Importance of Financial Planning

01-December-2020 by Virtue Ventures

Meaning of Financial Planning

  • A financial plan is a statement estimating the amount of capital requirements and determining its composition. It emphasizes on the following aspects: how much fund is required? When the fund is required? How the fund should be raised? How to use the funds?
  • It includes budgeting for your business, analyzing past reports, forecasting net revenue, estimating operating costs, understanding risks, and much more.
  • A realistic financial plan should be at the core of any business strategy. Here are some reasons why financial planning is so important for any business:
 

 

1. It creates a revenue model.
An effective financial plan acts as a revenue model, which includes calculating potential profit and loss. Tracking the cash flow and comparing it with the financial plan, which helps you analyze current situation of your business. Having a plan allows you to measure actual progress relative to where you envisioned it to be at the beginning of your financial year.



2. Setting-up a realistic goals and growth opportunities.
Financial planning is a way of setting goals that are realistically attainable for company, as it projects a certain amount of revenue after an extended period of time. It acts as a powerful lens to ensure the growth of the business. This makes it essential in facilitating growth and expansion programs to ensure a company’s long-term survival.



3. Improvise the decision-making to make it more risk free.
It acts as a guide to running your business and helps you create a realistic strategy with well-defined steps for achieving profits. One should not make an instant business move, whether it’s an investment or a purchase, without having proper cost benefit analysis. A financial plan enables proactive decision-making, as well as financial stability and control, which can be achieved only with careful, professional planning.


 
4. It ensures adequate funds.
For running a business many resources will be required. A financial plan ensures that many aspects of your business such as marketing, staffing, property and many others, have been allocated adequate funds so it continues to run smoothly. Your plan should also account for a set amount of emergency reserves to cope up with any unforeseen situation like recession in the industry, global economic recession etc. and make you sleep peacefully at night.



5. It tracks and maintain your liabilities and owner equity.
Financial planning requires analysis of your company’s short term and long-term liabilities and owner equity. Along with the current assets, liabilities are also need to be monitored carefully to maintain proper fund allocation and budget planning in the business. Your financial plan will schedule any debt repayments, or help you when considering new liabilities, eventually empowering you to fully understand your business’ finances and profitability for the coming years.



6. Maximum utilization of scarce resources:
A Financial Plan also ensures that the scarce financial resources are maximally utilized within the absolute best manner at the minimum of cost, so as to urge maximum returns on investment.


 
It is not a one-time exercise. It is planning till the end of everything, so it does require a lot of assumptions which Can change very frequently. As these assumptions change, so, should your financial plan.