Importance of Financial Planning
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
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
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
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.