Financial Planning | Process, Importance & Objective
Financial planning is the process of meeting financial objectives through a sound plan that is tailored to your specific needs. Financial planning encompasses more than just investments, and it’s more than a one-time event. Your plan may change over time as your needs change and new opportunities arise.
Financial planning allows you to determine what you want to do with your money. It allows you to save toward specific goals and help to reduce taxes, lower debt, and build wealth. Through an understanding of your current situation and future needs, you can ensure your hard work and accumulated assets will last for years to come.
This includes the proper management of funds and investments; setting up systems to track and review transactions; creating a budget; maintaining records, statements, and files based on your specific needs.
Objective of financial planning
Here are some of the main objectives of financial planning to make your business grow.
- Estimating capital requirements
Capital requirements are typically defined as the amount needed to support a financial plan, which can be calculated by summing projected assets and liabilities. Capital requirements can also be viewed in terms of insurance coverage needs and the cost of living expenses.
Capital requirements are the funds a business needs to operate and grow. They include inventory, equipment, buildings, non-operating assets such as goodwill and other intangible assets, and debt.
- Estimating capital structure
Capital structure is the mix of long-term and short-term debt, plus equity capital used to finance a firm’s assets. The capital structure should be estimated as one of the main objectives of financial planning. The capital structure entails the sources from which funds are obtained, their respective proportions, and the costs associated with each. Capital structure can be planned and estimated by analyzing companies’ performance in terms of profitability and liquidity
- Crafting financial policies
The next objective of financial planning in the queue is seeking to frame the policies of cash control, lending, borrowing, etc. These decisions are made by business owners primarily based on their own experience and intuition. Although no one can claim these policies are right or wrong, they can only be applied to future situations with a degree of uncertainty because no two future situations will ever be identical since they depend heavily on external factors beyond our influence.
- Inspecting Financial Resources Is Maximally Used
Financial planning is a process that helps to solve problems in the management of financial resources. A finance manager ensures that the scarce financial resources are maximally used in the best feasible manner at the least expenditure to get the ultimate ROI. This can be achieved through proper planning, utilization of available resources, and acceptance of responsibility for decisions taken during this process.
Financial Planning Process
Creating a financial plan is essential to the survival of your business. Financial planning helps you to establish a realistic plan designed to achieve your goals and maintain your investments. The process is thoroughly discussed below. This can help you make the right decisions to ensure that your company grows steadily over time and is stable even in difficult times.
Preparing financial planning can become overwhelming and confusing, especially if it is not done correctly. This guide will walk you through the financial planning process steps, so you’re never lost again with all the material you need to start making your business grow in the right way.
- Determine your Financial Situation
First, identify your financial situation. Know where you stand, what you owe, and how to get out of debt. If you have no debt, that is great! Now you can start a savings plan. If you have debt, find out how much time and money it will take to pay off your debt in the next year or two by cutting expenses and increasing income. It is important to understand the financial situation of your business and where you want to go from there.
- Determine Financial Goals
Determining your Financial Goals is the second step in the financial planning process. Financial Goals make up a life plan that lays out the milestones you want to achieve and how you’ll use your money to get there. This will help you set realistic objectives, prioritize your financial goals and make sure you are on track with your plan.
This can include both short-term and long-term goals, as well as financial planning for major purchases that you’ll be making over the next several years.
- Identify Alternatives for Investment
The third step in the financial planning process is Identifying Alternatives for Investment. There are many alternatives available to you such as bank savings, stocks and bonds, mutual funds and annuities, life insurance, and real estate. The objective of this step is to identify an appropriate amount of liability protection that your finances allow.
During this step, you will learn about various investment options available to you including stocks, bonds, mutual funds, and ETFs. An investor can invest in several different ways, but each has its advantages and disadvantages. Simply speaking, there are three types of investments: cash deposits, bonds, and stocks.
Investing is a decision that carries a great deal of risk – and the potential for reward.
- Consider Alternatives
The fourth step in the financial planning process is Evaluate Alternatives. This can be a confusing time, but no matter what kinds of questions you have, or what stage in life you’re at, it’s never too early or too late to start planning for your financial future. In this step, you need to identify, compare and contrast various ways to achieve your goals and objectives. Think about the various available options.
- Place Together a Financial Plan & Execute
Your financial planner will use the information gathered during the first four steps of the process to determine your risk tolerance, figure out how much money you’ll need to retire, and develop a budget that will help you make sure you’re saving enough for retirement. The plan should include details on your income sources, expenses, and savings goals.
Your financial plan is the best way to get started on your road to retirement and so much more. It gives you a detailed process for achieving your goals, along with the confidence and motivation to make it happen.
- Review, Re-evaluate and Monitor The Plan
Reviewing, re-evaluating, and monitoring your financial plan is an essential step in the process. Tracking your progress in these areas allows you to see how you’re faring and whether or not you need to make any adjustments. By reviewing your situation regularly, you’ll be able to keep your plan relevant to your daily life.
Importance of Financial planning
- It helps you understand what your financial goals are. It can help you to work on achieving them and make the most out of your money.
- It aims to provide you with a path to achieve your goals while minimizing the negative effects of unexpected occurrences which may hinder your progress.
- Financial Planning assists in providing a good balance between inflow and outflow of funds so that equilibrium is conserved.
- It reduces tensions on varying market trends which can be easily encountered through enough funds.
- It helps in decreasing the uncertainties which can be a burden on the company’s development. It aids in providing strength and profitability in concern.
The Bottom Line
Financial planning is all about understanding your short, medium, and long-term goals to determine how much capital you need to achieve those goals, and then making sure you have the right mix of income, savings, and investments that will help you get there. There are lots of financial forecasting software for small businesses and enterprises to make businesses grow.
Thus, financial planning is an ongoing process. It will never end as long as you are working to better your financial situation, and meeting objectives and goals.
