Financial Planning

What is Financial Planning?

Financial Planning includes all the activities that apply general management standards to the financial resources of a firm such as planning, directing, organizing, procurement of funds, investment, and return of the funds. In this article, students will learn about the meaning, objectives, and features of financial planning. 


Financial Planning is one of the major planning that is required to be conducted by the management. Financial Planning includes all the activities which are related to the procurement of funds, investing those funds, and the return expected from the investment done. Financial Planning also ranges from tax planning which is an important activity. This planning is very important for a business to function, in this regard we have initiated the discussion on this topic ‘Financial Planning’ which is to be studied in greater detail. The scope of this topic is vast hence for a conceptualized study this is to be referred to. 


Definition and Meaning

Financial planning is defined as a document that has records of a business owner or firm's financial situation along with planning on the spending of money to achieve a certain goal by working by a well-devised plan. Financial planning may be made independently or by an experienced planner.


It is basically a financial budget plan, which helps organize the business and includes a set of goals that are supposed to be followed by the firm or business owner to save and spend accordingly. It helps distribute various monetary expenses such as rent, while at the same time saving some amount of money as short-term or long-term savings. 


Financial Planning is the process of estimating the capital requirement and also determining the competitive elements required for financial planning. This is a plan which has been defined as a document that contains a person's current money situation with the long-term monetary goals, the strategies to achieve those goals on the basis of the current fund. A financial plan may be devised and drafted independently or with the assistance of a financial planner. The first step in the creation of a financial plan is to involve collecting the numbers from the web-based accounts into a document or a spreadsheet. 


This type of planning is also known as an investment plan as it manages various types of liquid and other assets that involve risk and uncertainty. Financial planning done by individuals is not as risky as they do not involve huge investment or undertaking, such as funds kept separate for college or university, estates, healthcare, or retirement.


Financial Planning in Financial Management

A financial plan is an overall evaluation of an individual's current pay and future financial state by using the current known variables to predict the future income, asset values, and withdrawal plans. Financial Planning includes the budget which organizes the business and the individual finances and at times includes a series of steps or specific goals for spending and saving for the future. This plan distributes the future income to various types of expenses such as rent or utilities and also reserves some income for the short-term and long-term savings as well. A financial plan is sometimes referred to as an investment plan, while personal financing focuses on specific areas like risk management, estates, colleges, or retirement. 


Objectives

There two main objectives of financial planning which are given below:

  • Ensuring Availability of Funds When Required: The foremost and most important objective of financial planning is to keep in check that funds are available in cases of emergency or whenever it is required for use. Sufficient funds should be available with the firms for various purposes.

  • Check Unnecessary Fundraising by the Firms: Insufficient funds are just as bad as surplus funds. Idle money will only result in a loss for a firm as against investment. Therefore, proper allocation of funds is a very important part of financial planning.


The Objectives of Financial Planning are Enumerated as Follows - 

  • To Ensure Availability of Funds Whenever Required: 

The foremost objective of financial planning is assuring that sufficient fund is available with the company for different purposes. 

  • To Check if the Firm Raises the Resources Unnecessarily:

Excess funding is as bad as inadequate funds. If there is a surplus amount of money, then the financial planning is to invest it in the best possible manner as keeping financial resources idle is a great loss for an organization as it will be in vain.


Features

There are a number of features of financial planning that are important for firms and individuals. These are listed below:

  • Foresight: A plan made without foresight will only result in a disaster. Foresight is needed in planning for estimating risks and the need for liquid and other assets. It may not be 100% accurate but it should be able to give an estimate of the future risks.

  • Flexibility: A plan made should be flexible as it will help in the future to make adjustments according to the needs. 

  • Optimal Usage of Funds: A financial plan should be able to utilize idle money and assets so that they can prove to be fruitful in the future. It does not involve funds kept aside for unforeseen circumstances but the assets that could be otherwise utilized.

  • Simplicity: Financial planning should be simple in terms of structure and should be able to provide a sound allocation of resources that can be easily understood even by a layman.

  • Liquidity: It is also a very important aspect of financial planning which involves keeping current assets in the form of money. This will help in easy allocation and payment of various kinds like salary, fees, and other kinds.


Features of Financial Planning is Enumerated as below - 

  • Simplicity: A sound financial structure must provide a simple financial structure that could be managed easily and understandable even to a layman.

  • Foresight: Foresight must be used in planning to know the estimate and the need for capital which may be estimated as accurately as possible. A plan visualized without any foresight will outcast disaster for the company.

  • Flexibility: Repeating the financial adjustments becomes necessary hence its flexibility is required so that it is easily adaptable

  • Optimum use of Funds: Capital should not only be adequate but should also employ productive effects. A financial plan should prevent wasteful use of the capital, thus avoiding idle capacity to ensure proper utilization of funds to earn the capacity in an enterprise.

  • Liquidity: Current assets are to be kept in the form of liquid cash. Cash is also required to finance purchases, to pay the daily needs like paying salaries, wages, and other incidental expenses.


Conclusion:

Financial Planning is an important aspect of the individual as well as business life. This article gives you an insight into what financial planning comprises and what are its key aspects.

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FAQs (Frequently Asked Questions)

1. What is meant by financial planning?

Financial planning refers to short-term and long-term planning of allocation of available funds according to the requirements of a business firm by estimating the requirements of the firm and determining the sources of funds.

2. What are the two objectives of financial planning?

The two objectives of financial planning are:

  • To ensure availability of funds whenever required

  • To see that funds are not sitting idle or are not raised unnecessarily.

3. How does financial planning act as a link between the present and the future?

Financial planning is made by keeping in mind the future requirements of the firm by allocating liquid assets for proper investment and return.

4. What is the role of financial planning in financial corporate firms?

Financial planning in financial corporate firms helps in determining short term and long term capital requirements like the cost of assets, promotional expenses, and long term planning as well as determining the amount and proportion of capital required by the firm in terms of investment which includes making decisions on debt-equity ratio. Financial planning also helps optimal allocation of resources and funds available and framing financial policies related to investments and cash control.

5. Why is Financial Planning useful?

Finance is the lifeblood of a business, this is very crucial to any organization. Hence, utilizing finance without proper planning will be a fool’s act. The organizations force a special team for planning this fundamental factor. Planning involves estimating the future need of finance, its investment in key areas, and executing the return estimate – these activities are required to proceed on for adequate functioning.

6. Who is a Financial Planner?

A financial planner or a personal financial planner is also a professional person who prepares financial plans for his clients. These financial plans often cover cash flow management, retirement planning, investment planning, financial risk management, insurance planning, tax planning, estate planning, and business succession planning which attracts both individual clients as well as business firms.

7. Why is ‘Investment Plan’ also known as ‘Financial Plan’?

An ‘investment plan’, precisely, is a part of a ‘financial plan’ which means that in order to invest in a particular event or activity, the plan is to be devised to know the requirement of the fund needed in the investment, the return from the investment and its factors related. Thus, we see there is planning involved in the finance of the investment, hence, they can be used as synonyms to each other.

8. Enumerate Principles on Financial Planning.

The Principles are –

  • Think long-term with goals and investing.

  • Spend less than you earn.

  • Maintain liquidity (emergency savings).

  • Minimize the use of debt.

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