Most times business owners and managers get caught up with the day-to-day operations of the business and they hardly have an opportunity to think about capital strategies for the company in five years to come.
When this occurs, the company fails to plan for the next five years and end up running into debt because of a lack of planning.
Sometimes, even those companies that have a“5 Year Plan” often fail to align those goals with a formal capital planning process.
Capital planning is an annual process of budgeting for company resources; this planning involves defining the plans of the company and setting a feasible plan for the company’s capital.
Capital Planning involves a good number of persons in the organization or company. The executives and heads of departments join the Capital Planning team to “make the numbers work” on every project, the company has to carry out.
On the other hand, there is a team of financial professionals who observe, test, and evaluate the plans to ascertain if it is a feasible plan.
Steps for Effective Capital Planning
There are many steps towards achieving effective capital planning as these steps vary from company to company.
However, these steps are the basic steps needed to achieve an effective capital plan.
Assess future funding requirements
The first step to effect capital planning is assessing future funding for the company. By doing this, you evaluate both the company’s short-term funding needs and the company’s long-term funding.
That way you easily identify the timing of when the company’s payments are due, then, align these payments to correspond with cash inflows.
To achieve this, you must have a strong understanding of cash requirements to meet company obligations and ensure that every capital plan aligns with the company’s funding.
Position Your Plan in Reality
Most start-ups that are starting the capital planning process from scratch make the mistake of not making plans based on past performance and present numbers.
This is because they are startups and they do not have past experiences to fall back on while making their plans.
On the other hand, some companies that have this experience still fail to make their plans based on these experiences as well.
For an effective capital plan, you have to make these plans based on the past plans of the company, that way you can evaluate and identify if the plans are feasible. Dream big, but have a plan in place to produce your organization’s vision.
Define Your Companies Five-Year Capital Plan
To come up with an effective capital plan, you must ensure these plans are in line with the company’s goals.
Identity and define what you want for your company in five years and strategies to help you with expected capital requirements and how they can align with the organization’s long-term goals.
Work with Financial Modeling
Financial models help make capital planning easy and achievable. This is because these models quantify the impact of capital, ground your numbers with historical performance, and give decision-makers financial reports.
Additionally, finance models help you understand overviews of the expected capital needs and gains as the company’s projects move forward.
Evaluate your Current Working Capital Sources
For your company to create and achieve effective capital planning there is a need to evaluate your working capital sources.
In addition, review your access to various funding sources, such as working capital lines of credit, cash and investment accounts, accounts receivable, and inventory.
Test and Update the Working Capital Plan
For capital planning to be effective, it needs to be tested and updated annually, quarterly and monthly as well.
Implement the Plan
Identity your Planning structure and approval process for your company. Follow the basic steps, document, research, model, and present your plan. Get approval, provide monthly reports, and meet your company goals.
Conclusively, it is not news that no one can predict the future; however, companies must prepare working capital plans now to ensure sufficient access to capital.
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