Like all activities, financial activities must also be planned for.
Financial planning is the process of creating the financial blueprint for a future course of action.
As it relates to business, financial planning is the preparation of a financial roadmap for the future operations of the company.
It involves creating a plan to manage the financial resources of a company so as to achieve the financial goals of the organization.
Financial planning also refers to the process of estimating the funding requirements of a business and determining the sources of funds available to the business.
The main purpose of financial planning is to ensure enough funds are always available at the right time.
In other words, it seeks to ensure that there is neither a shortage nor a surplus of funds in the organization.
If funds are not adequate, the company will not be able to honour its debt obligations and fulfil its financial goals.
On the other hand, if the company has excess funds, it will unnecessarily add to the cost and may encourage wasteful spending.
So, financial planning aims to ensure that financial resources are always available as they are needed so that the company can achieve its financial goal.
Objectives of financial planning
1. To ensure availability of funds when needed: Financial planning involves estimating the funds required for different purposes and when these funds will be required.
It aims to make sure that there is always enough money available to cover both the business's short-term and long-term expenditures.
It seeks to make sure that the business can easily access the money needed to always achieve its financial obligations and goals.
2. To ensure that there are no excess funds: Having excess funds is as bad as having inadequate funds.
Financial planning involves making short-term and long-term plans for the financial resources of the company so that they can be put to the best use.
This can help avoid excess funds and reduce unnecessary spending.
Importance of financial planning
1. Basis for financial control: Financial planning sets the financial goals of the organization and provides a framework for managing and allocating resources to meet these goals.
Financial planning serves as the basis for financial control because it sets the financial goals and objectives of the organization, which are then used to monitor and modify the financial activities of the organization to make sure that they are in line with the laid down financial objectives.
2. Facilitate effective collection of funds: Financial planning aids in identifying the sources of funding that are available to a business.
By so doing, it ensures that the funds required for the operation of a company can be easily obtained from the various sources of funding that are available to the company.
3. Efficient utilization of resources: Financial planning involves deciding on the sources and uses of funds in a way that achieve the financial goals of the organization efficiently.
Through financial planning, a detailed plan of action can be taken to use funds efficiently and judiciously so as to reduce the wastage of funds.
4. Stability of business: A sound financial plan would outline the sources of finance available to an organization and how these finances can be utilized efficiently.
Thus, financial planning reduces the uncertainty of finance, which can bring about some degree of stability to the operation of the business.
5. Helps other activities: Whether you believe it or not, every activity of the organization requires some form of finance to be accomplished.
If the finances of the organization are not well planned, there is a likelihood that other organisational activities like production, and marketing, will be affected by a lack of funds.
However, if a company has a good financial plan in place, then there is a high likelihood that other activities will be carried out successfully.
So, financial planning is necessary for other activities or functional areas of the business to be carried out successfully.
6. Provide a link between financing decisions and investment decisions: Financial planning helps companies make financing decisions.
That is, it helps companies determine where will get their funding, whether through debt or equity.
Financial planning also helps companies make investment decisions.
That is, it allows a company to determine how sourced funds will be invested in a way that aligns with the financial goals of the company.
By deciding on the source of funding and where these funds are to be invested, financial planning links financing decisions and investment decisions together.