Financial Planning is the process of estimating the capital required and determining it’s competition. It is the process of framing financial policies in relation to procurement, investment and administration of funds of an enterprise.
Financial planning, also called budgeting, is the process of setting performance goals and organizing systems to achieve these goals in the future. In other words, planning is the process of developing business strategies and visions for the future. It’s big picture stuff.
Financial planning is the task of determining how a business will afford to achieve its strategic goals and objectives. Usually, a company creates a Financial Plan immediately after the vision and objectives have been set. The Financial Plan describes each of the activities, resources, equipment and materials that are needed to achieve these objectives, as well as the timeframes involved.
Importance of Financial Planning
Financial Planning is process of framing objectives, policies, procedures, programmes and budgets regarding the financial activities of a concern. This ensures effective and adequate financial and investment policies.
- Financial Planning helps in ensuring a reasonable balance between outflow and inflow of funds so that stability is maintained.
- Adequate funds have to be ensured.
- Financial Planning ensures that the suppliers of funds are easily investing in companies which exercise financial planning.
- Financial Planning reduces uncertainties with regards to changing market trends which can be faced easily through enough funds.
- Financial Planning helps in making growth and expansion programmes which helps in long-run survival of the company.
- Financial Planning helps in reducing the uncertainties which can be a hindrance to growth of the company. This helps in ensuring stability and profitability in concern.
The Financial Planning activity following tasks:
- Confirm the business vision and objectives.
- Assess the business environment.
- Identify the types of resources needed to achieve these objectives.
- Calculate the total cost of each type of resource.
- Quantify the amount of resource (labor, equipment, materials).
- Identify any risks and issues with the budget set.
- Summarize the costs to create a budget.
The role of financial planning includes three categories:
- Objectives of financial management
- Strategic role of financial management
- The planning cycle.
Objectives of Financial Planning
- Determining capital structure: The capital structure is the composition of capital, i.e., the relative kind and proportion of capital required in the business. This includes decisions of debt- equity ratio- both short-term and long- term.
- Determining capital requirements: This will depend upon factors like cost of current and fixed assets, promotional expenses and long- range planning. Capital requirements have to be looked with both aspects: short- term and long- term requirements.
- A finance manager ensures that the scarce financial resources are maximally utilized in the best possible manner at least cost in order to get maximum returns on investment.
- Framing financial policies with regards to cash control, lending, borrowings, etc.
It will set out clearly the money that you need to put together to start the business and then to run it for a period. It will help you to obtain funding if you need it. It will help prevent you from going into a business that will not be successful. Highlight periods where your business may need extra financial help. Inspire confidence in lenders and banks that you may have to approach for finance. It will help you to spot problems early so you can make plans for the necessary solution. For example, it will highlight whether you are holding too much stock or whether your collection is less than it should be or that you will be short of cash at a particular time.
Limitations of Financial Planning:
The growing mechanization of the industry is bringing rapid changes in the industrial process. The methods of production, marketing devices, consumer preferences create new demands every time. The incorporation of new changes requires a change in financial plan every time.
A Problem of Coordination:
The financial function is the most important of all the functions. Other functions influence a decision about the financial plan. While estimating financial needs, production policy, personnel requirements, marketing possibilities are all taken into account.
Once a financial plan is prepared then it becomes difficult to change it. A changed situation may demand a change in financial plan but managerial personnel may not like it. Even otherwise, assets might have been purchased and raw material and labor costs might have been incurred. It becomes very difficult to change a financial plan under such situations.
Financial plans are prepared by taking into account the expected situations in the future. Since the future is always uncertain and things may not happen as these are expected, so the utility of financial planning is limited. The reliability of financial planning is uncertain and very much doubted.