what is financial planning|ARTICLECG

what is financial planning?

A person wants to make maximum use of his limited resources. That's why he plans before doing any work. And when it is related to money, it becomes very important. In this article, we will discuss what is financial planning. Will know about If you run your own company or business, then you need to do your financial planning. So that you can achieve your goal. Financial planning means a plan that pre-determines financial activities. So that you can achieve your goal. Financial planning can be divided into two parts.

1 describes the capital structure of the business.

2 State the financial policies of the business.

Importance of Financial Planning

Financial planning is an essential and important financial process. Which determines the success of the business. Financial planning is the key to business success. How to use your financial resources. It has to be guessed correctly. The first objective of financial planning is

what is a key factor of financial planning?

1 business success

The success of the business depends on your right planning. In this, the first planning should not fulfill the financial requirement for the business. Financial planning is essential for both the future and present operations of the business.

2 Operations and Savings

 Both operations and savings of the business can be done properly by planning finance. And the wastage of your business can be stopped.

3 Conservation of capital

That part of the property which you have put into that e-business is called capital. He purchases various types of assets with the capital invested in the business. But the business circulation was new inventions, and the value of advanced machines starts decreasing. The need to purchase new assets always remains. Therefore, financial planning should be done for these things in the future.

4 financial planning for business expansion

Every businessman wants to develop his business. After achieving his initial goal, he plans to expand further. This type of expansion and development requires financial planning for the plan to be successful.

5 cashflow projections

There is always a need for cash in business operations, so it is necessary to maintain cash in your business. Which is possible to a great extent through the process of financial planning.

Objectives of Financial Planning?

There are two main objectives of financial planning.

1 To decide the availability of funds at the time of need.

The company has to buy many types of assets for itself, such as machine plants, building stock, etc. Apart from this, some expenses are also incurred for the operation of the business, the funds are arranged for all these through financial planning.

2 How the financial balance is made from the financial plan.

Business over-capitalization or under-capitalization is not good for both businesses. Businesses can be saved from these evils by planning finance.

process of financial planning

In present times, financial planning is a complex task related to each and every aspect of the functioning and operation of a business. While planning, it should include all future aspects. These things should be kept in mind while doing financial planning.

1 what is the historical analysis of financial planning

    While planning for the future, you must keep your old experience in mind so that the shortcomings can be removed from the new plan. To remove their old account books and invoices should be observed.

2 Taking care of long-term needs

The businessman wants to develop his business in the future, for which he makes a lot of plans. Money is needed to meet your financial requirement. If he makes his financial plan right then it is easy to get success.

3 Choosing a Funding Source

Any business organization has limited resources while it has many plans. It should choose its resources based on priority.

Characteristics of a Good Financial Planning

 

The success or failure of any business organization and its future growth and decline completely depend on a sound financial plan. Therefore, the following features are targeted in good financial planning-

(1) Simple – The financial plan of the institution should be of such a type that its basis is reasonable and estimates can be made easily and also the management and control of that plan can be done easily. The main part of the financial plan i.e. the model of the capital structure should also be simple so that investors can automatically be attracted to it.

(2) Foresight – A sound financial plan takes into account the present needs as well as the future needs. The financial plan should be such that the business can run smoothly for a sufficient period. The first part of the financial plan should be such that all types of permanent and current expenses can be met with that amount. The form of this plan should be such that the financial situation can remain balanced in future ups and downs and the financial plan can face well the financial difficulties that come from time to time.

(3) Full use of funds: A sound financial plan can only be said to be that which makes full use of funds possible, this is possible only when there is complete coordination between the amount of capital and financial requirements, that is, there is a condition of proper capitalization. There should not be either situation of over-capitalization or under-capitalization. Also, there should be a proper relationship between working capital and fixed capital.

4) Flexibility - 

The financial plan should be such that it can absorb expansion, contraction, and other changes. To run the business smoothly, the financial structure mustn't be rigid, because due to rigidity, many defects and difficulties arise. In such a situation, instead of becoming a helpful tool, financial planning becomes a burden. Therefore, it is necessary to be flexible in financial planning so that changes can be accommodated over time.

(5) Liquidity-

 It is essential to have adequate liquidity arrangements in financial planning. For this, a certain portion of working capital should be kept in cash. The cash component indeed depends on the size of the institution, its credit standing, the state of the business cycle,, and the nature of its business. Therefore, keeping all these elements in mind, the provision of cash should be made in the financial plan. Thus having liquidity does not create any hindrance in the execution of day-to-day operations and

In the event of an accident, it can be easily dealt with.

(6) Economy-

 In financial planning, the expenses incurred in obtaining capital and issue of securities should be kept minimum. Many types of expenses like printing, underwriting, commission, brokerage, etc. have to be done in capital issues. Financial planning will be called successful when savings are made on all expenses.

types of financial planning

The types of financial planning can be explained as follows-

(a) Short-term financial planning 

Under short-term financial planning, plans are generally made for one year. Projected profit-loss accounts or balance sheets, details of receipt and utilization of funds, estimation of working capital, etc. are considered important tools of short-term financial planning mainly for the management of working capital.

(b) Medium-term financial planning

 Generally, when financial plans are made for more than one year, but less than five years, it is called the process of medium-term financial planning. Under this, medium-term financial planning is needed to meet the requirements of maintenance of assets, their replacement, running research and development works, arranging special working capital, etc. Through this planning, an attempt is made to obtain such a source of capital, which reduces the cost of capital and keeps the financial structure of the organization liquid.

(c) Long-term financial planning

 is related to all those financial plans which are made for more than five years. Determining long-term financial goals, determining the amount of capitalization, preparing the capital structure, arranging additional capital for future expansion plans, etc. are included in long-term financial planning.

Factors Affecting Financial Planning

There are many factors to be taken into account while making a financial plan. Its main factors are as follows-

(1) Nature of business 

 The nature of business has a great influence on the preparation of financial planning. Capital-intensive purposes require more capital, while labor-intensive industries require less capital. Apart from this, the possibilities of development, a possible rise in the demand for the produced goods, scientific progress, etc. also have an impact on the sources of capital.

Management by Objectives (MBO)|

(2) Attitude of the managers:

The format of the financial plan is also affected by the attitude of the managers. If the managers want to concentrate the control of the business in their own hands. So will not issue too many even shares or will issue very less. Instead of the general public, will encourage institutional investors and arrange finance through debt. Similarly, conservative management may at times,, not like new issues for future expansion programs and modernization plans.

(3) Expansion of financial the plans

 Future expansion programs and plans have to be kept in mind while making financial plans. If this scope is not left in the financial plan at the beginning itself, then there may be obstacles in making adjustments in the future.

(4) Capital structure in high-grade securities 

 The capital structure should be made diversified, balanced, and conservative, a major part of the financial plan. A proper balance should be maintained in different types of securities and care should be taken so that no strong and permanent burden of capital relations should arise on the institution.

(5) Desired amount of external capital

 In case of gradual expansion of the business, the financial management should be done in such a way that a little bit of money is collected from external sources. If money is needed for a short time, then only redeemable preference shares or redeemable debentures should be issued. As far as possible, the hassle of issuing shares in small amounts should be avoided, because it adversely affects both the reputation of the institution and the cost of capital.

(6) Government control

 government policies, financial controls, and other statutory regulations while preparing the financial plan. Arrangements should also be kept in mind.

(7) Degree of risk

 The risk and uncertainty inherent in the production of a particular enterprise also affect financial planning. Lenders hesitate to provide more capital in case of high-risk industries and hence these industries have to rely more on proprietary securities to raise their capital. On the contrary, in the case of low-risk industries, more reliance is placed on debt capital. These industries can get the benefit of 'business at par' by taking loans.

(8) Status and size of business

 In the preparation of the financial plan, the status of the business: such as the age, size, scope of work of the unit engaged in business, the credibility and reputation of the promoters and management, etc. have to be kept in mind. Large-sized organizations do not face much difficulty in raising capital, but their capital requirement is high. Small size organizations require less capital. But they have difficulty raising capital. Every investor is ready to invest in old and good credit and reputation institutions, but the newly promoted institution has to face difficulty in collecting capital.

(9) Evaluation of alternative financial instruments

 While preparing the plan, the best option should be selected by making a relative evaluation of the alternative financial instruments available in the capital market. An analytical study of face value, issue cost, and facts of popular and popular securities in the market should be done for the evaluation of alternative means. Along with this, it should also be seen whether the time of issue of such securities is favorable or not.

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(10) Other factors 

 Other factors, such as current market conditions, boom or bust conditions, investors' outlook, level of interest rates, taxation, etc., are taken into account in making financial plans for a newly promoted institution or for the expansion of an existing institution. Policy, etc. also have to be kept in mind. All these factors have an impact on financial planning.

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