It is quite understandable that financial planning is very important for a business. After all, a business is all about spending resources in the most efficient way to result in more useful things, profiting in the form of money and fame in the process. If the capital, a very useful one of all kinds of resources available, is not utilized is a well-researched manner, it is almost impossible for a business to operate long term.
While not engaging in financial planning can end up in catastrophic results, mastering the art of financial management might take your business to heights. Let us see what are the key steps in financial planning. In this article, we are going to talk about the advantages of financial planning, get a better picture of its importance, the components of financial planning, core concepts in financial planning, the scope of financial planning, learn the process of financial budgeting and setting personal goals, and finally, the objectives of personal finance one should aim to achieve through financial planning.
In simple words to create a financial plan for your organization first, you need to understand steps in financial planning. in short you need to learn about types of financial planning for small business and what factors affecting financial planning in your business, aspects, planning deals with limitations and so on.
We have made a short and brief comprehensive article for you to master the art of financial planning. Of course, just for you!
What is Financial Planning?
In layman terms, financial planning is what, how and why to spend funds. It is the process of assigning a part of the funds to a specific goal and outlining what the business will achieve out of it. The allocation essentially succeeds in the competition of many possible executions where the more advantageous one is chosen.
The process of financial planning in business is as integral to a business as the assets; it starts right through when setting up the business and stays as long as the business is active.
Objectives of Financial Planning
There are three specific objectives one should aim to achieve in the process of financial planning.
- To determine the amount needed for the company to operate smoothly.
- To determine the funds, the sources, and the type of security associated with the available funds.
- To determine the plan of the action for the available funds, the process of utilizing them to the most extent.
What is the importance of financial planning in business?
Peoples always ask about How do I write a financial plan for my business or What is the purpose of a financial plan?
Financial Planning facilitates several attributes to running a company such as a fund accumulation, cash flow, liquidation, financial control, departmental fund distribution, investments, etc.
Optimizing Fund Accumulation
Not fund accumulation, the optimum fund accumulation is important. It is bad for the enterprise if it runs out of spendable capital and it has to desert some projects that will result in further loss in addition to losing the profit the company was going to make. Worse is idle laying funds, it will be most probably wasted. Either the company will see the extra funds and surplus amount or a burden and they will be spent without doing much research bearing poor results. A good financial plan indicates the fund needed in advance. Saves a lot of money right?
A company is supposed to grow through a successful investment. The financial planning advises you on the investments to trust.
Using the Right Capital Structure
Funds come from many types of sources – shareholders, banks, financial institutions. It becomes necessary to have an appropriate capital structure that tells you which source to tap into in a certain time.
Financial control is comparing the revenue collected with what you estimated and between what you spent and what you earned. Financial Planning is a baseline for that.
A cash cushion to save you from the hits of a bad season will also save you from closing your business. Your financial planning will help you spend funds in such a way that you are always left with the reserved funds. If you don’t plan the expenditures well, your company might engage in a project that forces you to use up all the funds at some point. And if a slow sale is to follow that, it is going to be a tragic story.
Business in the Future
Financial planning gives you an outline of end goals achievable by the present time capitals on your disposal, and down the road, the financial planning will also indicate if the growth is above or below the growth. It, thus, gives you an idea of how your business will look like in the future.
Process of Financial Planning
Financial planning strategies are a big comprehensive process for small and startup business. Therefore, it is better to break it down into steps.
5 Steps of Financial Planning
Finding the Goal Attribute
This part of financial planning, if you’re starting or running a business, you have already thought of. An enterprise cannot run without a clear goal, the purpose of its existence. If you’re learning financial planning for your everyday life, you must have the knowledge of what is necessary for you in the present and the coming future.
The very beginning of starting to spend in a pre-planned manner, business financial plan template is play a very vital role to be it for individual or a multinational company operation, is by understanding the ‘why’ part of spending funds.
When allocating significant resources to an operation, ask yourself these questions:
Is financing this x project going to be advantageous?
Will financing it harms the fund availability for other operations?
The answer to these questions is only through a better understanding of the goals you are striving to achieve in your business.
Cognition of Funds Available and Funds Possible in Near Future
The second step is to know your fuel, the funds that keep your company running. This is the part where you recognize the dispensable assets before you start utilizing them. This is a two-step process in itself. As important it is to quantize the secure funds you have, it is also very useful to weigh the possible forms of financing shortly and learning how probable they are.
What are the funds your organization generates?
What are the external funds that are available?
What are the funds you require to support the sales?
Before you make a layout of your action plan, the operations you are going to carry out, the campaigns and projects, etc. comes the part of determining the available money to spend.
Sales forecasting is predicting future sales. An accurate sales predicting unit will be very helpful in the enterprise’s ability to come with intelligent decisions.
Let us understand it with an example. Let’s say your sales forecast implies that growth by 20%. Now there are two scenarios. First, you hire additional staff and expand your company to prepare to meet the demand when the sales rise. If your predictions end up being significantly wrong, you might be wasting resources. In the second scenario, you didn’t act by the forecast, assuming they are reliable, you lose a chance to profit.
Hence, for your business to flourish, it needs a reliable sales forecasting unit with high accuracy. Sales forecasting is the prerequisite to understand the cash flow, manage resources and draw the action plan for the operations.
Making the Outline of the Action Plan
Now that you have got a better understanding of your goals, good knowledge on your sources of funds, and the predictions of the sales you are going to make and the revenue you would be able to generate out of it, you can start laying out the plans for the operations and projects. Right in the beginning, it is determining your plan of action. When outlining what your operations will look like, it is also recommended to draw out an alternative path, the plan B.
The process of outlining the action needs you to project factors like capabilities and risk tolerance.
If a particular investment were to go wrong, how hard is it going to hit the business?
Is your company designed to operate smoothly when sales are low and still make it to the top?
Down the road of action planning, you are required to modify the plans and develop them. That is the next step in financial planning.
Collect Data, Analyze and Monitor
“Than perfect start, it is more feasible and results in bringing to keep improving all the way along.”
You’ve made an action plan and are executing the operations. Now is the time to collect reports and reflect. From the accuracy of the sales forecast to revenue generation, get info on everything. Sit back and critically examine, or let your finance management do it. It is impossible to make a perfect plan. It is unrealistic obviously because there will never be another company or business in the world the same with the same sets of challenges to face. While it is good to start with a general model, it is only through your mistakes you are going to learn.
The continuous step of financial planning involves analyzing the results of plans, their effects on financial ratios and stock prices. Weigh the results of the operations your business engaged in and the profit you made out of it. For the things that went wrong, reflect on the process involved and what can you do to avoid that. Is it better to desert that?
Monitoring performance is a crucial part of financial planning. Your investments should pay off, and your performance reports tell you which investments are more probable to multiply.
5 Important Things in Financial Planning
- Financial Advisor
It is recommended to get you a financial advisor to both help you in financial planning and get better at it over time. Someone who is well experienced in that field is going to be a great help if you know how to choose the right person.
Investments can build or ruin. It is not possible to avoid investing but one should aim at getting good on making the right investments if you are to run a business and take it to heights.
- Comprehensive Budget
Your financial plan is your budget and it is laid in detail to help you spend in each operation.
- Trimming off Debts Interests and Taxes
Minimizing expenditure involves knowing your way around the taxes and the interests you might have to pay for any debts.
- Financial Control
The whole point of financial planning is financial control. The flow of funds into and out of the company needs to be regulated.
All right, that was to help your business in coming up with good financial planning. Now you know how important financial planning is, the things you need to keep in mind and the steps involved in planning your financial flow, get the right persons for financial planning or do it yourself. Don’t forget to get a financial advisor. Let me know how your business fares off.