Meaning of Financial Planning
Financial planning is a term related to the estimation of fund requirements of business and deciding the sources for acquiring such funds. In simple terms, financial planning can be termed as the financial blueprint of the organization for carrying out the future set of operations towards attaining goals. It is a detailed process that involves framing strategic financial policies for procurement, deployment and monitoring of business funds.
Financial planning determines the optimum capital structure for the firm and ensures that an adequate amount of funds is always available. It influences the long-term growth and expansion plans of the business, hence the proper analysis of the business environment is must before formulating such policies.
Nature of Financial Planning
- Access Business Environment: Financial planning involves proper assessment of business environment for facilitating efficient decision making. It properly evaluates nature of operations performed within the organization for identifying the nature of business.
- Clarify business Vision and Goals: It considers all aims and objectives of business before formulating any plans. Financial planning focuses on enhancing the business profitability by acquiring funds at lowest cost.
- Determine the Capital Requirements: Financial planning properly analyses the capital requirements of business needed for smooth functioning. It estimates both fixed and working capital needs of business for carrying out its activities.
- Decides Capital Structure: It determines the optimum capital structure for organization. Capital structure is the proportion of debt and equity in capital of business. It involves deciding the debt-to-equity ratio both in short as well as long term.
- Frame Financial Policies: Financial planning is concerned with formulating policies related to raising, investment and administration of business capital. It frames policies for controlling cash movements, lending and borrowing by business.
- Maintain Adequate Funds: Regulating right amount of funds at every point of time is must for every business. Financial planning helps in maintaining proper amount of funds by raising it from distinct sources timely.
- Long-Term View: Financial planning is concerned with long-term view of company. It influences the pattern of financing in long term and have major effects on all its future goals.
Scope of Financial planning
- Ensure Availability of Funds: Financial planning ensures availability of adequate funds within the business for smooth functioning. It first estimates the capital requirements and then determines various sources for procuring such funds.
- Reduces Uncertainties: It minimizes the chances of uncertainties for business by delivering the right amount of funds at right time. Proper financial planning avoids any hindrance to the growth and continuity of business.
- Avoids Unnecessary Funds: Financial planning avoids any chances of shortage and surplus of funds within the business. It properly determines the funds requirements before raising them from distinct sources. Both of these conditions that is shortage and surplus of funds adversely affects the profitability of business.
- Proper Balance Between Funds Inflow and Outflow: It focuses on maintaining proper balance in between the cash inflow and outflows to ensure optimum liquidity within the organization. Financial planning regulates all cash transactions, lending and borrowing by business organization.
- Facilitates Growth and Expansion Programmes: Financial planning assist business in fulfilling long term growth and expansion plans. This guarantees the availability of required funds every time which support organization in attaining its long-term goals.