Meaning and definition of financial planning
Financial planning can be delineated as long-term profit planning intended at generating higher return on assets, growth in market share, and at solving foreseeable problems. Putting it simple, it is the process of estimating the amount of required capital and determining its competition. It is a process that frames financial policies in relation to investment, procurement, and administration of an enterprise’s funds.
Objectives of financial planning
The main objectives looked forward by financial planning include:
- Determination of capital requirements
Financial planning is helpful in determining capital requirements. However, this depends upon factors like current and fixed assets cost, promotional expenses, and long-term planning. The capital requirements are looked upon with short term as well as long term aspects.
- Determination of capital structure
The capital structure refers to a composition of capital. This implies that it is the comparative type and proportion of capital needed in the business. This involves decisions about short term as well as long term debt-equity ratio.
- Framing financial policies
The financial planning is helpful in framing financial policies regarding lending, cash control, borrowings, etc.
- Utilization of resources
Another important objective of financial planning is to ensure optimum utilization of scarce financial resources in the best possible way at minimum costsso as to obtain higher returns on investment.
Importance of Financial Planning
Financial planning is a process that involves framing policies, objectives, procedures, budgets, and programs with regards to financial activities of a concern thus ensuring adequate and effective financial as well as investment policies. The importance of financial planning can be outlined in the following points:
- Financial planning ensures adequate funds.
- Financial planning is ascertains that the suppliers of funds are investing, without doubt, in companies exercising financial planning.
- Financial planning is helpful in ascertaining a reasonable balance between the inflow and outflow of funds so as to maintain stability.
- Financial planning is helpful in making growth and expansion programs which aid long term existence of the company.
- Financial planning mitigates uncertainties regarding changes in market trends which can be handled easily through sufficient funds.
- Most importantly, financial planning is helpful in reducing uncertainties which as=ct as a hindrance to company’s growth thus ensuring stability and profitability in concern.