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Friday, April 9, 2021

Why financial planning is important in different stages of life?



Financial planning means deciding in advance how much to spend, on what to spend according to the funds at your disposal.

The financial planning begins with a determination of total capital requirement. For this, the finance managers do the sales forecast and if the future prospects appear to be bright and expect an increase in sales, then the firm needs to increase its production capacity which means more requirement of long-term funds. A higher level of production and increase in sales will require higher fixed as well as working capital.

After estimating the requirement of funds the next step of financial planning is deciding how to raise this finance. Finance may be internally generated by the business or capital may have to be raised from external sources such as equity shares, preference shares, debentures, loans, etc.

 Financial planning is broader in scope as it does not end by raising estimated finance. It includes long-term investment decisions. In financial planning finance manager analyses, various investment plans and selects the most appropriate. Finance managers make short-term financial plans called budgets.

Importance of Financial Planning

Sound financial planning is essential for the 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 avoiding 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 the 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:

The 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 the function of a business depends upon the financial decisions as the right decision ensures smooth flow of finance and smooth operation of production and distribution.

5.     Base for Financial Control:

Financial planning acts as a basis for checking the financial activities by comparing the actual revenue with estimated revenue and actual cost with an estimated cost.

6.     Helps in Proper Utilisation of Finance:

Finance is the lifeblood of business. So financial planning is an integral part of the corporate planning of the 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 the debt/equity ratio and by deciding where to invest this fund. It creates a link between both 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 to present financial requirement with the future requirement by anticipating the sale and growth plans of the company.

Objectives of Financial Planning:

Financial planning is done to achieve the following two objectives:

To ensure availability of funds whenever these are required:

The main objective of financial planning is that sufficient funds should be available in the company for different purposes such as for the 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.

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 organization.

Financial Planning includes both short-term as well as long-term planning. Long-term planning focuses on capital expenditure plans whereas short-term financial plans are called budgets. Budgets include a detailed plan of action for a period of one year or less.

  

1 comments:

  1. thanks for sharing this blog and importance of financial management I am also doing my PGDM Course in finance from distance learning center i find this blog very useful for my study as well.

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