Planning is the first step in the process of management involving creative thinking and insight in future. Similarly, financial planning is the task of determining how a business will afford to achieve its strategic goals and objectives. Finance is considered as the life blood of every business and therefore financial planning is an integral part of planning process. Often a company starts working on its financial plan right after it has decided its vision and objectives for running the business. A company has N number of sources of funds but it has to plan diligently which source to use and in what proportion. The finance department has to find the most apt proportion between the debt and equity sources of funds available so that they are not only able to cover up the general expenses but also the interest payable on already taken loans and advances and to meet any unexpected loss that may occur. Financial planning also involves managing the existing funds of the company to meet various short term and long term objectives.
A financial plan involves the activities, resources, equipment and materials required to achieve the objective of the business within the given time frame. The plans so set must be helpful in achieving the objectives of the business and should be realisable without harming company in any manner. It is a year-round activity requiring proper analysis of various financial reports. We discuss now how a financial plan is framed. It is a 6 step process defined below:-
I. Establishing and defining the professional relationship
The financial planner will explain how he/she would work and inform about his responsibilities and that of the company too. The company must inform the planner about their requirements, tax position, investment plan and already existing fund position clearly to the planner.
II. Gathering information
If it an existing business the planner will ask for the information’s about the current financial position of the company. In case of a new business they would provide advice and help in raising funds. Having discussed about businesses objectives, concerns and risk undertaken the planner would set the financial goals along with the time period within which they are to be achieved.
III. Analysis and evaluation of financial status
Next the planner analyses the information so provided and thinks about the ways in which the set financial goals can be achieved. It’s basically involves making strategies to achieve goals.
IV. The Plan
After analysing the plan is drafted. The plan so designed will cove assets, investments, liabilities and income. There will be alternative plans too in case some contingency arises.
V. Implementing the plan
Now is the time to execute the plan drawn keeping in mind the recommendations from both the parties.
VI. Monitoring the implemented plan
The final stage is to regularly monitor and review the plan to ensure it is being carried out in the right direction. It should be carried out from time to time.
Clarity in financial plan is very important so one must understand its various important components. Listed below are few such components:-
• Financial management : It considers the short and long term goals for income, expenses, debt reduction and savings. The planner ensures the investments so made are consistent with the goals, time frame and risk tolerance capacity of the company.
• Risk management : It relates to protecting the company in case a particular incident ruins the plans so designed. Insurance products are useful in managing these risks.
• Tax planning : The main objective here is to minimize the tax obligation of the company so that the amount of wealth increases.
• Break-Even analysis : This analysis comprises of costs and sales revenue. It is a situation where there is no net loss no net profit. It determines the minimum output that must be produced by business to earn normal profit.
• Analysis of financial statements : The financial statements include Income Statement, Balance Sheet and Cash Flow Statement. Thorough analysis of these statements is required to make future financial plans. Loop holes can be detected and can be rectified so that same mistake is not repeated in future.
Financial planning helps in adding value to the company’s growth. No company can function efficiently without making a proper and viable financial plan. Below are some of the reasons why financial planning for a business is crucial and beneficial at the same time.
• A company has to plan to make sure it accumulates just enough amount of funds. Too little as well as too much of fund accumulation is not good. If the funds raised are too less expenses have to be cut short and if excess funds are hoarded it will lead to indulgence in wasteful activities. Planning helps in gathering, storing and using just the right amount of funds.
• How are funds to be raised? Is another important question. The company may issue shares or issue debt or take loans from banks. Once this decision is made, the company has to decide to whom they want to issue the shares and the debt, and which banks they want to approach for loans. Since most companies use a mix both debt and equity to raise funds, planning becomes extensive and complicated.
• At any point of time, a company might have two or more investment proposals. They need to decide which among them is the most affordable, the most profitable and has the most chance of success. Then it can invest in those proposals.
• Every company needs a considerable quantum of funds for its day-to-day operations, and larger the enterprise, more is the money requirement. Money has to continuously flow into the business so that operations are performed without any hindrance, and at no point of time there is any shortage of raw materials or stoppage in production.
• Financial planning is also the base for financial control. Unless the finance team knows how much money has been allocated and to which activity, they cannot know if they are over-budgeted or are under-budgeted. Remedial action can be taken only when there is a base for taking corrective measures.
• Every business has to face unanticipated expenses, crisis situations and events over which they have no control. Emergency funds are needed to combat these hard times. One of the roles of financial planning is to make sure that there are enough reserves for such occasions, and that these reserves are continuously renewed whenever they get exhausted.
• A company has to decide which department gets how much money. Every department like production, sales, marketing, etc. would have their own budget. But it is not necessary that their money requirement is apt. There will be times when the marketing department might need more and there will be times when the HR department might need more. Deciding which department gets how much funds and at what point of time is a constant activity for the financial planners.
• Financial planning also ensures consistency of goals, lines up the growth objectives of the enterprise with its financial requirements.
• Financial planning also supports the strategic growth of the organization, by taking into account risks, capital budgeting estimates, and opportunities in new markets.
A financial plan guides a company throughout its existence. A well-crafted financial plan can reduce losses, ensure steady and increasing gains and can help in avoiding any financial crisis from arising. It is therefore mandatory for the companies to ensure that their finance departments have skilled and competent planners with the best qualification in the field of finance.