A company needs money as working capital and for investments both when launching operations and when expanding them. When launching operations, the initial investments must be made before the cash-flow financing starts to run.
Financial planning is usually divided into short-term (less than a year) and long-term planning.
Short-term planning focuses on your company’s liquidity. The purpose of the management of cash in hand is to ensure that your company’s liquidity is good and the cash assets are sufficient for managing its daily payment transactions. If your liquidity is poor, even a financially solid company may go under quickly.
A cash deficit can be covered by
increasing storage rotation
a short-term bank loan
increasing capital financing
accelerating sales receivables (cash discounts, shortening of payment terms).
delaying the disbursements of accounts payable
acquiring an account with an overdraft facility.
Cash management includes cash flow forecasting and cash budgeting. A cash budget is compiled on a cash basis. It can be used to predict cash deficits and plan the measures for managing them.
In the long term, it is essential to consider the profitability of your company and its financial balance. Investments, in particular, are often so extensive that they necessitate external capital. A key concern in financial planning is the planning of investments and capital financing.
You can use the My Enterprise Finland calculations to help in the planning of adequate financing.
A company’s financial structure describes the ratio between the company’s equity and external capital and what their composition is. Adequate equity makes your company financially solid, i.e. it improves your ability to manage your financial obligations in the long term. Financial solidity is usually measured by the company's equity ratio and it debt-equity ratio.
Equity capital consists of the owners’ capital invested in the company, cash flow financing, various subsidies and possible investments made by capital investors. An appropriate number could be a self-financed share of at least 30%.
An investment made by a capital investor is made on equity terms or through mezzanine financing. A capital investor is not a permanent owner: the aim is to withdraw from the company in accordance with an agreed plan.
External capital includes loan financing, which the company can apply for from banks, finance companies, special credit institutions and insurance companies. Other possible financiers include Finnvera and Tekes – the Finnish Funding Agency for Innovation, both of which can grant loans and securities to companies without collateral security. For investments and development projects, it is also possible to receive public aid from the Centre for Economic Development, Transport and the Environment or Tekes, for example.
Unfavourable changes taking place in the finance markets or the company may cause your company's results to be weakened or its cash flow to be reduced.
By performing a risk analysis, you can assess the probability of the risks, the magnitude of potential damages and minimise the cost of the damages.
An interest rate risk is caused by interest changes in the finance markets. Loans with variable interest rates linked to EURIBOR are risky, as changes affect the payable interest at the end of each interest period.
Currency risks concern companies with currency income or expenses, for example. Currency rate fluctuation can cause a significant variation in results, cash flows and balance.
Liquidity risks concern companies that are unable to quickly realise assets or obtain additional financing to cover payments falling due.
A credit risk concerns a company’s sales receivables. Your customer's solvency may result in credit losses for your company.