Methods of Devising Financial Plans

• There are many theories, checklists, and approaches of creating business financial plans. Most would agree, however, there are two primary methods that most businesses, large and small, consider before putting pencil to paper: Top down or bottom up.
  
  Designing a financial plan from the top down typically involves considering the relative value of your products or services in relation to gross sales. After making some assumptions of gross income for the coming period, the company makes projections regarding the associated operating expenses that will occur.
  
  Bottom up plans, often called zero based budgeting, start at the end by estimating or projecting the net income your company would like. Building the remainder of the financial plan involves estimating the expenses and sales figures needed to achieve this result.
  
  

Identify the Income and Expense Components

• Identify Income & Expense Components
  
  Regardless of the approach to build the plan, companies must identify the components that will be included in their financial plan. These can vary widely depending on the industry in which a company operates and market conditions. Income components can vary based on new or discontinued products or market fluctuations. Expense categories typically include those that are staples for all companies (compensation, cost of goods sold, utilities and other standard categories) and, possibly, others specific to the company.
  
  

Perform a Market Analysis for the Coming Period

• A market analysis should include the local, national and international current and projected state of supply and demand for products the company offers. Understanding the current and near future market is critical for building the income side of the financial plan. Whether the contemporary market is wonderful or marginal, companies need to understand conditions and project accordingly.
  
  

Analyze Competitive Factors

• Analyze Competition
  
  Unless a company has a true monopoly, which rarely if ever exists, a strong understanding and appreciation for the competition is critical to devising a usable financial plan. Competition influences a variety of expense issues, including sales, inventory, advertising, marketing and other categories. Decide the level of funding the business needs to successfully challenge the projected competition.
  
  

Project Estimated Investment Levels

• Examine projected investment issues. Whether you need research and development (R&D) dollars, new or refurbished brick and mortar locations, or are ready to upgrade computers, software, networks, or other necessary equipment, the cost of these investments must be integrated into the financial plan.
  
  

Compile Data and Create the Financial Plan

• Plan for Success
  
  If the company is building its financial plan from the bottom up, analyze how effective the projected income, expenses and investment dollars achieve their goal. Should calculations create an undesired result, plan components need to be re-examined and revised to improve the model. Even if the financial plan is using a top down method, compiling the income, expense and investment projections will display a predicted result that may or may not be acceptable. Once again, all components should be re-examined to verify their amounts if a better bottom line is desired. Make changes where possible and reasonable. The finished product should be a financial plan that a business can use as a road map for operations.