Financial planning is basically a preparation of a financial outline of an organization’s future operations. It is the procedure of estimating the capital required and decisive its competition. It is the procedure of framing financial policies in relation to procurement, investment and administration of funds of an organization. The objective of financial planning is to ensure that enough funds are available at right time. If sufficient funds are not accessible the firm will not be able to honour its commitments and hold out its plans. On the other hand, if surplus funds are accessible, it will unnecessarily add to the cost and may persuade wasteful expenses. It must be kept in mind that financial planning is not corresponding to or an alternative for financial management.
Create a sound financial plan in six steps
- Establish your goals in life – short, medium and long-term
- Work out what assets and liabilities you have – write them down
- Evaluate your current financial position – how close are you to achieving your goals?
- Develop your plan – create a “route map” for achieving your different goals
- Implement your plan – make the changes and make it happen
- Monitor and review your plan at least yearly and make adjustments when needed
Financial management aims at choosing the greatest investment and financing alternatives by focusing on their expenses and benefits. Its objective is to boost the shareholder’s wealth. Financial planning, on the other hand, aims at smooth operations by focusing on fund requirements and their availability in the light of financial decisions.
For example, if a capital budgeting decision is taken, the operations are likely to be at an upper scale. The number of expenses and revenues are likely to increase. Financial planning process tries to forecast all the items which are likely to undergo changes. It enables the management to foresee the fund requirements both the quantum as well as the timing. Likely shortage and surpluses are forecast so that necessary activities are taken in advance to meet those situations.