A firm's financial plan largely involves the forecast and use of various types of budgets. These budgets are prepared for every key area of firm's activities such as production, marketing, research and development, purchase and so on. The major steps involved in financial planning are as follows:
1. Project financial statements and use these projections to analyze the effects of the operating plan on projected profits and various financial ratios. The projections can also be used to monitor operations after the plan has been finalized and put into effect.
2. Determine the funds needed to support periodic plan which includes funds for plant and equipments, inventories, receivables,new product development, research and developments and for other major activities.
3. Forecast availability of funds over the planning horizon. This involves estimating the funds to generate internally as well as those to be obtained from external sources.
4. Establish and maintain a system of control to govern the allocation and use of funds within the firm.
5. Develop procedures for adjusting the basic plan, if the economic forecast upon which the plan was based do not materialize.
6. Establish a performance based management compensation system.