Objectives and Importance of Financial Planning

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Objectives of a Financial Plan

They are two key objectives financial planning seeks to address

  • Ensure a Business Has Funds to Smoothly Run Its Operations

Whether it is the purchase of a long-term asset, day to day expenses a financial planshows how a business will meet these requirements. It outlines how money will be earned and used to ensure funds are always available when needed.

  • Avoid Unnecessary Raising of Resources

A financial planning lets you know how much money you need to inject into the business for it to grow. If you don’t know what you require you might spend a lot of time and money raising resources you don’t need, which is not good. With a financial plan, you have a clear picture of what capital is enough so you don’t raise excess. However, should you have a surplus financial planning dictates that that money be spent on a profitable venture instead of lying idle.

Importance of Financial Planning

  • For Optimum Fund Raising

As I have already mentioned as a business you don’t want to have less funds this will hamper your operations negatively. So, to avoid under or over capitalization do financial planning, it will tell you how much capital you need.

  • Determine Capital Structure

Organizations raise short, medium, and long-term funds from various sources. When doing a financial plan, you will determine how to raise the money for the various stages. Generally long-term funds are contributed by shareholders, debenture holders, for the medium-term business look to financial institutions while for short-term commercial banks.

  • Helps in Financing the Right Projects

Because financial planning looks at the company spending you can choose the best investments which guarantee the best return on investment. You will be able to choose this given that as you come up with the financial plan you will be comparing the various investments proposed.

  • Give Investor Confidence

If somebody is to invest in your business they definitely what to know that you understand what you are doing. Ensuring that your business does financial planning will make it easier for you to attract investors. If they ask for the numbers you can give them that and not guessing things when they ask the tough question.

  • Helps You Survive Turbulent Times

Remember I told you the first step to financial planning is studying your business environment. Because you had already anticipated and determined your financial requirements the business will be able to manage shocks better than if it didn’t have a financial plan. One thing financial planning does is ensure you have cash reserves which you can use in bad times.

  • Links Present and Future

Financial planning outlines what is required now so as to achieve growth in the future i.e. this are the sales numbers we need to be able to achieve this level of growth in 2years.

  • Helps in Operational Activities

Succeeding or failing in the production or distribution process largely depends on financing decisions. If proper financial plans are not made for example, you have not put good plans to pay for trucks maintenance and serving of machinery, the smooth working in this department will be disrupted which only means one thing losses for your business.

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