Nearly all business activity which takes place has been planned in one manner or another. Financial activity is clearly no exception. Especially within the current economic environment, anticipation of and preparation for financial activities are essential in successful management of a business. A detailed business financial plan is a foundational part of the financial management process.

Users of future-oriented financial information include internal parties, such as executive, financial and operations managers, and external parties such as present or future customers, vendors, lenders and investors. Business managers need projected financial information to manage expectations of external parties, as well as for making operational and financial management decisions.

External parties also require projected financial information from a business for making decisions regarding the nature and extent of their activities with that business. Successful management of relationships with these external parties necessitates accurate information available in a timely manner. A business financial plan can be a great tool for generating reliable information for these purposes.

Projected financial information from a business financial plan can be used to manage:

o customer relationships
o accounts receivable
o inventories
o product development
o property, plant and equipment needs
o vendors and suppliers
o lenders and financing needs
o investors

Others outside of an organization also manage many of these same areas by use of projected financial information.

Methods for gathering, organizing and reporting future-oriented financial information are many and varied. Simple formats, some even unwritten or written only on the back of an envelope are quick to prepare, but have limited usefulness. At the other end of the spectrum are entire software systems solely devoted to business management, called enterprise resource management (ERM) systems. These systems are very sophisticated, and have capabilities and operational requirements which are typically beyond the scope of small business needs.

Among the alternatives in between these two extremes is the model-based business financial plan. This model-based approach is a reasonably cost-effective and manageable method of planning financial activities. It usually consists of one or more spreadsheets in which data inputs and assumptions are linked together to calculate financial outputs. As an example, inputs such as quantities of products sold, sales price, discounts and returns, along with a few assumptions are used to calculate an output of the expected revenue for a period of time.

When designing a business financial plan model, the outputs are usually the starting point. A clear understanding of the nature of the outputs required provides an outline of the model. Common alternatives considered in the design process, in order of sophistication, include:

Type of information:
· Business activity, such as revenue and expenses or income statement related projections in future periods
· Financial position, such as projections of assets and liabilities at future dates
· Cash flow projections

General level of detail:
· Entity-level
· Product or service line level

Once the outputs have been decided on, the inputs and assumptions needed to calculate these outputs are determined. The inputs, such as quantities, prices, costs, margins and rates, timing of activity, and others are organized and linked together in a format that ideally allows for a change to any assumption to properly affect the related outcome(s) throughout the model.

During the design phase of the modeling process, the level of detail included in the outputs, as well as the inputs and assumptions, is typically evaluated for cost and benefit to the organization and its decision makers.

Benefits of a business financial plan model use include:

· Effective planning information for internal operations, finance and resource management.
· A practical means of measuring (and therefore monitoring) business performance activity in a timely manner (actual compared to projections).
· Enhanced credibility with third parties requesting projected financial information (clear, open communication enables relationship building).

Clients at Wright Griffin Davis have benefited from the tools and people available to assist owners/managers in developing a business financial plan model, or with improving and refining an existing model. To explore the idea of financial modeling, we recommend that you give your business advisor a call to discuss how he or she can assist you.

Joe Lewandowski, CPA, is a Manager in the Audit and Accounting Services Group at Wright Griffin Davis and Co., CPAs.