Financial planning is the process of estimating future needs of a business or project in terms of required investment, resources for generating funds, and efficient administration of these funds.
Financial planning is usually done for long term projects whose estimated life is 4-5 years or more.
Financial planning includes:
- Planning for the amount of capital or investment required for a business to carry out its operations in a smooth way.
- Determining and comparing sources of funds both internally and externally.
- Making of suitable rules and policies for administration and utilization of funds.
- Identify risks and issues with all the estimations.
5 Objectives of Financial Planning:
The most prominent five objectives of financial planning are the following:
Estimating the total capital required:
The first step in financial planning is to determine the actual investment or capital required. The capital requirement can be further divided into two categories, i.e. short term requirements and long term requirements. Capital required depends on a number of factors like the requirement of current and fixed assets advertisement and operation expenses.
Determining the sources, availability, and timing of funds:
Determining the sources and timing of funds is as tricky as anything else. The required amount of funds should be available at the right time according to business needs. Financial planning helping in determine the inexpensive source of funds and make sure that funds are available at the right time.
Determining the business capital structure:
The capital structure of a business is considered as the composition of total external or internal debt to the shareholder’s capital.
Financial planning includes the decision on debt to equity ratio and kind of investment required both in the short term and long term which doesn’t affect the capital structure of the company.
Avoid excess generation of funds:
Unnecessary excess and shortage of funds are always an expensive deal for businesses.
One of the most important objectives of financial planning is to prevent the business from rising of unnecessary funds. Excess funds are just an idle asset of a business that cannot generate any revenue for the business but have their own cost.
Counter strategies for Risks:
Financial planning identifies the risks and issues associated with the business plan.
Once the issues are identified at the planning stage, the counter strategies are prepared to counter the identified issues. This ensures the smooth completion of the project and saves a lot of money and time.
Importance of Financial Planning:
Financial planning helps businesses to prepare a balanced plan for their short term and long goals. The most common importance is as follows:
- Arrange funds according to the project need at the right time.
- Financial planning helps to plan and execute long term development which plays a vital role in the growth of the business.
- Financial planning helps to prepare for any shortcomings and risks. This rise the chances of success for the project.
- Proper financial planning gives a competitive edge by arranging sufficient funds for every stage of the project.