Limitations of Financial Planning and Forecasting
Financial planning is the backbone of every business’s success. It estimates how much money will be needed in order to run the operation and identify any potential revenue earned. It also identifies risks along with opportunities as they arise so you can make informed decisions.
Financial planning is a delicate process that requires extreme care and prudence. A small mistake at the Planning stage can lead to failure during the execution of the company, so it’s important for every planner who works with finances.
Limitations of Financial Planning
The planning process begins with an estimate of what the future will look like. This is based on current trends and assumptions about how things are likely to unfold, which may or may not come to reality.
It is also the same as financial planning which depends on the company estimation, market data, and management knowledge. Most of them are just the assumption that will be different from one company to another.
Financial planning is not an easy task and it has many limitations. For example, the uncertainty associated with the future along with other factors that are not under the company’s control. It can force the company to change the estimation as project execution goes on.
When you are in charge of planning and executing a project, there’s always uncertainty. But these limitations can be overcome with knowledge and experience, so your estimates stay accurate even when things change during execution time.
Financial planning is a strategic approach to managing your finances in the event that you are uncertain about what will happen in the future. Because things often do not come as expected, financial planners have been found ineffective at predicting long-term.
The longer we plan, the more uncertain it will get. There are many possible events that are not under our control and they will connect with each other. If we make one wrong assumption, it will lead to many more impacts in the long term future.
Lack of Accuracy Data
Financial planning is a lifelong journey based on past or researched data coming from different sources. The results of your financial plans may go wrong if the data itself has errors in it, which would then affect all those estimates you have worked so hard to make.
To make sure everything works out well for our financial future, the planners need authentic and accurate data. It means checking both what we know now as well as historical trends regarding our industry’s market information.
Most of the data we use come from the survey, market research, or our own data which is just a small sample. It cannot represent the whole population of the market or industry. When we make assumptions based on such a small sample, it will be a problem regarding to its accuracy.
Financial planning is prepared based on the assumption that other external factors do not change or change within a prediction. The factors include market change, recession, new competitors, and so on. The company builds the expectation of those factors.
However, these are the external factors that are not under anyone’s control. They will move based on the overall market. So the result can be different from our estimation.
The actual change in the market may be faster than the expectation. When the market increase significantly, it will go beyond our forecast.
When the market change too much, it will leave behind the planning. The planning will become irrelevant.
It is very time-consuming when the company needs to prepare the proper financial planning. They have to collect the data and analyze them properly. After that, they have to spend time preparing the future plan based on the data collection and management assumptions.
It is very challenging, if the company spends too much time in preparing planning, it will expire and become useless when come to execution.
In the business, the more time we spend, the higher cost it will get. The company requires to have an expert in the field to analyze the past data and predict the future.
They need to have high-quality data from market research. It must be the fresh data collected by the professional. These are the factors that increase the cost of financial planning.
How to Solve the Limitation of Financial Planning
Even though the planning has many challengings, the company requires to have proper planning due to its huge benefit. So we have to face these limitations and take benefits from the financial planning. Please refer to some solutions below:
- The company should give enough time to prepare the financial planning. Without enough time, the quality of the report will be a problem. However, too much is also a problem. It can lead to the expiration of the data collected and the report becomes useless.
- Spend enough money to collect the data from reliable sources. It can be expensive but it will generate a high-quality report. The cost is not comparable to the damaged base on the usage of error planning.
- Assign a competent person for this task. As we know it is the backbone of the company, so we have to give this task to a person with enough skill otherwise, the quality of the report will impact the company’s operation.
- Keep up to date with the external factors. The planning should be adjusted for the change in external factors such as war, economic crises, and market movement. It is the ongoing plan which needs to modify when something happens.