THE PLANNING HORIZON 149
The planning horizon
The planning horizon is the most distant point in the future that you will visit in the plan.
By the time you start work on the financials, the planning horizon will already have been
staked out – probably three or five years hence. If you happen to be working on a plan
covering longer than this, you probably will not want to attach much credibility to fore-
casts more than five years out.
Good business plans usually contain monthly figures for the first year, and quarterly
or maybe only annual numbers for the remaining years. Budgets, used for planning and
measuring performance, are no more than profit and loss and cash flow forecasts by
another name (usually monthly). If you have mixed periods, include a summary for the
early part of the plan for ease of comparison. For example, if you have monthly figures for
the first year and annual figures for the remaining term, show annual figures for the first
year also.
FORECASTS AND BUDGETS
A budget is a misleading name for a set of financial projections or forecasts that have
been formalised as:
an operating plan; and
a set of financial targets;
for a given period of time – usually one year.
The budget is the forecast that you adopt as representing your best guess at the future.
Essentially, the budget is saying if our assumptions about our operating environment are
correct this is how much we will spend and receive. It is preferable to think of a budget as an
operational financial plan – not as a budget that must be spent.
You can add together financial flows. The sum of the expenditure figures
for the 12 months January to December gives you total spending for the
calendar year.
Do not add balance sheet figures. They show the end-period balances. The
figures for the month ending 31 December are the figures for the end of the fourth
quarter and for the end of the whole year.
150 CHAPTER 7 ABOUT THESE NUMBERS
Sometimes it does not make sense to operate within a fixed budget. For example,
when sales are very unpredictable, the production department could operate on a flexible
budget. The production manager might be authorised to increase spending by $100,000
for every extra 10,000 units of production above a pre-agreed volume.
‘If the profits are great, the risks are great.’
CHINESE PROVERB
HOW LONG IS A MONTH?
To save me having to use complicated phrases, please interpret references to months as
your shortest accounting period. Some businesses – such as retailers – use a four-week
accounting period to help compare like with like. They always begin on the same shop-
ping day. Also, I tend to use the term year to mean the longer of a year or an operating cycle
– the amount of time that it takes to buy stuff, turn it into a product, and collect cash from
the lucky buyer. Most businesses use a 12-month period – fiscal year – that sometimes
coincides with the calendar year. It might run for some other period that is convenient for
you, perhaps coinciding with the tax year.
If you are starting a new business and you want to spoil your accountant’s new year’s
eve celebrations, choose a fiscal year that matches the calendar year.
It’s the same, even if you are not in it for the money
Much of the discussion here might appear to focus on the financials for business.
If you are involved with non-profit organisations, government agencies or similar
bodies, your financial statements will look a little different. However, in this case
you will almost certainly have or be able to obtain historical examples that you
can mimic in your business plan – and the broad principles are exactly the same as
those discussed here.
t
THE PLANNING HORIZON 151
Capital outlays
Fixed assets at cost
– Depreciation
= Net fixed assets
Sales
Sales
Materials consumed
+ Depreciation
Change in inventory
+ Production costs
= Cost of sales
Operating costs
Employee costs
+ Depreciation
+ Other expenses
= Total op. costs
Cash flow
Net profit
–
+
+
+
–
=
Profit and loss
Sales
Less cost of sales
=
–
=
Balance sheet
Assets
Fixed assets at cost
–
=
Inventory
Prepayments, etc.
Accounts receivable
Cash at bank
Liabilities
Accounts payable
Accrued expenses
Loans
Owners' equity
Capital
Retained earnings
Depreciation
Net fixed assets
Fixed assets
Depreciation
Paid not expensed
Sales on credit
Expensed not paid
Net cash flow
Gross profit
Operating costs
Net profit
Figure 7.4 Financial relationships exposed
This diagram shows the interrelationships between the three sets of transactions and the
three financial statements. Perhaps it looks a little complex, but it is actually quite simple. If
you are in doubt, the relationships will become evident as you work through Chapters 7–10
of this book.
Remember that all the accounts show flows over time, except the balance sheet, which
shows balances at a point in time. As discussed in the text, the changes in balance sheet
between two dates reveal flows.
..................Content has been hidden....................
You can't read the all page of ebook, please click here login for view all page.