Corporate financial planning is an overarching business process that sets the financial goals and objectives for a company. Business owners and managers will often boil down this process to a few essential factors, including creating a standard budget for all departments, setting expected rates of return for each type of business investment, setting short- and long-term financing plans, and forecasting costs or sales revenues for business activities. These activities do not always involve accountants; business or financial analysts typically handle these tasks.
A standard budget consists of the planned expenditures for all departments in a company. Each year, owners, directors and executive managers will draw up the budget based on previous accounting information. Increases or decreases will be discussed at this time to determine how much the company should plan to spend on operations. The standard budget helps companies track variances and discover why they occur. Variances are not bad if the reason for the higher expenditures came from unplanned demand for goods or services.
Expected rates of return is a corporate finance tool that helps set certain expectations in corporate financial planning. This figure is also the return on investment for a project. For example, the company may desire that all business opportunities have a 15 percent rate of return. A basic measurement for this is revenue generated divided by the total cost of investment. The classic formula for return on investment is the gain from investment less initial cost divided by the initial cost. Projects under the 15 percent threshold are commonly passed over in favor of other options.
Corporate financial planning typically requires companies to set short and long-term financing goals. Short-term financing involves the use of, or opportunity to use, credit lines or other loans on an as-needed basis. This helps avoid drops in cash flow that come from the inability to collect accounts receivable or sell inventory in order to generate cash. Long-term financing options help companies have options for business expansion, equipment financing, or other loans available through previous relationships with banks, lenders, or investors.
Economic forecasting allows a company to determine which internal or external factors can create business risk. Corporate financial planning focuses on mitigating internal factors such as poor production methods, wasted resources, or the inability to acquire new resources from suppliers or vendors. External factors are the taxes or fees associated with entering new markets or releasing new products. Business and financial analysts will look for opportunities that result in the highest return at the lowest risk.