Financial plan

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In general usage, a financial plan is a comprehensive evaluation of an individual's current pay and future financial state by using current known variables to predict future income, asset values and withdrawal plans. [1] This often includes a budget which organizes an individual's finances and sometimes includes a series of steps or specific goals for spending and saving in the future. This plan allocates future income to various types of expenses, such as rent or utilities, and also reserves some income for short-term and long-term savings. A financial plan is sometimes referred to as an investment plan, but in personal finance, a financial plan can focus on other specific areas such as risk management, estates, college, or retirement.

Contents

Context of business

In business, "financial forecast" or "financial plan" can also refer to an projection across a time horizon, typically an annual one, of income and expenses for a company, division, or department; [2] see Budget § Corporate budget. More specifically, a financial plan can also refer to the three primary financial statements (balance sheet, income statement, and cash flow statement) created within a business plan. A financial plan can also be an estimation of cash needs and a decision on how to raise the cash, such as through borrowing or issuing additional shares in a company. [3]

Note that the financial plan may then contain prospective financial statements, which are similar, but different, to those of a budget. Financial plans are the entire financial accounting overview of a company. Complete financial plans contain all periods and transaction types. It's a combination of the financial statements which independently only reflect a past, present, or future state of the company. Financial plans are the collection of the historical, present, and future financial statements; for example, a (historical & present) costly expense from an operational issue is normally presented prior to the issuance of the prospective financial statements which propose a solution to said operational issue.

The confusion surrounding the term "financial plans" might stem from the fact that there are many types of financial statement reports. Individually, financial statements show either the past, present, or future financial results. More specifically, financial statements also only reflect the specific categories which are relevant. For instance, investing activities are not adequately displayed in a balance sheet. A financial plan is a combination of the individual financial statements and reflect all categories of transactions (operations & expenses & investing) over time. [4]

Some period-specific financial statement examples include pro forma statements (historical period) and prospective statements (current and future period). Compilations are a type of service which involves "presenting, in the form of financial statements, information that is the representation of management". [5] There are two types of "prospective financial statements": financial forecasts & financial projections and both relate to the current/future time period. Prospective financial statements are a time period-type of financial statement which may reflect the current/future financial status of a company using three main reports/financial statements: cash flow statement, income statement, and balance sheet. "Prospective financial statements are of two types- forecasts and projections. Forecasts are based on management's expected financial position, results of operations, and cash flows." [6] Pro Forma statements take previously recorded results, the historical financial data, and present a "what-if": "what-if" a transaction had happened sooner. [7]

While the common usage of the term "financial plan" often refers to a formal and defined series of steps or goals, there is some technical confusion about what the term "financial plan" actually means in the industry. For example, one of the industry's leading professional organizations, the Certified Financial Planner Board of Standards, lacks any definition for the term "financial plan" in its Standards of Professional Conduct publication. This publication outlines the professional financial planner's job, and explains the process of financial planning, but the term "financial plan" never appears in the publication's text. [8]

The accounting and finance industries have distinct responsibilities and roles. When the products of their work are combined, it produces a complete picture, a financial plan. A financial analyst studies the data and facts (regulations/standards), which are processed, recorded, and presented by accountants. Normally, finance personnel study the data results - meaning what has happened or what might happen - and propose a solution to an inefficiency. Investors and financial institutions must see both the issue and the solution to make an informed decision. Accountants and financial planners are both involved with presenting issues and resolving inefficiencies, so together, the results and explanation are provided in a financial plan.

Issues of definition

Textbooks used in universities offering financial planning-related courses also generally do not define the term 'financial plan'. For example, Sid Mittra, Anandi P. Sahu, and Robert A Crane, authors of Practicing Financial Planning for Professionals [9] do not define what a financial plan is, but merely defer to the Certified Financial Planner Board of Standards' definition of 'financial planning'.

Planning

When drafting a financial plan, the company should establish the planning horizon, [10] which is the time period of the plan, whether it be on a short-term (usually 12 months) or long-term (two to five years) basis. Also, the individual projects and investment proposals of each operational unit within the company should be totaled and treated as one large project. This process is called aggregation. [11] [12]

See also

Related Research Articles

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Cash flow, in general, refers to payments made into or out of a business, project, or financial product. It can also refer more specifically to a real or virtual movement of money.

<span class="mw-page-title-main">International Financial Reporting Standards</span> Technical standard

International Financial Reporting Standards, commonly called IFRS, are accounting standards issued by the IFRS Foundation and the International Accounting Standards Board (IASB). They constitute a standardised way of describing the company's financial performance and position so that company financial statements are understandable and comparable across international boundaries. They are particularly relevant for companies with shares or securities publicly listed.

In financial accounting, a balance sheet is a summary of the financial balances of an individual or organization, whether it be a sole proprietorship, a business partnership, a corporation, private limited company or other organization such as government or not-for-profit entity. Assets, liabilities and ownership equity are listed as of a specific date, such as the end of its financial year. A balance sheet is often described as a "snapshot of a company's financial condition". It is the summary of each and every financial statement of an organization.

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<span class="mw-page-title-main">Income statement</span> Type of financial statement

An income statement or profit and loss account is one of the financial statements of a company and shows the company's revenues and expenses during a particular period.

<span class="mw-page-title-main">Budget</span> Balance sheet or statement of estimated receipts and expenditures

A budget is a calculation plan, usually but not always financial, for a defined period, often one year or a month. A budget may include anticipated sales volumes and revenues, resource quantities including time, costs and expenses, environmental impacts such as greenhouse gas emissions, other impacts, assets, liabilities and cash flows. Companies, governments, families, and other organizations use budgets to express strategic plans of activities in measurable terms.

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The following outline is provided as an overview of and topical guide to finance:

<span class="mw-page-title-main">Cash flow forecasting</span>

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<span class="mw-page-title-main">Strategic financial management</span> Study of finance of an enterprise

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<span class="mw-page-title-main">Financial ratio</span> Numerical value to determine the financial condition of a company

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<span class="mw-page-title-main">Corporate finance</span> Framework for corporate funding, capital structure, and investments

Corporate finance is the area of finance that deals with the sources of funding, and the capital structure of businesses, the actions that managers take to increase the value of the firm to the shareholders, and the tools and analysis used to allocate financial resources. The primary goal of corporate finance is to maximize or increase shareholder value.

Flux Analysis is an accounting process used to identify and explain changes in financial statements over a specific period. It involves comparing financial data—such as account balances or line items—from one period to another, highlighting significant variances, and determining the reasons behind those changes. This method helps organizations understand the financial trends, operational impacts, and potential anomalies in their accounts, enabling better decision-making and financial planning.

References

  1. ↑ "Financial Plan Definition". A comprehensive evaluation of an investor's current and future financial state by using currently known variables to predict future cash flows, asset values and withdrawal plans.
  2. ↑ Meigs, Walter B. and Robert F. Financial Accounting, fourth ed. (McGraw-Hill Book Company, 1970) pp. 187-188.
  3. ↑ Barron's Finance, fourth ed, 2000, p.578.
  4. ↑ [Ronette Santos, Financial Advisor - Reno, NV 89501 | Northwestern Mutual Financial Advisor]
  5. ↑ "Auditing A Business Risk Approach", 8ed, 2010
  6. ↑ "Auditing A Business Risk Approach", 8ed, 2010, p.892.
  7. ↑ "Auditing A Business Risk Approach", 8ed, 2010
  8. ↑ "Standards Of Professional Conduct". Certified Financial Planner Board of Standards. Rev. January 2010. Retrieved 2011-09-24.
  9. ↑ Sid Mittra, Anandi P. Sahu, Robert A Crane. "Practicing Financial Planning for Professionals" (Practitioners' Edition), 10th Edition. (Rochester Hills Publishing, Inc., 2007) sec. 1-3.
  10. ↑ Asset Insights. "Planning Horizon". Asset Insights, 2000-2013. Retrieved 3 March 2014.
  11. ↑ Jordan, Stephen A. Ross, Randolph W. Westerfield, Bradford D. (2010). Fundamentals of corporate finance (9th ed., Standard ed.). Boston: McGraw-Hill Irwin. p. 89. ISBN   9780073382395.{{cite book}}: CS1 maint: multiple names: authors list (link)
  12. ↑ Financial Planning Guide
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