Term
Financial plan
An integrated plan of sales, costs, investment, financing and cash flows for one or more years, often with a projected balance sheet. It shows how much money the company will need and when, and is the basis for banks and investors.
Updated
What it means
A financial plan is an integrated plan of sales, costs, investment, financing and cash flows for one or more years, often with a projected balance sheet. It shows how much money the company will need and when, and underpins decisions by management, banks and investors.
It forms the financial part of the business plan and consists of three linked statements: a projected profit and loss account, balance sheet and cash flow. The link matters because profit does not mean cash, and a company can be profitable yet run out of money.
Unlike the annual budget, which sets binding limits for individual items, the financial plan is strategic and looks further ahead. During the year it is complemented by a forecast that continually updates expectations in line with actual results.
How it works in practice
The plan starts with assumptions: sales growth, prices, margin, wages, payment terms for receivables and payables, investment and financing conditions. Assumptions should rest on historical figures or market research rather than wishes, and be recorded so they can later be compared with reality.
When assessing a loan application, the bank checks whether the planned cash flow covers repayments even in a worse scenario. It therefore helps to prepare base, optimistic and pessimistic versions and show how the company would react if sales were delayed.
For investment decisions, the financial plan links to capital budgeting, which assesses the return on individual projects. In a crisis or when liquidity is tight, a more detailed 13-week cash flow forecast is used for the short term.
What to watch out for
The most common mistake is underestimating working capital needs. Growing sales mean more inventory and receivables that must be financed before customers pay, so a fast-growing company can run short of cash despite good results.
A plan that is filed away after it is drawn up has no value. It pays to compare it with actual results monthly, analyse variances and adjust assumptions, so problems surface in time and the company can change costs or financing.
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