Planning is the road map to achieving an organization’s short and long term goals. Financial planning is the core part of every business plan as it estimates the needs of total funds and identifies the resources needed for the generation of funds.
Financial planning should be carried out with extreme care and prudence because a little mistake at the planning stage can be a cause of project failure at the time execution.
Limitations of Financial Planning:
Financial planning is mainly based on estimation and forecasting techniques like future assumptions and past records.
The uncertainty associated with the future along with other factors that are not in the control of the management are limitations of financial planning.
After all the hard work, these limitations may force you to change your estimates as the execution of the project goes on. So you should be aware of that.
Following are the common limitation of financial planning:
Financial planning is based on the assumption about the future factors associated with the project.
The nature of the future is uncertain, and most of the times things do not come as expected. The uncertainty of future events greatly decreases the reliability of financial planning.
Lack of Accuracy in Based Data:
Financial planning is the future estimates based on past or researched data coming from different sources.
The results of financial planning may go wrong if the based data itself is inaccurate. Authenticity and accuracy of based data are most important as all the estimates may go wrong.
Rapid Changes in Environment and Policies:
Drastic changes in government rules and regulations about the economic environment can affect financial plans adversely.
If the plan does not possess the flexibility to adjust to the changing environment, a perfect plan may change to a fail financial plan.
External factors that are not directly stakeholders of your business plan but may affect your planning adversely for example war, natural disaster, etc are extremely difficult or impossible to predict.
To overcome these types of limitations, you should include proper steps like insurance to avoid the loss arises due to these kinds of issues.
Time Consuming and Expensive Process:
Financial planning is a time-consuming activity. It also requires the use of new technologies and expertise of different experts which makes this process expensive also.
Most of the time, either businesses do not want to invest in planning or they do not have that much time to plan properly, which leads to inaccurate and incomplete planning. This limitation can be overcome by dividing the project into phases and then plan for every phase individually.
Methods to Overcoming Financial Planning:
Limitations of financial planning can be dealt with through proper planning and techniques, which are:
- The planner should be given sufficient time and tools.
- Gather information and data from a very reliable source. The base data should be cross-checked with other sources to make it more reliable.
- Involve concerns persons to make the planning more accurate and error-free.
- The information system should be properly implemented, which gathers, processes and makes reports of relevant data.
- You should be aware of current political and economic signals coming from government sectors to base your predictions more accurately.