash flow budget deficit, which is most often used among all types of financial budgets, is understood as the negative sum of all financial resources available to the company at the beginning of the forecast period and net cash flow (receipts – payments) for the same period. Perhaps this may seem implausible to some. But even in large companies with a long-standing financial planning system and several stages of approval, deficit budgets are sometimes approved. This happens due to the usual “human factor” and inattention (when in one of the forecast periods, a negative balance or cash balance “crawls out” that no one noticed).
Such a budget is not feasible and requires urgent adjustment using the following measures:
- Covering the deficit through internal borrowing (cash pooling or intra-group loans) or external financing (loans, lines of credit, etc.).
- Rescheduling receipts and payments so that the budget becomes deficit-free (by evaluating the possibility of reducing payments in a deficit period or shifting the payment schedule from a deficit period to a deficit-free period).
- Revision of the production or investment program: refusal of certain activities, acquisition of fixed assets, adjustment of the production schedule, repair work, etc.
- Revision of marketing and administrative expenses (reduction of planned employee bonuses, postponement or reduction of some advertising campaigns, etc.).
Mistake 2. The Concentration of Planning and Control of Its Execution in One Hand
In any company, even if its staff is very small, the processes of planning and controlling the execution of budgets must be clearly delineated. Unfortunately, it is not uncommon for a company to draw up and implement a plan-fact analysis of financial budgets by the same employees of the financial and economic block (budgeting specialists). This is fundamentally erroneous and violates two fundamental principles for building an effective financial planning and control system.
Mistake 3. Using Only One Form of Financial Budget
One of the common mistakes is the desire of the company’s management to over-complicate (in which it strives to reflect all possible forms of planning at once within one huge table) or to over-simplify when only one type of financial budget is used (for example, only a forecast balance or only cash flow plan). Other forms are simply ignored. The most optimal approach is to introduce three fairly standard and transparent forms or types of financial budgets that provide all the necessary information about the company’s development prospects in terms of:
- predicted financial result;
- financial flows;
- the financial position of the company.
Mistake 4. Incorrect Consolidation of Budgets
Very often, in the process of financial planning in a company, some of the important information about the planned financial flows may either purposefully or accidentally not be included in the overall budget. This may be due to the notorious “human factor” or because one of the functional managers decided not to include this information due to the desire to isolate financial flows for a project: for example, if it is not related to current activities companies. However, this approach is erroneous and can lead to an increase in financial risks for the company since such incomplete consolidation can lead to inefficient investment decisions and inconsistent planning of financial resources.
Mistake 5. Lack of a Clear Distribution of Roles and Data Entry Procedure
The area of responsibility of the financial director is to establish the procedure for collecting and consolidating data for the formation of a financial plan. However, very often, there is no such regulation in the company as a result of which the employees of the financial unit have to allocate areas of responsibility for filling in individual blocks of data and “hunt” for those employees who have the relevant information necessary to make a forecast (for example, from the marketing or logistics department).
In addition, if employees of related departments do not have direct responsibility for the formation of a forecast for financial flows, they will not be interested in taking on an additional burden. Therefore, the CFO should establish such responsibility for all performers whose participation in the collection of data for the formation of the budget is necessary.
In addition, the distribution of roles alone is not enough for the system’s effective operation. It is also important to determine how and in what form employees will fill out budget forms. Often, all employees are provided with a single form of a plan that is quite difficult for them to understand. Therefore, implementers should be sent only the part of the budget form for which they are responsible, with clear instructions for completing it. Thus, unnecessary information does not distract or interfere with their task.
About the Author
Amanda Girard is AdvanceSOS’ financial copywriter. She writes the most informative, educational, and exciting finance articles for the official website. Amanda graduated with a Master’s in finance from the University of Oklahoma. We are proud to have her on board.
