In this modern era of never ending competition, financial planning has become very important. No business can survive today unless its financial matters are well-planned. I have gathered some information on this topic which would help everyone to understand that why financial planning can make a huge difference. It begins with estimating the required capital and determine its competitive value. The process involves setting the financial policies by the administration of funds, investment, and procurement of a company.
There are many objectives of financial planning which include capital requirements, capital structure, setting financial policies, and maximum utilization of financial resources. Determination of capital requirements depends on factors like long-range planning, promotional expenses, and cost of fixed and currents assets. Capital requirements must be looked at both long-term and short-term requirements of the business.
The capital structure consists of capital which includes relative kind as well as part of the capital needed for the company. In other words, it is about the ratio of debt and equity for both long-term and short-term plans. Setting the financial policies is about borrowings, lending, and cash control. Maximum utilization of financial sources is the biggest challenge for a finance manager. He must ensure that minimum sources are efficiently used in the best possible way. It is vital for getting the maximum possible returns on investment.
It is highly important to know the importance of financial planning before it is started. The process of financial planning is about framing the programs, procedures, policies, budgets, and objectives for financial activities. It is necessary for adequate and effective investment and financial policies. The entire process begins with ensuring that adequate funds are present.
The balance between inflow and outflow of funds is necessary to maintain stability which is possible only when financial planning is done correctly. It also ensures that the fund suppliers are investing in the company with ease. The survival of a company in the long-run is based on the expansion programs and the growth it is making. Market trends change from time to time, and that create uncertainties for a company. Financial planning ensures that there are enough funds which reduce the uncertainties.
Another problem associated with uncertainties is that they act as a resistance to the company’s growth. Profitability and stability of the company are possible only when the financial planning is correct. Successful financial managers keep in mind the planning horizon when they draft a financial plan. Financial horizon is the period of a financial plan which could be either short-term or long-term.
A short-term financial plan is made for twelve months whereas a long-term financial plan is made for two to five years. A company could consist of various operational units. All investment proposals and individual projects of the company should be treated as one big project. This process of totaling all investment proposals and individual projects is called Aggregation. The objectives and strategic goals of a business can only be achieved when the management carefully creates their financial plan after setting the objectives of the business.