All activities that apply general management principles to a company’s financial resources fall under the financial planning category, including planning, organizing, directing, procuring, investing, and returning funds. Students will discover the definition, goals, and features of financial planning in this article.
One of the critical planning exercises that the management must perform is financial planning. Financial planning includes all activities connected to raising money, investing it, and calculating the expected return on the investment. Tax planning is a vital activity that falls under the umbrella of financial planning.
A business must have this planning in place to operate, so we have started a discussion on “financial planning”, which will be looked at in more detail. It is referred to as a visualized study because of the broad scope of the topic.
Definition and Meaning of Financial Planning
Financial planning is a document that contains information about a company’s or business owner’s economic situation and plans for the expenditure of funds to accomplish a specific goal by following a carefully developed plan. Independent or professional planners can make financial plans and take advantage of all the features of financial planning.
It is essentially a financial budget plan that aids business organization and contains a list of objectives the company or business owner is to follow to save and spend money appropriately. It assists in allocating different financial costs, such as rent, while also setting aside some cash for either short- or long-term savings.
You are estimating capital requirements and determining the competitive components necessary for financial planning. It is a plan, defined as a written description of a person’s current financial situation, long-term financial goals, and the strategies for achieving those goals using the existing fund.
You can come up with and draft a financial plan on your own or with the help of a financial planner while considering the financial planning features. Gathering the data from the web-based accounts into a document or spreadsheet is the first step in creating a financial plan.
Because it handles a variety of assets that involve risk and uncertainty, this kind of planning is also referred to as an investment plan. Individual financial planning is less risky because it does not include significant investments or undertakings, such as setting aside money for retirement, college or university, estates, or healthcare.
Financial planning contains various features of financial planning that provide numerous benefits to financial planners and provide financial stability to the planner. Here we will discuss the features of financial planning in detail.
Financial Planning in Financial Management
A financial plan uses the currently known variables to forecast future income, asset values, and withdrawal plans to honestly evaluate an individual’s current pay and financial situation. The budget, which organizes business and personal finances, is a feature of financial planning.
It may also include several steps or specific objectives for spending and saving. A portion of the future income is set aside for both short- and long-term savings and various expenses like rent and utilities. Personal finance focuses on risk management, estates, colleges, or retirement, whereas a financial plan is an investment plan.
We will further discuss numerous financial planning features in this article, helping company owners and individuals attain financial security and meet their financial goals.
Features of Financial Planning
Features of financial planning help if you determine an estimate and the need for capital; you can estimate accurately. A poorly thought-out strategy will be disastrous for the business’s operations. The following are a few significant attributes or features of financial planning for individuals and company owners.
Even the most beginner investor should be able to manage and understand a straightforward financial framework provided by a sound financial foundation. For the promoters and management to raise the required sum of money for their venture, the features of financial planning “simplicity” is a requirement. Making a simple and direct financial strategy is also easy.
A financial plan should be so straightforward that even the average person can understand it. A complex economic structure brings about complications and confusion.
The feature of financial planning, “Flexibility”, indicates that the budget should not be too restrictive. It must leave room for adjustments as and when new conditions arise. Financial planning features teach the planner that if new opportunities arise, there might be room for raising additional funds. Similarly, any idle money can be put into short-term, low-risk investments. A plan’s ability to be flexible will help it meet future demands.
It becomes necessary to repeat the financial adjustments, so these features of financial planning are needed to make it simple to adapt.
Flexibility is necessary for it to be easily adaptable because it becomes necessary to repeat the financial changes. That is why Adaptability is also one of the essential features of financial planning.
4. Solvency and Liquidity
The enterprise’s solvency and liquidity should be guaranteed by financial planning, which makes this financial planning features essential. The Features of financial planning would help if you made short-term and long-term payments on the due dates to maintain solvency. It will ensure the company’s credit ratings and reputation.
Solvency will be possible if you preserve asset liquidity. When payments are due, there should always be enough money. Planning for liquidity will be made easier with accurate forecasts of upcoming costs.
When choosing a financial plan, the cost of raising capital is a crucial features of financial planning. The various sources should be selected so that the financial burden is minimal. Interest-bearing securities should be returned as soon as is practical to reduce this burden.
6. Optimal Use of Funds
Capital needs to be adequate, but it must also be helpful. A financial strategy should minimize inefficient use of capital and thus prevent idle capacity to ensure proper usage of money to generate power in a business. Optimal use of Funds is the essential financial planning features that provide fantastic benefits to the company owners.
Planning is essential with foresight which is one of the vital features of financial planning. It will help you to know the estimate and the need for capital, which can be estimated as accurately as possible. A plan must have the forethought to end well for the business. Foresight financial planning features help business owners to avoid potential financial risks.
8. Reduced Dependence on External Information Sources
Long-term financial planning should minimize reliance on outside funding sources. It is made possible by setting aside a portion of revenue for reinvestment.
Financial transactions are made possible through the creation of personal money. Financial planning should be done while keeping in mind these features of financial planning so that dependence on external funds can be reduced over time, even though it may be necessary initially.
The financial opening should structure to keep the cost of capital acquisition minimum. There are certainly more critical financial planning features. The amount of money raised shouldn’t put an undue burden on the company.
According to the SEC, the fixed dividend on preference shares and the interest on loans and debentures should depend on the company’s ability to make money. The fixed interest payments must not reduce the company’s earnings to maintain long-term growth.
10. Lower the Risk of an Accident
By maintaining a healthy balance between profitability and risk exposures, financial management aims to lower risk. Financial managers carefully review the available investment options before placing all the funds in an appropriate arrangement.
Before investing any money in it or making any decisions, they evaluate the investment proposal’s safety, liquidity, profitability, and risk. These financial planning features help business owners grow their businesses without encountering any financial loss.
Goals of Financial Planning
To understand the financial planning features, let’s first learn about the objectives of financial planning. The following are the two main goals of financial planning:
- Assuring Funds Are Available When Needed:
The primary and most essential financial planning goal is to ensure that resources are available in an emergency or whenever needed. The firms should have enough money on hand to cover all of their expenses.
2. Examine the Firms’ Unnecessary Fundraising:
Equally detrimental to excess cash. In contrast to investment, idle money will only cause a company to lose money. Therefore, money management is a crucial financial planning features.
Points to note when Formulating a Financial Plan
After knowing the financial planning features, choosing the best financial strategy is equally important. When choosing a financial strategy, keep the following factors in mind:
1. The Type of Industry
For various industries, different amounts of money are required. Not all industries share the same asset structures, seasonality, or earnings stability. These factors will impact determining the scope and organization of financial requirements.
2. Concern’s current state
When creating a financial plan, long-term goals should be taken into account. A flexible financial strategy will be needed shortly to adjust the plans for expansion and diversification. The funding sources should be such that they will quickly provide the necessary funds.
3. Future Plans
A concern’s long-term goals should be considered when creating a financial plan. A flexible financial strategy will be needed shortly to accommodate the plans for expansion and diversification. The funding sources should be such that they will quickly provide the necessary funds.
4. Sources Availability
There are numerous places where money can form. Before making a final choice on the sources, the advantages and disadvantages of each reference should be thoroughly discussed, as discussed in the financial planning features. The authorities should be able to deliver enough money consistently to cover needs throughout the year. The dependability of various sources should be considered when choosing a financial strategy.
5. The general state of the Economy
A decision regarding a financial plan will depend on local, national, and global economic conditions. Before making any decisions regarding funding sources, these conditions should be considered. A favorable economic climate will make it easier to raise money. However, unstable economic conditions might make it challenging for a good company to raise enough money.
6. Administration Control
Government policies will impact a financial plan regarding issuing shares and debentures, paying dividends and interest rates, entering into international collaborations, etc. It will be challenging to raise money because of governmental restrictions on using particular sources, limiting compensation and interest rates, etc. So, when choosing a financial strategy, government controls should be carefully considered.
When you create and use your financial plan, you can identify the parts of your company where resources are vital for growth, such as marketing and expansion, product development, and innovation. Business decisions become riskier without understanding the characteristics and features of financial planning, and organizations risk missing out on lucrative commercial opportunities.
Features of Financial Planning – FAQs
Why should I make a Financial Plan?
Ans. Your financial decisions have purpose and direction, thanks to financial planning. You can save enough money by purchasing a specific investment product to pay for your child’s college education. Additionally, you can adjust to life’s changes more easily and feel assured that your goals are on track. Using financial planning, you can better understand how each financial decision impacts other aspects of your finances.
What are the financial planning features for entrepreneurs?
Ans. For entrepreneurs, financial planning features include Simplicity, Clear objectives, less dependency on external sources, Flexibility, solvency and liquidity, profitability, etc.
Why should a business owner do good financial planning?
Ans. An effective financial plan helps you to stay focused and on the right path. It helps your company grow when challenges arise and during crises.