Differences: Opportunity: One of the great opportunities of having timely and accurate internal financial statements is the opportunity for future financial planning.
The future: Financial planning allows an owner to look into the future. Balance sheets, income statements and other financial instruments may be projected many years into the future, which might give an owner the opportunity to plan for key decisions.
Key decisions: Some of the key decisions that financial planning might assist business owners are topics such as new locations, diversification of sales, the increase of personal wealth, wealth management, hiring key employees, and much more. There is very little downfall and much potential upside to an owner who can see key decisions that need to be made many years in advance.
Talent: An owner who wants to do future financial planning may need assistance from professionals who know how to make future financial projections as well as those who have the talent to do the interpretations. This talent will often have the necessary software and knowledge to make sophisticated but understandable future financial plans.
Assumptions: There will be many key assumptions that will be documented for the financial projections and planning. These assumptions can become complicated and a novice should not be involved in their creation. Some of the assumptions for future projections might seem counter-intuitive, such as one we call "The Illusion of Increased Sales."
The illusion: It might seem logical that future financial projections of increased sales would show an increase in the company’s cash. As is shown in the above graph, this is not always the case. In fact, some companies that project future sales increases might have a significant decline in future cash unless adequate planning is made for the potential cash short-fall.
Where is the cash? Cash is like water; it constantly flows but not always in the direction you want. The cash may be tied in a variety of ways; such as inventory, customer receivables, increased payroll expenses and labor burdens, purchases of equipment, increased costs of production or service, income taxes, increased administrative expenses, governmental compliance expenses, debt service payments, etc. (Avoiding The Danger Zone, Business Illusions, p. 42-43).
Lines of credit: Making future financial projections might allow an owner the opportunity to see the approximate future dates when bankers need to be approached to create or to increase working capital lines of credit. The ability to see in the future gives owners a significant advantage on this subject matter. Hopefully, there will be a year (or more) of time to plan for the event of future increased working capital lines of credit.