What is financial planning?
Strategic planning informs financial planning; strategic is the "what" and "why," while financial planning concerns the "how" and "when." Financial planning is built around financial projections. A company's data and financial analysts look at a number of things to determine the financial outlook of the present and future of both the economy and outside factors including:
- Trends - An electronics manufacturer, for example, might look at sales trends for plasma TVs and LCD TVs. If plasma TV sales are dipping, and LCD TV sales are rising, then the manufacturer would allocate more money to making and marketing LCD TVs.
- The competition - It's important to look at how the "other guy" is navigating the landscape. A soft drink company would look at how its primary rival is performing in emerging overseas markets, and allocate accordingly, or if the rival's new salmon-flavored drink is selling well, then it might decide to spend some money developing a new, weird flavor of its own.
- Profit margins - A bakery would examine how the cost of raw goods like sugar and wheat are influencing its bottom line. Will wheat cost more in six months due to a drought in a wheat-producing state, thus driving up the price, and lowering the bakery's profit margins?
- Expenses - A business is always acutely aware of its overhead and expenses, but in financial planning, it examines overhead and expenses intricately and makes projections on how they may fluctuate due to outside forces, or how they may rise and fall due to internal decisions.
- Economic indicators - A business does not exist in a vacuum -- it's part of an economy, which involves unemployment levels, disposable income levels and the changing (or non-changing) government regulation climate.
Financial planning is more precise than strategic planning. Rather than dealing with setting idealized goals, financial planning is about manipulating real-world factors -- specifically, money and human resources -- to make the strategic plan tenable in a measurable period. The strategic plan may call for a lofty goal to happen in 10 years, but financial planning may dictate that it is more likely to happen in nine years, 11 years, or even 50 years (which would indicate a woefully inept strategic plan). As such, financial planning is long-term oriented. You could say that strategic planning is about determining a destination and financial planning is about making sure the destination is reached.
For financial planning to work effectively and assuredly, it has to be integrated with strategic planning early and thoroughly.