Definition of Financial Planning
Financial Planning is the process of estimating the capital required and determining its competition. It is the process of framing financial policies in relation to procurement, investment and administration of funds of an enterprise.
Objectives of Financial Planning
Financial Planning has got many objectives to look forward to:
- 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.
- 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.
- Framing financial policies- Framing the financial policies with regards to cash control, lending, borrowings, etc.
- Managing scarce resources- 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.
Importance of Financial Planning
Financial Planning is process of framing objectives, policies, procedures, programs and budgets regarding the financial activities of a concern. This ensures effective and adequate financial and investment policies. The importance can be outlined as-
- Adequate funds have to be ensured.
- Financial Planning helps in ensuring a reasonable balance between outflow and inflow of funds so that stability is maintained.
- Financial Planning ensures that the suppliers of funds are easily investing in companies which exercise financial planning.
- Financial Planning helps in making growth and expansion programs which help in long-run survival of the company.
- Financial Planning reduces uncertainties with regards to changing market trends which can be faced easily through enough funds.
- 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.
Basic steps of Financial Planning
1. Setting Financial Goals
# Financial planner informs client on proper financial goals.
# Set out goals relevant to the interest of the client.
2. Gathering Relevant Data
# The planner leads the client through the process.
# Collect financial information needed to generate a proper financial proposal.
# Use the Financial Wizard to enhance the data gathering process.
3. Analysis of Data
# The data will tell the financial situation of the client.
# Relate the current situation to the financial goals.
# Prioritize the financial goals according to current ability and available resources.
4. Recommendation of Financial Plan
# The planner sets out and develops a set of recommendations to help the client achieve financial goals.
# Once the client selects the most suitable and agreeable idea, funding will be explored to help implement the financial plan.
5. Implementation of Financial Plan
# The planner will help the client to take action through the most appropriate financial tools.
# The client must be motivated to be responsible in going ahead with the plan.
6. Monitoring of Financial Plan
# The financial plan must be constantly reviewed.
# From time to time, comparisons must be made between the plan objectives and the original financial goals.
# The objectives and the actual performance of the plan might differ over time, thus the planner and client must work hand in hand to ensure that the financial goals are achieved as planned.