A financial plan serves as a road map
for where a company hopes to go.
When creating such a plan, it is important to spend time reflecting on potential future activities — such as capital
expenditures and liquidity events — rather
than just assuming a specific growth rate.
By taking into account both past performance and future expectations, a company and its bank can work hand in hand
to properly structure products and services
that will meet current as well as future
needs.
“Having a financial plan in place that outlines the financial expectations of your
company enables a bank to suggest products and services that complement business strategies going forward,” explains
Melissa Pollard, senior vice president in
Comerica’s Orange County Middle Market
Banking Group.
Smart Business spoke with Pollard
about financial plans, how often they
should be prepared and why they are so
invaluable to bankers.
What are the benefits of financial planning
for a business?
Financial planning is often associated
with individuals, but it can be an invaluable
tool for businesses as well. In addition to
providing a clear-cut road map for where
businesses hope to go, a business financial
plan can reap significant dividends when
used as part of discussions with one’s
bank. The more information a banker has,
the better he is able to provide customized
solutions that truly meet a company’s current needs and its needs going forward.
Bankers hate surprises, and being able
to review a company’s financial plan
allows them to establish financial covenants collaboratively, so that they’re really working with a client as opposed to taking an off-the-shelf solution and imposing
it upon the client.
How do financial plans differ from financial
statements?
Financial statements provide historical
information whereas financial plans offer a glimpse into the future. At the very least, a
financial plan should include a projected
income statement and balance sheet.
Companies wishing to be more sophisticated may also include a cash flow projection.
Not all banks require financial plans, but
we have found that by going the extra step
and asking for additional information,
we’re better able to put the right financial
components in place from the beginning.
How often should financial plans be prepared?
We require financial plans, at a minimum, on an annual basis. Most often, however, financial plans are prepared quarterly, or sometimes even monthly, if it’s a
company that is impacted by seasonality
or cyclicality.
Our existing clients provide us a financial
plan when they submit their year-end financial statements. This allows them to use
the year-end historical information as the
foundation from which they build their
plan looking forward.
We might ask for the updated plan once a
year, but in terms of how much detail is
provided it is a case-by-case basis.
At the macro level, a financial plan should take into account a company’s
strategies of what it plans to do in the
years going forward. At the micro level,
the plan should outline how business
strategies will impact the different line
items on a balance sheet.
What are some common mistakes that companies make when preparing financial plans
and how can these be avoided?
In a banker’s eyes, it is always better to
under-commit and over-deliver. Some companies have several versions of their financial plans — reflecting best-case, worst-case and most-realistic scenarios — using
the most aggressive one as an internal tool
that sets themselves up to exceed the
banker’s expectations. When a company
meets projections, it makes it easier for a
banker to increase its loan amounts in the
future; when it falls short, the opposite
occurs.
Why is a company’s financial plan so invaluable to its banker?
A lot of people throw around the term
‘relationship banking.’ Having a company’s
financial plan allows us to take it a step further and practice collaborative banking.
We are able to provide our clients with a
deeper understanding of how the bank
views financial transactions and we develop a deeper understanding of our clients’
motivations and interests.
When a company shares financial expectations with its bank, it will benefit by providing the banker with the opportunity to
recommend other services — including
treasury management and private banking
— that may be appropriate based on its
future outlook. Collaborative banking benefits everyone involved; the company
receives the support it needs, and the bank
has the opportunity to add value by providing targeted banking solutions.
MELISSA POLLARD is senior vice president in Comerica’s
North Orange County Middle Market Banking Group. Reach her at
(714) 940-6751 or [email protected].
