Financial Planning

Financial Planning

Financial planning is an important part of financial management. It is the process of determining the objectives; policies, procedures, programmes and budgets to deal with the financial activities of an enterprise.

Financial planning reflects the needs of the business and is integrated with the overall business planning. Proper financial planning is necessary to enable the business enterprise to have right amount of capital to continue its operations efficiently. Financial planning involves taking certain important decisions so that funds are continuously available to the company and are used efficiently. These decisions highlight the scope of financial planning.

Elements of Financial Planning

Financial planning involves the following steps or elements:

Determination of Financial Objectives

For effective financial planning, it is essential to clearly lay down the financial objectives sought to be achieved. The financial objectives should be based on the overall objectives of the company. The objectives of financial management may be set up in the areas, namely, investment, financing and dividend.

Estimation of Capital Requirements

Capital is required for various needs of the business. Separate assessment is to be made of the requirements of fixed and working capital. Fixed capital is needed for acquiring fixed assets such as land and building, plant and machinery, furniture, etc. It is blocked for a long time. Working capital is required for holding current assets like stock, bills receivable, etc. 

Determination of the Kinds of Securities to be issued

A company can issue equity chares, preference shares and debentures to raise long-term funds. The types and proportion of securities to be issued should be properly determined.

Formulation of Financial Policies

Financial planning leads to formulation of policies relating to borrowing and lending, cash control and other financial activities. Such policies will help in taking vital decisions for the administration of capital and achieving coordination in financial activities.

Importance of Financial Planning (Management):

Sound financial planning is essential for the success of any business enterprise. It will provide policies and procedures to achieve close coordination between the various functional areas of business. This will lead to minimisation of wastage of resources. Management can follow an integrated approach in the formulation of financial policies, procedures and programmes only if there is a sound financial plan.

  1. Financial planning provides policies and procedures for the sound administration of the finance function.
  2. Financial planning results in preparation of plans for the future. Thus, new projects could be undertaken smoothly.
  3. Financial planning ensures required funds from various sources for the smooth conduct of business.
  4. Uncertainty about the availability of funds is reduced. It ensures stability of business operations.
  5. Financial planning attempts to achieve a balance between the inflow and outflow of funds. Adequate liquidity is ensured throughout the year. This will increase the reputation of the company.
  6. Cost of financing is kept to the minimum possible and scarce financial resources are used judiciously.
  7. Financial planning serves as the basis of financial control. The management attempts to ensure utilisation of funds in tune with the financial plans.
  8. Finance is the life-blood of business. So financial planning is an integral part of the corporate planning of the business. All business plans depend upon the soundness of financial planning.(i) Financial planning provides policies and procedures for the sound administration of the finance function.

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