Importance of Financial Planning in a Business

What is financial planning?

Once a vision and objectives have been determined, a business organization creates its financial plan. Financial plan is a document that depicts the current financial situation of the business and identify its future goals and objectives and how business will achieve them. The process of achieving such business goals and objectives and how does it afford to achieve them is known as financial planning. Financial planning is a systematic process that involves highly creative thinking skills. 

Financial planning includes various activities such as identifying the types and amount of resources required to achieve those activities, calculation of the cost of such resources to be utilized, identification of risks involved, evaluation of the business environment, and also validate the vision and objective already set up.

What are the objectives of financial planning?

The objectives of financial planning include:

• Evaluation of business objectives– Before the implementation of business procedures, methods, techniques, and strategies, the objective of financial planning includes evaluate them.
• Verification of vision and objectives– The vision and objectives of the business that has already set up need to be verified before formation of financial plan. This is an essential objective of financial planning particularly in such a dynamic business environment.
• Identification of funds that are available to achieve objectives– Generation of funds and making them available whenever required is the key area in which financial planning is proficient. It also includes the estimation of funds required.
• Estimation of time and source of funds– Availability of funds at the right time and right place is as essential as generation of funds. The source of funds is equally an important factor to achieve business goals.
• Estimation of costs involved in the creation and implementation of financial plan– The cost of the plan may change with the passage of time but a realistic cost needs to be estimated for the successful creation and implementation of the financial plan.
• Identification of risks involved with financial plan– One of the important objectives of financial planning is to identify the risk and issues associated with such financial plan and hence saves lot of time and money at an early stage and counter strategies are prepared accordingly.
• Generation of capital structure– The capital structure defines the nature and proposition of capital required in the business. It also includes planning of funds required for short term and long-term purpose which also concerns debt-equity ratio.
• Avoid raising of unnecessary funds– Raising excessive funds than required is as bad as inadequate or shortage of funds. Excess of funds does not add returns rather it adds cost to the company. It is one of the most important objectives of financial planning that make sure that company does not raise unnecessary resources.

Why financial planning is important in a business?

Financial planning is very important to a business in formation and preparation of short term and long-term goals. The importance of financial planning is outlined as follows:

• It expedites raising of funds– Financial planning maintains a balance between excess of funds and shortage of funds. It recognizes the optimum funds required for a business to avoid under capitalization and over capitalization.
• It provides an aid in fixing appropriate capital structure– Financial planning helps in raising short-, medium- and long-term funds from various sources at different stages. It also determines how to raise funds for various stages.
• Allocation of funds at right place– Creation of financial plan is important for allocation of funds at various investment opportunities.
• It builds confidence among investors– A business having financial plan intends to attract more investors by providing true and correct information about the business and not guessing things hence, it builds confidence among them.
• It helps in avoiding business shocks– In any uncertain situations, financial planning helps in avoiding business shocks by forecasting financial requirements.
• It helps in growth and expansion of business– Financial planning helps in growth and expansion of business Programmes which led to survival of such business in long run.

Process of financial planning

• Determine current financial situation- It is the first step of financial planning process in which company determines the current situation with respect to income, savings, expenses, etc.
• Develop financial goals- Establishing goals is the foundation for financial planning process.
• Identification of alternative action- For making good decisions, developing alternatives is very important. Some of the possible actions are continue the same course of action, expand or change the situation or take a new course etc.
• Evaluation of alternatives- Every possible course of action needs to be evaluated while considering all the factors like opportunity cost, risk factors, etc.
• Creation and implementation of financial plan- Creation of financial plan is done to achieve goals. Hence, financial plan is developed and implemented by obtaining recommendations from experts.
• Monitor the progress and revise the plan if required- Monitoring and reviewing the plan regularly is very essential as the plan may evolve with the passage of time.

Advantages of financial planning

Some of the advantages of financial planning are:

• Provides direction to financial decision– Financial plan decides various investment opportunities that are available to a business and can also avoids various financial problems and it also helps in providing direction to financial decisions.
• Optimum utilization of resources– Financial planning helps a business organization to utilize their financial resources at a right time and at a right place and it make sure that such resources do not get waste and remains unutilized.
• Helps in reducing cost– Financial planning helps in reducing unnecessary cost and also helps to save money and hence it allows the company to use its resources in a right direction.
• Helps in raising funds easily– The financial plan depicts the goals and objectives of the company and risks and uncertainties involved in achieving such goals. The prospective investors or bank will analyze such business plan and it leads to generation of confidence among them which helps organization in raising funds easily.
• Brings Transparency with staff as well as investors– A business plan can be shared with the employees and staff of the organizations at meetings that helps employees and staff to assess real data and hence keep a watch on business.

Conclusion

Financial planning ensures that the accurate balance is maintained between the inflow and outflow of funds. Financial plan needs to be revised at regular intervals if required. It also involves capital budgeting, forecasting, formation of policies and investment strategies, acknowledge the type of resources required and quantify the same, determine the cost to be involved, possible risk involved, etc. Financial planning is something that says about how a company can efficiently manage the money it earns keeping goals in mind.

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