What should be the main objective of your financial plan?

Financial Planning is an essential portion of both personal and organizational financial management. Additionally, having a plan in place is the first function of management. In this article, let’s uncover what the meaning of financial planning is along with its objectives.>

What is financial planning?

Financial planning is nothing but the process of:

1. Determining your future needs in terms of investment, resources, funds
2. Determining the sources of funds
3. Managing or utilizing these funds efficiently
4. Identifying risks and issues in the plan

In layman's terms, financial planning helps decide in advance how much and how to spend money depending upon the funds at your disposal.

Financial planning is generally carried out for the long term. Such planning can be accomplished either as a result of substantial experience or by following the advice of a reliable financial advisor.

What are the main objectives of financial planning?

The objectives of a financial plan are as follows:

• Estimating the capital requirement

  Determining the investment or capital required for a business is the commencing step of a financial plan. The capital requirement is divided into two categories:
  1. Short-term capital
  2. Long-term capital

  Capital requirements are affected by multiple businesses needs such as the ratio of the requirement for current and fixed assets, operation expenses, etc.

• Estimation of sources, availability, and timing of funds

  This particular activity is time-consuming and requires precision in terms of execution. The required funds should be made available at the appropriate times in alignment with the business needs. It also includes estimating fund requirements for different purposes in the business. Financial planning aids primarily by determining the cheapest sources of funds and ensuring availability at the right time.

• Determining the Capital structure for the business

  The capital structure of a business refers to the composition of total internal and external debt towards the shareholder’s capital. Financial planning includes determining an effective debt-equity ratio of the business both short-term and long-term.

• Avoiding unnecessary generation of funds

  One may imagine that having an excess of funds can never be a bad thing. But that’s a misconception. An unnecessary excess and shortage of funds, both, are expensive affairs. An important function of financial planning is to ensure that the business does not raise unnecessary resources. Excess funds are idle assets. They don’t earn revenues for the business, moreover, incur their own cost.

• Tackling financial risks:

  Financial planning helps identify beforehand the operational and financial risks of a business. As a result, effective strategies can be prepared to counter such identified risks and issues. This way, the business can operate smoothly while also saving money and time.

Benefits of financial planning

Financial Planning is the process of marking boundaries to a company’s targets, policies, procedures, strategies, and budgetary plans in the long term. It allows businesses to prepare a steady plan for their short-term and long-term goals. Now that we have covered what the objectives of financial planning are, let’s look at some of the benefits:

• Arranging and ensuring the availability of sufficient funds in line with business needs
• Financial planning supports the long-term development of a business steadily
• Being prepared against shortcomings and risks raises the chances of success.
• Establishing trust amongst investors to effortlessly raise capital.
• Minimizing the impact of vulnerabilities that arise as a consequence of changing industry patterns. This guarantees improved security and benefits to the organization.

Final word

Financial planning is needed for estimating the fund requirements of a business along with determining its sources. It generally includes long-term investment, growth, and financing decisions. Financial planning is a not-so-simple financial outline for the future of a business.