Financial planning – it is preparation of budgets based on projected sales revenue (income) and financial ratios (or financial regulations). For example, expenses or their individual components are determined as a percentage of revenues; for the construction of balance and cash flow forecast we use indicators of turnover, etc. With it we should set targets to improve standards of financial indicators: growth in turnover, reducing the proportion of overhead costs, revenue growth, etc.
Such calculations always are useful: an analysis of the dynamics (including forecast) of indicators that reflect the financial performance and efficiency, improves the quality of planning. This method of financial planning is preferred and well-established when the budget is set for the head, fully responsible for the financial results and with who has necessary powers to do it. Typically, in this case, the formation and adoption of the production plans under the relevant budget is either impossible or even can be harmful, since constrains the initiative of leader. For example, to the director of restaurant it is impossible to establish for plan-period the plan about the range of dishes to calculate the budget (it is also harmful). Such manager must have independent authority, to change the menu for several times a day, depending on changes in preferences of visitors, which will allow him to achieve better financial results.
Of course, the use of financial techniques for the formation of the budget does not mean abandoning the use of more accurate methods for monitoring the actual costs. The same restaurant manager will monitor compliance of actual spending on products for dishes making.
What is the financial model?
The term “financial model” may refer to the company or project. Financial Model is a tool for modelling the finances of the business or project.
The financial model is a simplified description of the financial processes and outcomes in the form of a mathematical model to simulate financial results based on different input data for simulation (constraints and assumptions). It is considered an objective function of finance and the formation of financial, i.e. essential relationships between input parameters and financial results, based on we set laws as values of financial ratios. For example, we define cost structure and behaviour of the different costs, depending on various factors. In physical terms the financial model is a program that requires a baseline data on which the financial model generates results (for the implemented algorithms). For example, it considers the project risks with Monte Carlo method; it shapes projected reporting forms, etc.
Financial modelling is used for planning and budgeting from top – to down, it is method, without which it is impossible to imagine a modern financial management of enterprises. For example, is the financial model will determine the ultimate am
ount of financial resources that a company can use for repair equipment before planning list of refurbishment projects. This volume can be adjusted, but the financial model initially sets the baseline for planning.
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