Financial planning means deciding in advance how much to spend, on what to spend according to the funds at your disposal.
Objectives of Financial Planning:
Financial planning is done to achieve the following two objectives:
1. To ensure availability of funds whenever these are required:
The main objective of financial planning is that sufficient fund should be available in the company for different purposes such as for purchase of long term assets, to meet day-to- day expenses, etc. It ensures timely availability of finance. Along with availability financial planning also tries to specify the sources of finance.
2. To see that firm does not raise resources unnecessarily:
Excess funding is as bad as inadequate or shortage of funds. If there is surplus money, financial planning must invest it in the best possible manner as keeping financial resources idle is a great loss for an organisation.
Financial Planning includes both short term as well as the long term planning. Long term planning focuses on capital expenditure plan whereas short term financial plans are called budgets. Budgets include detailed plan of action for a period of one year or less.
Importance of Financial Planning:
Sound financial planning is essential for success of any business enterprise. Its need is felt because of the following reasons:
1. It Facilitates Collection of Optimum Funds:
The financial planning estimates the precise requirement of funds which means to avoid wastage and over-capitalization situation.
2. It Helps in Fixing the Most Appropriate Capital Structure:
Funds can be arranged from various sources and are used for long term, medium term and short term. Financial planning is necessary for tapping appropriate sources at appropriate time as long term funds are generally contributed by shareholders and debenture holders, medium term by financial institutions and short term by commercial banks.
3. Helps in Investing Finance in Right Projects:
Financial plan suggests how the funds are to be allocated for various purposes by comparing various investment proposals.
4. Helps in Operational Activities:
The success or failure of production and distribution function of business depends upon the financial decisions as right decision ensures smooth flow of finance and smooth operation of production and distribution.
5. Base for Financial Control:
Financial planning acts as basis for checking the financial activities by comparing the actual revenue with estimated revenue and actual cost with estimated cost.
6. Helps in Proper Utilisation of Finance:
Finance is the life blood of business. So financial planning is an integral part of the corporate planning of business. All business plans depend upon the soundness of financial planning.
7. Helps in Avoiding Business Shocks and Surprises:
By anticipating the financial requirements financial planning helps to avoid shock or surprises which otherwise firms have to face in uncertain situations.
8. Link between Investment and Financing Decisions:
Financial planning helps in deciding debt/equity ratio and by deciding where to invest this fund. It creates a link between both the decisions.
9. Helps in Coordination:
It helps in coordinating various business functions such as production, sales function etc.
10. It Links Present with Future:
Financial planning relates present financial requirement with future requirement by anticipating the sales and growth plans of the company.