A financial operating plan (FOP) is a type of planned strategy that identifies the scope of expenses and anticipated revenue that will be collected to cover those expenses. Typically, a plan of this type will be drafted to cover a defined time period, such as an upcoming budgetary year. Creating a financial operating plan can be very helpful when it comes to organizing data in anticipation of drafting a budget, since the process helps to set specific goals and aims for various sections of that budget.
Putting together a viable financial operating plan often means relying heavily on financial data from past periods. As part of the process, planners will look closely at the cash flow enjoyed by the company during comparable periods of time, often analyzing up to five previous periods and using the averages of those periods as the basis for the goals in the current plan. Particular attention is paid to direct and indirect expenses incurred during the periods used as background, as well as all sources of income such as revenue from sales and returns from investments.
While historical data plays a major role in developing a workable financial operating plan, attention is also paid to potential future events and trends that could have some impact on the performance of the company. This includes allowing for replacement and updating of equipment, anticipated shifts in the economy that may affect the cost of raw materials or even trigger a change in demand for the products manufactured by the company, and even general changes in the economy. Allowing for these factors makes it easier to develop goals for each section of the plan that are realistic and likely to be helpful in the later task of creating departmental as well as company budgets.
It is important to note that the purpose of a financial operating plan is to create an informed plan of action for the future operation of the company. The idea is to project both income and expenses in a way that makes it possible to establish a budget which ultimately helps the company remain viable even during adverse economic circumstances. When the information used to formulate the financial operating plan is accurate and properly interpreted, the task of creating the specifics of an operating budget is much easier and likely to minimize the potential for the company to encounter severe financial reversals that could threaten the ability to continue functioning in the years to come.
