WHAT IS FINANCIAL PLANNING

A financial plan is a comprehensive picture of your current finances, your financial goals, and any strategies you’ve set to achieve those goals. Good financial planning should include details about your cash flow, savings, debt, investments, insurance, and any other elements of your financial life. Financial planning is the task of determining how a business will afford to achieve its strategic goals and objectives.

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 funds 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 the timely availability of finance. Along with availability financial planning also tries to specify the sources of finance.

To see the 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 manner as keeping financial resources idle is great for an organization.

Financial planning includes both short term as well as the long term planning. Long term planning focuses on capital expenditure plans whereas short term financial plans are called budgets. Budgets include a detailed plan of action for a period of one year or less.

IMPORTANCE OF FINANCIAL PLANNING

Financial planning is essential for success. Its need is felt because of the following reason:

  • FACILITATES COLLECTION OF OPTIMUM FUNDS: The financial planning estimates the precise requirement of funds which means to avoid wastage and over-capitalization situations.
  • HELPS IN FIXING THE MOST APPROPRIATE CAPITAL STRUCTURE: Funds can be arranged from various sources and are used for the long term, medium-term and short term. Financial planning is necessary for tapping appropriate sources at an appropriate time as long term funds are generally contributed by shareholders and debenture holders, medium-term by financial institutions, and short term by commercial banks.
  • HELPS IN INVESTING FINANCE IN RIGHT PROJECTS: The Financial plan suggests how the funds are to be allocated for various purposes by comparing various investment proposals.
  • HELPS IN OPERATIONAL ACTIVITY: The success or failure of the production and distribution function of a business depends upon the financial decisions as the right decision ensures a smooth flow of finance and smooth operation of production and distribution.
  • BASE FOR FINANCIAL CONTROL: Financial planning act as a basis for checking the financial activities by comparing the actual revenue with estimated revenue and actual cost with an estimated cost.
  • HELPS IN PROPER UTILISATION OF FINANCE: Finance is the lifeblood of business. So financial planning is an integral part of the corporate planning of the business. All business plans depend upon the soundness of financial planning.
  • HELPS IN COORDINATION- It helps in coordinating various business functions such as production, sales function, etc.
  • LINKS PRESENT WITH FUTURE: Financial planning relates the present financial requirements with future requirements by anticipating the sales and growth plans of the company.