Corporate budgets often include an earnings before interest and tax (EBIT) calculation.
Corporate financial planning is a comprehensive business process that defines a company’s financial goals and objectives. Business owners and managers often boil this process down to a few essential factors, including creating a standard budget for all departments, defining expected rates of return for each type of business investment, defining short-term and long-term and forecasting sales costs or revenues for business activities. These activities do not always involve accountants; business or financial analysts often handle these tasks.
Corporate financial planning is a comprehensive business process that defines a company’s financial goals and objectives.
A standard budget consists of planned expenses for all departments in a company. Each year, owners, directors and executive managers will prepare the budget based on previous accounting information. Increases or decreases will be discussed at this point to determine how much the company should plan to spend on operations. The standard budget helps companies track variations and find out why they occur. Variations are not bad if the reason for the higher spending comes from unplanned demand for goods or services.
Corporate financial planning requires both short-term and long-term financial goals.
Expected rates of return is a corporate finance tool that helps set certain expectations in corporate financial planning. This value is also the return on investment of a project. For example, the company may want all business opportunities to have a 15% rate of return. A basic measure for this is the revenue generated divided by the total cost of the investment. The classic formula for return on investment is the investment gain minus the initial cost divided by the initial cost. Projects below the 15 percent threshold are commonly ignored in favor of other options.
Corporate financial planning typically requires companies to set short-term and long-term funding goals. Short-term financing involves the use of, or the opportunity to use, lines of credit or other borrowings as needed. This helps prevent cash flow dips from an inability to collect accounts receivable or sell inventory to generate cash. Long-term financing options help companies have options for business expansion, equipment financing or other borrowing available through past relationships with banks, lenders or investors.
Economic forecasting allows a company to determine which internal or external factors may create risk for the business. Corporate financial planning focuses on mitigating internal factors such as inadequate 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 launching new products. Business and financial analysts will look for opportunities that result in the highest return with the lowest risk.