Financial Planning is a vital part of Financial Management. In fact, planning is the first function of management. Before embarking on any venture, the company must have a plan. Let’s understand in detail what Financial Planning is.
Before initiating a new business, the organization puts an immense focus on the topic of Financial Planning. Financial planning is the plan needed for estimating the fund requirements of a business and determining the sources for the same. It essentially includes generating a financial blueprint for company’s future activities. It is typically done for 3-5 years-broad in scope and generally includes long-term investment, growth and financing decisions.
Objectives of Financial Planning
- Ensuring availability of funds: Financial planning majorly excels in the area of generating funds as well as making them available whenever they are required. This also includes estimation of the funds required for different purposes, which are, long-term assets and working capital requirements.
- Estimating the time and source of funds: Time is a game-changing factor in any business venture. Delivering the funds at the right time at the right place is very much crucial. It is as vital as the generation of the amount itself. While time is an important factor, the sources of these funds are necessary as well.
- Generating capital structure: The capital structure is the composition of the capital of a company, that is, the kind and proportion of capital required in the business. This includes planning of debt-equity ratio both short-term and long-term.
- Avoiding unnecessary funds: It is an important objective of the company to make sure that the firm does not raise unnecessary resources. Shortage of funds and the firm cannot meet its payment obligations. Whereas with a surplus of funds, the firm does not earn returns but adds to costs.
Process of Financial Planning
- Preparation of sales conjecture.
- Decide the number of funds – fixed and working capital.
- Conclude the expected benefits and profile ts to decide the number of funds that can be provided through internal sources.
- This causes us to evaluate the requirement from external sources.
- Recognize the conceivable sources and set up the money spending plans consolidating these variables.
Importance of Financial Planning
Financial Planning is the procedure of confining company’s targets, policies, techniques, projects and budget plans with respect to the financial activities lasting for a longer duration. This guarantees viable and satisfactory financial investment policies. The importance is as follows-
- Guarantees sufficient funds.
- Planning helps in guaranteeing a harmony between outgoing and incoming of assets with the goal that stability is kept up.
- Guarantees providers of funds to effortlessly put resources into organizations which provokes financial planning.
- Financial Planning supports development and expansion programmes which support in the long-run sustenance of the organization.
- Diminishes vulnerabilities with respect to changing business sector patterns which can be confronted effortlessly through enough funds.
- Financial Planning helps in diminishing the vulnerabilities which can be a deterrent to the development of the organization. This aids in guaranteeing security and benefits of the organization.
Solved Question for You
Question: Choose the first step of the process of Financial Planning
- evaluate the requirement from external sources
- recognize the conceivable sources
- decide the number of funds that can be provided through internal sources
- preparation of sales conjecture
Answer. d. Preparation of sales conjecture is the first step in this process.