Financial Planning in Action

Once you have chosen the actions you believe will produce the results you want, it’s time to determine both the projected income from those actions and the expenses that correspond to your plan. This is one of the most important steps in the planning process –and the one where many planners fall short.

Before creating the financial projections for your year’s operations, make sure you’ve researched the costs of carrying out your plan. Let’s say your strategy is to increase the percentage of prospects that are converted to a sale, thereby increasing sales. You not only want to project what that will mean to total sales, you’ll also want to know when the income (cash) can be expected.

Consider the time between sale and delivery (whether goods or services). Let’s assume there’s a one month lag time between sale and delivery. If you carry Accounts Receivable and it takes 60 days from delivery and invoice to receipt of payment, you’ll have a 3 month span between sale and receipt of payment. If any of these are longer, you’ll need to make adjustments accordingly. See why it’s so important to know the timing on each aspect?

Staying with this example let’s make some arbitrary projections based on our plan. You have decided that by increasing the conversion rate of sales you’ll be able to increase gross income (revenue) by $60,000. Your plan to accomplish this is to improve your sales materials and provide specific training to your sales staff and management. The materials need to be created first so the training can take place using the new materials. Here’s the amounts and timing as we’ve determined.

Projected Income (Cash) from Plan       $60,000 ($15,000 each month Dec. thru March)


Improved Materials       $10,000  (Costs incurred in June)

Sales Training                  10,000  (Costs incurred in July)

COGS *                           20,000  (Salaries, Product & Service Costs)

Sales Costs                       13,000  (Commissions & Related Sales Costs)

Total Costs of Plan         $53,000

Return on Investment          $  7,000 (11.6%)

*Cost of Goods Sold – This is the cost to provide the product and/or services. It includes related payroll costs plus all other related costs to deliver product or service.


By calculating all this in advance you can determine if the return is worth the investment. In our example our return is projected at 11.6%. If you think that is an adequate return, you’ll go forward. If not, you may want to rethink how you can either increase return or reduce costs.

Since the materials and training costs will occur before the income is to be realized, it’s helpful to plot this out by month to see how cost will be covered.


                   June              July            August        Sept.          Oct.           Nov.         Dec.

Income                                                                                                                                   $15,000

Expenses    $10,000(a)    $10,000(b) $  5,000(c) $  5,000(c)  $  3,000(c)

COGS                                                                                      $  5,000     $  5,000   $  5,000

                  January         February    March

Income      $15,000        $15,000      $15,000

Expenses   $         0        $         0      $         0

COGS       $  5,000        $         0*    $         0*

(a)    Sales Materials,   (b) Training,  (c) Sales Costs

* In February and March we’ve already completed the services from the initial sales and are finally realizing the return from our earlier investments.

Note: This chart represents CASH outlay and income for the projected period. Sales took place in September through December, but with a one-month delay in delivery and billing and a two month lag on receipts the first cash doesn’t come in until December from a June and July activity.

This is why financial planning is so critical. We’ve got to know how we’re going to cover the up-front costs pending results from our expenditures. We may need a credit line, a loan or possibly an infusion of outside capital. By calculating all this in advance we’ve got time to take whatever action is necessary to cover the costs. Or we might decide to make adjustments in timing so that our up-front costs fall in a part of the business cycle that typically has a higher margin. By playing around with timing, costs, sales and receivables we can create the most cost-effective plan and be prepared for the results.

Of course, you’ll need to do this with each aspect of your plan. It’s helpful to determine cost per unit sold for each different item you sell. And it’s probable that the costs are incremental. Once the fixed costs are covered, the variable costs (such as sales costs and COGS) may become less expensive per unit as the volume grows.

You’ve now created the budget that corresponds to your next year of operations. You have your plan of action with timing of the related costs and income.

The next step I recommend is to enter them on a financial projection spreadsheet that’s also set up to monitor your actual expenses and income as they occur. This gives you an easy way to manage your cash and see how you’re doing against your plan.

Once you’ve made sure you have the means to support your plan, you’re ready to put your plan into action. Yes, that’s our topic for next time.