Long-Term Financial Planning by Guest Blogger Olivia Riley, CPA

For years, best practices have recommended long-term planning for organizational operations, upkeep of major assets and healthy continuity of business operations. A common caveat to long-term planning warns that forecasts exceeding 10 years may yield incorrect results. Hence, it is better to calculate forecasts for a 5 to 10 year period.

The market offers many tools for developing and maintaining a solid model to help with long-term planning. The tool one uses is not as important as the ability to insert all the crucial data needed to properly plan for the future. Most models consist of an Excel workbook with linked sheets and assumptions used in the calculation of future activities. An important task to remember is the gathering of all the available data that needs to be considered as one plans for future revenues and related costs.

The initial step needs to include a complete list of revenues generated by the organization. All revenues commonly generated by operational activities should be considered in the long-term plan model. In calculating the 5 to 10 year revenue projections, gathering 3 to 5 years of actual results and calculating an average amount per year is a good start.

Once all demographic and economic impacts have been determined, assumption ratios can be calculated. These assumption ratios will be helpful in growing revenue and costs amounts from year to year for up to 10 years.

Next step, information of all operational expenses needs to be gathered. Actual operational expenses for a 3 to 5 year period will help with the preparation of the long-term plan related to operational costs. As stated above, a yearly average for each type of expense should be calculated for the base year and the assumption ratios will similarly be applied to the base expense year to calculate expenses for the 5 to 10 years projections.

Final step, major improvements and replacements need to be considered for the same period of time that operational expenses are projected. It is highly recommended that an organization spread the cost of replacements over a period of time. Annual amounts should be calculated and a reserve should be funded annually to accumulate the amounts needed for these major purchases.

Once all the above information has been gathered, it’s time to create the plan. Start with a description of all revenues and costs to be forecasted. Separate operating costs from capital replacements and improvements so that operating net revenue can be displayed separately from reserve balances. Columns need to include actual results of activities for comparison with the forecasted amount.

Finally, your plan is created so the fun begins to see how actual results match up to your forecasts. GOOD LUCK!

Olivia Riley, CPA is CFO of the Town of Addison. Before joining the Town of Addison, Riley worked for the City of Cedar Park and spent 20 years in public accounting where she worked as an auditor for counties, school districts and cities. Riley is a member of TSCPA’s Board of Directors and former president of the Austin Chapter.

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