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What is Financial Planning?
What is Financial Planning?
A company’s ultimate objective is to grow its sales and revenues and earn as many profits as possible from the markets. For this, it must have assets, such as equipment and machinery in its possession. The company must incur expenses to buy raw materials in order to produce finished goods from raw materials.
There are expenses in marketing the goods and services too. The company may need to sell its products in credit to increase the market share and push the sales up. This will create accounts receivables and debtors. The company may decide to use its retained earnings to fund new projects and distribute dividends to its shareholders.
The process of allocating and generating funds for the above mentioned needs through a specific manner that helps in the identification and use of the processes involved is known as Financial Planning. In other words, analyzing the company’s investment options, estimating the resources needed, and finding the sources of funds is known as the financial planning of a company.
Factors Involved in Financial Planning
Generally, financial planning may involve the following key factors −
Evaluation of Company’s Current Financial Condition
First factor is evaluating the current financial condition of the company. It is essential because it offers an insight into the fact whether corrective measures to re-enact the good health of the company is needed. The use of financial ratios and analyses are commissioned to evaluate the condition of the companies.
Company’s Growth Check
The next task is to check the company’s growth prospects, and the various opportunities available for growth. In this task, the finance managers must keep an eye on the industry they are offering services or goods in and then check the forthcoming projects in order to find new prospects for investment.
Appraising Investment and Divestment Options
Another task that the managerial staff needs to take into consideration is appraising the various investment and divestment options to achieve the growth objectives that are opted for. The appraisal is an important step because only those investment projects need to be selected that have future growth potential. Similarly, the projects that are sick and unable to generate revenue must be divested for the better future of the company.
Projection of Profitability and Future Growth
The next task that the managers should perform is to project profitability and future growth. Although managers may take full precaution which is a must in this step, there is never a 100% guarantee of success of the projections made because the future may be uncertain and non-projectable at any given time however well the measure of its calculation is.
Estimation of Funding
The next step is related to funding. The managers must estimate the funds that will be required in a project and find the resources from which the funds will be collected. A few guidelines, such as avoiding costly funding must be followed in this step.
Moreover, the managers must have a 360-degree view of the market while acquiring funds from the market so that the best loan with the lowest interest rates can be availed.
Alternative Funding Plans
The next step is to choose from alternative and different plans of funding. It is similar to the last step. However, in this step, the resources that are selected are finalized and approved by the board of directors. It is a very important step because the entire success of the project depends upon the selection of good resources.
Compare Planned Performances
The last activity that must be followed by the managers is to compare the planned performance with the real one. The idea is to judge whether the plan is working and going on the right path.
Financial planning is an unavoidable option for every company because it shows the potential of a company to earn profits while maintaining its operational strategies intact. Without a proper financial plan, companies won’t have any clue about achieving their goals. That is why financial planning is considered an inevitable part of business strategies.
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