Financial planning is a vital part of financial management. The process of determining the objectives; policies, procedures, programmes and budgets to deal with the financial activities of an enterprise is the core of financial planning. Financial Planning is the process of estimating the capital required and determining enterprise’s competition. It is also the process of framing financial policies in relation to procurement, investment and administration of funds of an enterprise.
Proper financial planning is necessary to allow the business enterprise to have right amount of capital to continue its operations efficiently. Financial planning involves taking certain important decisions so that funds are continuously available to the company and are used efficiently. These decisions emphasize the scope of financial planning.
In the financial planning, it involves the following elements such as:
- Formulation of Financial Policies
Financial planning leads to formulation of policies relating to borrowing and lending, cash control and other financial activities. Such policies will help in taking vital decisions for the administration of capital and achieving coordination in financial activities.
- Estimation of Capital Requirements
Capital is required for various needs of the business. Separate assessment is to be made of the requirements of fixed and working capital. Fixed capital is needed for acquiring fixed assets such as land and building, plant and machinery, furniture, etc and it is blocked for a long time. Working capital is required for holding current assets like stock, bills receivable, etc. and cash for meeting day-to-day expenses in running the business.
- Determination of Financial Objectives
For effective financial planning, it is essential to clearly lay down the financial objectives sought to be achieved. The financial objectives should be based on the overall objectives of the company. The objectives of financial management may be set up in the areas, namely, investment, financing and dividend.
- Determination of the Kinds of Securities to be issued
A company can issue equity chares, preference shares and debentures to raise long-term funds. The types and proportion of securities to be issued should be properly determined.
Why it is important for an enterprise to have sound financial planning? Clearly, sound financial planning is essential for the success of any business enterprise. It will provide policies and procedures to achieve close coordination between the various functional areas of business. This will lead to minimization of wastage of resources. Management can follow an incorporated approach in the formulation of financial policies, procedures and programmes only if there is a sound financial plan. Some of the important benefits of financial planning to a business are as follows.
- Financial planning serves as the basis of financial control. The management attempts to ensure utilisation of funds in tune with the financial plans.
- Financial planning provides policies and procedures for the sound administration of the finance function.
- Financial planning ensures required funds from various sources for the smooth conduct of business.
- Cost of financing is kept to the minimum possible and scarce financial resources are used thoughtfully.
- Uncertainty about the availability of funds is reduced. It ensures stability of business operations.
- Financial planning attempts to achieve a balance between the inflow and outflow of funds. Adequate liquidity is ensured throughout the year. This will increase the reputation of the company.
- Financial planning results in preparation of plans for the future. Thus, new projects could be undertaken smoothly
In short, financial planning has many objectives to look forward to ensure that the scarce financial resources are maximally utilized in the best possible manner at least cost in order to get maximum returns on investment. Finance is the life-blood of business and an integral part of the corporate planning of the business. All business plans depend upon the soundness of financial planning.