Financial planning has to do with laying down a roadmap to guide your every action towards achieving your business or financial goals.
On a personal level, it comprises functions such as budgeting, banking, insurance, mortgages, and, investments, as well as retirement, tax, and estate planning.
Financial planning for a business involves determining how much funding is needed to run the business well, finding sources of funding, and creating policies for managing the funds. This type of plan is typically carried out for long-term projects with a projected lifespan of 4-5 years or longer. Financial management and planning could be done by an employee within the enterprise with experience or a reputable financial advisor.
In this article, we will be examining the main objectives and importance of financial planning to an enterprise.
Objectives of Financial Planning.
Every business's success depends on their ability to make prudent financing decisions, whether its ensuring a positive cash flow, managing their debt equity ratio or the process of estimating upcoming revenue and costs. The key to ensuring your company makes good financial decisions is understanding that the planning is the process that makes them happen.
Financial planning is carried out to achieve the following objectives:
1. Estimating the capital requirement: The first phase of financial planning is figuring out how much capital will actually be needed. A company’s capital requirements could either be short-term or long-term. Short-term financial plans are called budgets, and long-term financial planning involves making a broad plan for capital expenditure. There are various factors that can affect how much capital a business needs, including the need for assets, operational costs, and advertising expenses.
2. Identifying the sources, availability, and timing of finances: Every company must identify the sources and timing of its funding. However, these calculations can be really tricky to determine.
Depending on the needs of the firm, the required amount of funds will need to be available at the necessary time. Financial planning aids in identifying the most economical sources of funds and guaranteeing that funds will be available when needed. For example, to meet day-to-day expenses, and so on.
3. Defining the capital structure of the business: A business’s capital structure comprises the ratio of total external or internal debt to shareholder capital. Financial planning helps a business determine how much funding is needed, find sources of funding, and manage the funds effectively.
4. Prevent excessive fund generation: Unnecessary excess and deficiency of finances always cost organizations money. Preventing the company from raising resources unnecessarily is one of the most important goals of financial planning. Excess funds are simply non-productive assets of a company that incur costs but do not produce any income for the company.
5. Plan and prepare against all risks: The risks and problems associated with the business plan are identified through financial planning. Then, counter strategies can then be designed to address these probable difficulties once they have been discovered during the planning stage. This guarantees the project’s successful completion and saves the business a ton of cash and time. Long term investment should also be considered as a way to protect assets against external risk factors.
Importance of Financial Planning.
The importance of financial planning includes:
1. Financial planning organizes funds according to the project’s requirements and at the right time.
2. Long-term development, which is essential to the expansion of the company, can be planned and carried out with the aid of financial planning.
3. Financial planning aids in preparing for potential problems and risks. This increases the project’s chances of success.
4. By planning sufficient funds for each stage of the project, good planning gives the company an advantage over the competition.
5. Financial planning helps to coordinate various departments like production and sales and helps the business achieve its most important objectives.
6. Financial planning helps a company forecast its sales and growth goals, and connects its current financial status with its future needs and objectives.
Financial planning is integral to the success of any business and its operations as well as projects. However, for it to be effective, financial planning must be approached properly and revisited regularly. This is so that it remains suitable for the business and up-to-date with the changing economic environment.