The key objective of financial planning is estimation and understanding of capital structure or requirement of capital and determination of areas where it is to be disbursed. For a business enterprise regardless of its volume of business, the significance of proper finance planning can never be overlooked. It is similar to the lifeblood of a business. According to Tom Colton that it is basically a must-have business process that ensures productive functioning of a business. By framing seamless financial policies, a business can take decisions about investment, procurement of allocation of funds in different areas.
Purpose of Financial Planning
Thus, the whole purpose of financial planning is intended to take care of the following areas:
- Typically, the factors that are determined include the cost of assets (current and fixed), all promotional expenses and long term plans. A business entrepreneur is supposed to take care of both short-term as well as long- term requirements of its business.
- Determining the capital structure is an essential part of financial planning. The composition of capital structure addresses analysis of capital volume needed in the business. Importantly, at the time of finding out the volume, a financial planner must consider the debt factors and its equity ratio in both short and long term.
- The financial manager should formulate various financial policies in relation to cash control, borrowing, lending and ways to achieve better cash flow. Typically, in order to work effectively in this function, financial planners should work together with accounts people, departmental heads as well as management.
- The finance manager must ensure minimal consideration of scarce financial resourcing areas. This minimizes risk issues concerning effective business functioning, inspires investors and stakeholders and maximizes returns on business investments.
Necessity of Financial Planning
Financial Planning is a business process crucial for determining and framing different goals, business policies and budgeting related to financial activities apart from setting other business programs. Flawless planning ensures adequate fund flow in the business as well as money spinning investment policies. Its significance can be narrated as follows
- As said above the planning ensures required fund flow in the business which is essential for its well functioning.
- Reasonable balancing between fund outflow and inflow ensures sustainability of a business. By effective planning, a financial manager ensures that proper balance will be maintained.
- Financial Planning backed by analysis ensures that the stakeholders and investors in the company will continue providing support.
- Apart from its sustainability, a business enterprise needs steady growth and expansion that helps in long term survival in the highly competitive market. This most essential business growth is ensured by financial planning
Tom Colton says that with an effective financial plan, a business group can reduce its future uncertainties pertaining to the fast changing market trends, increasing competition in the open economy, whereas enough fund flow is essential. The financial statement also lessens related uncertainties which can come on the way of an impediment for the development of the business. It also ensures profitability which is key concern for any business.