What is Financial Planning? Financial planning is an important part of financial management. A financial plan is an estimate of the total capital requirements of the company. It selects the most economical sources of finance. It also tells us how to use this finance profitably. The financial planning gives a total picture of the future financial activities of the company. It is the process of determining the objectives; policies, procedures, programmes, and budgets to deal with the financial activities of an enterprise. Financial planning is also known as capital planning. So, what we discussing is – Financial Planning: Meaning, Definition, Objectives, and Importance.
The Concept of Financial Planning explains their key points into Meaning, Definition, Objectives, and Importance.
In this article we Discuss; Financial Planning: Meaning of Financial Planning, Definition of Financial Planning, Objectives of Financial Planning, Need for Financial Planning, and the Importance of Financial Planning. Meaning and Definition: Financial planning reflects the needs of the business and is integrated with the overall business planning. Proper financial planning is necessary to enable the business enterprise to have the right amount of capital to continue its operations efficiently.
Financial planning involves taking certain important decisions so that funds are continuously available to the company and are used efficiently. These decisions highlight the scope of financial planning. The financial plan is generally prepared during the promotion stage. It is prepared by the Promoters (entrepreneurs) with the help of experienced (practicing) professionals. The promoters must be very careful while preparing the financial plan. This is because a bad financial plan will lead to over-capitalization or under-capitalization. It is very difficult to correct a bad financial plan. Hence immense care must be taken while preparing a financial plan.
#Definition of Financial Planning:
Financial planning, also called budgeting, is the process of setting performance goals and organizing systems to achieve these goals in the future. In other words, planning is the process of developing business strategies and visions for the future. It’s big picture stuff. Financial Planning is the process of estimating the capital required and determining its competition. It is the process of framing financial policies in relation to procurement, investment, and administration of funds of an enterprise.
#Objectives of Financial Planning:
Financial planning is done to achieve the following two objectives:
To ensure availability of funds whenever these are required:
The main objective of financial planning is that sufficient fund should be available in the company for different purposes such as for the purchase of long-term assets, to meet day-to-day expenses, etc. It ensures timely availability of finance. Along with availability financial planning also tries to specify the sources of finance.
To see that firm does not raise resources unnecessarily:
Excess funding is as bad as inadequate or shortage of funds. If there is surplus money, financial planning must invest it in the best possible manner as keeping financial resources idle is a great loss for an organization.
Others Financial Planning has got many objectives to look forward to:
- Determining capital requirements; This will depend upon factors like the cost of current and fixed assets, promotional expenses and long-range planning. Capital requirements have to be looked with both aspects: short- term and long- term requirements.
- Determining capital structure; The capital structure is the composition of capital, i.e., the relative kind and proportion of capital required in the business. This includes decisions of debt-equity ratio- both short-term and long-term.
- Framing financial policies with regards to cash control, lending, borrowings, etc.
- A finance manager ensures that the scarce financial resources are maximally utilized in the best possible manner at least cost in order to get maximum returns on investment.
Financial Planning includes both short-term as well as the long-term planning. Long-term planning focuses on capital expenditure plan whereas short-term financial plans are called budgets. Budgets include a detailed plan of action for a period of one year or less.
#Need for Financial Planning:
The following financial planning below are:
- Determine the financial resources required to meet the company’s operating programme.
- Forecast the extent to which these requirements will be met by internal generation of funds and the extent to which they will be met from external sources.
- Develop the best plans to obtain the required external funds.
- Establish and maintain a system of financial control governing the allocation and use of funds.
- Formulate programmes to provide the most effective profit-volume-cost relationships.
- Analyze the financial results of operations, and.
- Report facts to the top management and make recommendations on future operations of the firm.
#Importance of Financial Planning:
Sound financial planning is essential for the success of any business enterprise. It will provide policies and procedures to achieve close coordination between the various functional areas of business. This will lead to the minimization of wastage of resources. Management can follow an integrated approach to the formulation of financial policies, procedures, and programmes only if there is a sound financial plan.
The important benefits of financial planning to a business are discussed below:
- Financial planning provides policies and procedures for the sound administration of the finance function.
- Financial planning results in the preparation of plans for the future. Thus, new projects could be undertaken smoothly.
- Adequate funds have to be ensured.
- Financial Planning helps in ensuring a reasonable balance between outflow and inflow of funds so that stability is maintained.
- Financial Planning ensures that the suppliers of funds are easily investing in companies which exercise financial planning.
- Financial Planning helps in making growth and expansion programmes which helps in long-run survival of the company.
- Financial planning ensures required funds from various sources for the smooth conduct of business.
- Uncertainty about the availability of funds is reduced. It ensures the stability of business operations.
- Financial planning attempts to achieve a balance between the inflow and outflow of funds. Adequate liquidity is ensured throughout the year. This will increase the reputation of the company.
- Cost of financing is kept to the minimum possible and scarce financial resources are used judiciously.
- Financial planning serves as the basis of financial control. The management attempts to ensure utilization of funds in tune with the financial plans.
- Financial Planning reduces uncertainties with regards to changing market trends which can be faced easily through enough funds, and.
- Financial Planning helps in reducing the uncertainties which can be a hindrance to the growth of the company. This helps in ensuring stability and profitability in concern.
Finance is the life-blood of the business. So financial planning is an integral part of the corporate planning of the business. Financial Planning is the process of framing objectives, policies, procedures, programmes and budgets regarding the financial activities of concern. This ensures effective and adequate financial and investment policies. All business plans depend upon the soundness of financial planning.