FINANCIAL PLANNING – Meaning, Types, Objectives, Steps and Importance of Financial Planning
Business Finance and Financial Management
Business Finance means money or funds required for carrying out business operations. Finance is need for establishing a business, to run, to modernize, and to expand. All finance comes at some cost. It is quite important that it needs to be carefully managed.
Financial management is concern with optimal usage of finance. It refers to efficient acquisition of finance, efficient utilization of finance and efficient distributing and disposal of surplus for smooth working of company.
So now let’s understand an important topic of CBSE Class 12 Business Studies, the concept of Financial Planning in detail. Table of Content:
- What is Financial Planning?
- Objectives of Financial Planning
- Steps in Financial Planning
- Types of Financial Planning
- Importance of Financial Planning
What is Financial Planning?
Financial planning is an intregal part of the financial management of the enterprise. Financial planning is the process of determining the objectives, policies, procedures, programmes and budgets to deal with the financial activities of an enterprise.
In layman language, deciding in advance how much to spend, on what and where as funds available for disposal.
Objectives of Financial Planning
Proper financial planning is necessary to enable the business enterprise to have right amount of capital to continue its operations efficiently. Financial planning involves taking certain decisions so that funds are continuously available to the enterprise and used efficiently.
- To ensure adequate funds should be available at the right time – A proper estimation of the funds required for different purposes such as day to day expenses or long term assets or investments., etc. Find out the estimate time at which these funds are to be made available. On the basis of requirement, funds could be arrange or raise from short term and long term sources.
- Control excess funding – Means inadequate funding. Financial planning manager must check that enterprise does not raise more capital than its requirement. The excess funds should be utilized properly.
Steps in Financial Planning
- Determination of financial objectives.
- Estimation of capital requirements.
- Determination of kinds of securities to be issued.
- Formulation of financial policies, procedures and budgets.
Types of Financial Planning
Financial planning involves two types of Planning:
- Short term planning – Financial plan for a comparatively short period, i.e, upto 1 year. It is called budgeting.
- Long term planning – Financial Planning covers long term investment plans of the enterprise i.e, 3 years to 5 years. It focuses on capital expenditure programme of the enterprise.
Importance of Financial Planning
Proper financial planning is necessary for the success of any enterprise. It will provide policies and procedures to achieve close coordination between the various functiona; areas of the enterprise. It provides policies and procedures for the sound anminsitration of the finance functions. How financial planning benefits to a enterprise are discussed below –
- Forecast what may happen in future – Financial planning helps the enterprise in preparation of plans for meeting challenges in future. It helps the enterprise to be better prepared to face future uncertainties.
- Avoid business shocks and surprises – With the help of financial planning, enterprise avoid business shocks and surprises. It would ensure stability of business.
- Co-ordinate various business functions /operations – Various functions of the organization are well coordinated with the help of clear financial policies and procedures.
- Proper utilization of Finance – It involves preparation of detailed plans of action. By doing so, it prevents duplication of efforts and reduces wasteful activities and gaps in planning, resultant proper utilization of finance.
- Link the present with the future– Financial planning create a bridge between present financial resources and future financial requirements. It attempts to achieve a balance between the inflow and outflow of funds. Liquidity is maintained throughout the year. This will help the enterprise to enhance the reputation of the enterprise.
- Link between investment and financial decisions – By planning the pattern of financing like debt, equity, etc for projects requiring huge capital investment a link will be create between investment and financial decisions.
- Financial control– Financial planning serves as the basis of financial control. The management attempts to ensure utilization of funds in tune with the financial plans.
So, Financial Planning is an integral part of the corporate planning of the business. All business plans depend upon the soundness of the financial planning.
Suggested Reading for Class 12 Business Studies:
Demonetization: Concept and Benefits
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Important Tags : Financial Planning / Business Finance / Financial Management / What is Financial Planning? / Types of Financial Planning / Objectives of Financial Planning / Importance of Financial Planning / Steps in Financial Planning
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