What Is a Financial Operating Plan (FOP)?
A financial operating plan (FOP) is a financial plan outlining the revenues and expenses over a period of time. A financial operating plan uses past performances, incomes, and expenses to forecast what to expect in the following years. It then incorporates past and recent trends into the planning so as to most accurately forecast what is to come. It will define goals for areas such as budgeting, sales, and payroll as well as create a cash flow projection.
- A financial operating plan (FOP) outlines a firm's financial situation for the current and future periods.
- Using past data, the FOP projects future operating income and expenses in order to understand a firm's growth or areas of weakness.
- More extensive than an annual budget or financial statement, the FOP helps a company's insiders and potential investors understand its current and future financial situation.
Understanding Financial Operating Plans
Similar to a business plan for a new company, a financial operating plan helps managers and key investors understand how the company will operate and grow in the future. It helps keep the company on track and identify areas that need attention.
A good financial operating plan will need to be amended and updated due to any extraordinary events relating to finances, as well as to see if it is still relevant to the current situation. If prepared and amended accordingly, an FOP can be a useful tool in creating and managing the budget, improving control of management operations, and ultimately creating profitability.
How a Financial Operating Plan is Used
A financial operating plan can, in many ways, be far more extensive than a budget. The structure of the plan can be shaped by the objectives of an organization or individual, how their assets may be applied, and ways to adapt to achieve desired outcomes.
Structuring a financial operating plan typically requires input from across all divisions of an organization in order to create a complete framework of the costs and available revenue sources. The intentions and plans of each division must also be accounted for, as they may affect the availability of overall capital for the projected period being planned for.
While a financial operating plan can layout an organization’s internal expectations, external influences can affect the trajectory and follow-through of that plan. Changes in the market, fluctuating needs of customers, and other factors can require a financial operating plan to be restructured in response. In order to adapt to such change, an organization may need to adapt its financial operating plan by taking an assessment of new external factors rather than past trends.
For example, a retailer might use such a plan not only to increase revenue and profits, but to allow for expansion of the operation. Through a financial operating plan, the company can assess its potential liquidity and capital that would be available to support the development of additional locations, the hiring of more staff, as well as ancillary services needed to support the expansion. The plan would also account for maintaining the ongoing business while accommodating for expansion. Planned changes in the business, such as the projected costs of research and development of new products, may also be accounted for in the plan.