Financial planning is essential for the preparation of a financial blueprint for a business organization. Its main objective is to ensure that ample funds are available at right time. If enough funds are not available the firm will not be able to honour its commitments and carry out its plans. On the other hand, if more funds are available, it will add costs and encourage wasteful expenditure. Financial management aims to choose the best investment and financing alternatives by focusing on their cost and benefits. Having an objective to increase the shareholder’s wealth. Financial planning, on the other hand, aims at smooth operation by emphasizing fund requirements and their availability in the light of the financial decision. It tries to forecast all the items which are likely to change.
Financial planning is the process of estimating the requirement of finance of a business specifying the sources and ensuring the availability of enough funds at the right time.
The following three questions should be kept in mind while making financial plans for the business:
- How much capital is needed in the business?
- What should be the methods of meeting the financial needs of the business?
- How can the firm utilize the available funds in the best possible manner?
Financial Planning includes three main aspects:
- Estimation of quantum of finance, i.e., total finance requirements of the business.
- Determination of pattern of financing, i.e., form and proportion of various securities to be issued to raise the required amount.
- Utilization of finance, by laying down policies and procedures.
Objectives of Financial Planning
Financial planning focuses on achieving the following two objectives:
- To ensure availability of funds whenever required: The main object type of financial planning is that sufficient funds should be available in the company for different purposes such as the purchase of long-term assets, to meet day-to-day expenses, etc. It ensures the timely availability of finance.
- To see that firm does not raise resources unnecessarily: Excess funding is as bad as inadequate or shortage of funds. If there is surplus money, financial planning must invest it in the best possible manner. As keeping financer resources ideal is a great loss for an organization.
Financial planning includes both short-term as well as long-term planning. Long-term planning focuses on a capital expenditure plan. It is normally done for 3 to 5 years. Whereas short-term financial plans are called budgets, and they are for one year or less.
Financial Planning Vs Financial Management
These are the differences between financial planning and financial management:
|
Points of differences |
Financial Planning |
Financial Management |
|---|---|---|
| 1. Meaning | Financial planning is only related to finance related planning | Financial management includes investment, use, and distribution of funds. |
| 2. Objectives | The main motive is to create wealth and meet the different financial requirements. | Financial management keeps and grows the existing wealth. This is the main motive of financial management. |
| 3. Orientation | Financial planning is goal oriented. | Financial management is opportunity oriented. |
| 4. Functions | In financial planning generally, passive wealth management is involved. | In financial management, active wealth management is involved. |
| 5. Decisions | In financial planning, the decisions are time management and financial goals. | In financial management, the decision is generally made based on the investment portfolio. |
| 6. Covers | Financial planning covers cash flow, tax planning, etc. | Financial management covers the wealth and growth strategy. |
Importance of Financial Planning
Sound financial planning is essential for the success of any business enterprise. Its need is felt because of the following reasons:
- Prepares for future challenges: It helps in forecasting what may happen in the future under different business situations. It also facilitates smooth functioning and running of the business by preparing them to face future challenges.
- Helps in avoiding business shocks and surprises: By preparing a blueprint to face different types of situations, financial planning helps businesses in avoiding business shocks and surprises.
- Coordinate various functions: It helps in coordinating various functions, production, sales, etc by providing clear policies and procedures.
- Proper utilization of finance: Detailed plans of action prepared under financial planning reduce waste, duplication of efforts, and gaps in planning.
- Acts as a link: It tries to link the present with the future by anticipating sales, growth, etc. It also links the investment and financing decisions continuously
- Evaluates actual performance: By spelling out the detailed objective for various business segments. It makes the evaluation of actual performance easier.