Financial planning is an important aspect for a business. Finance is a business’s lifeline and without it, no business can run. So, it turns imperative for a business to plan its finance in order to manage it in an effective manner. In this blog, we shall discuss what financial planning is and its benefits and importance.
Table of Contents
What is Financial Planning?
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Financial planning is a process by which a business provides a framework to achieve its goals in a systematic and planned way. Financial planning and analysis show the business a way to optimal utilization of finances. It is the process of estimating the capital required for business and determining the competition in the market.
Financial planning also helps in framing financial policies correlating to investment and administration of the finances. In addition to planning finances for the business, personal financial planning is also important for a business owner.
What is the Importance of Financial Planning?
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The importance of financial planning for a business is as follow:
Fund Management
Managing funds is the primary importance of financial planning. It helps in managing funds of the investors and conduct activities that benefit the organization. Notably, funds are the liquid assets and it is important for a business to maintain the liquid fund ratio.
Forecast of Cash Flow
Planning the finances is necessary for the everyday operations of a business. It involves forecasting the inflow and outflow of cash. Forecasting cash flow helps in knowing the cash flow and outflow opportunities and therefore, be prepared for unexpected business opportunities.
Raising Finances
Planning in an efficient manner helps in knowing the business how much funds are required by a business. And this, in turn, helps in determining the right time for raining funds in terms of availing a business loan. Funds can be raised from different sources and it can be short-term (working capital loans) or long-term (capital loans).
Funds Management
Planning funds help in knowing the available funds in the business account. This is important to determine if the funds are properly utilized and to ensure that the business is in a liquidity position.
Cost Control
Financial planning helps in ascertaining the cost of production, administration, sales, and marketing. It helps in knowing the unnecessary expenses and eliminating them. Cost control can also be done by comparing the pre-determined cost of the activities and the actual cost incurred.
Predict Profits
Financial planning helps in forecasting profits. With knowing the profits in advance, a businessman can determine how much to spend on a specific situation, condition, activity, or product. And therefore, do not waste even a single penny. So, planning finances help in forecasting profits and course of action – is to accept or reject a business proposal.
Apply for Working Capital Loan
Asset Management
It assists in determining the total investment in the asset, such as machinery. The assets impact the operations of the business. Upon its failure (break down), the entire business can be impacted.
Fund Management
Managing funds is the primary importance of financial planning. It helps in managing funds of the investors and conduct activities that benefit the organization. Notably, funds are the liquid assets and it is important for a business to maintain the liquid fund ratio.
Cost Management
Knowing in advance the cost of operations of the business is important. And this is what the financial planning helps in. If the operations are costing more than the profits, then there is no sense in going further with the operations. In such a situation, the business must look for alternate ways of conduction operations that would maximize profits.
What are the Benefits of Financial Planning?
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The benefits of financial planning in India are as follow:
Finance Prevention
Financial planning helps in analyzing the current finances (inflow and outflow of cash). So, it points out the strengths and weaknesses of the business. If the businessman cannot manage the funds, he may lose money due to wrong decisions and spending. The businessman can take the help of financial planning calculator or financial planner for better planning with the finances and preventing misuse of the funds.
Planning for Contingent Situation
The nature of the business is uncertain and so is future. So, it is important to be prepared for unexpected situations. Planning finances in advance can help in identifying potential and protect finances.
Large Purchases
A business many times requires investing in machinery, new office, etc. which requires large sums. The business owner may not have enough funds at spare cover the expenses. Financial planning in such case helps in determining the short-term and long-term financing options for a business, such as machinery loans.
How to do Financial Planning?
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Here are your 7 seven steps to financial planning:
Step 1: Determine your Expenses
The first and most important step to creating a plan for finance is to develop a budget. The budget must be detailed with information such as where your money presently goes.
In addition to a budget with all the major expenses, the businessman must also have detailed information about every small spending as well. Every time even a single penny is spent, a note must be made with details, such as what is bought and how much does it costs.
After noting every expense, the businessman must categorize the expenses. If money was spent on food? Or traveling? Or utilities? Consolidate the notes at the end of the month. Repeat this duty for a couple of months. The work here is to just figure out where all the money is spent.
The importance of this exercise to determine the expenditure. Without knowing where the money is going, no cost-cutting and savings can be done.
Step 2: Set Financial Goals
The next step is to determine where the businessman wants to see the business in coming 5 or 10 years. The answer must be specific. It must not be just running a business successfully. But in more specific terms, such as the turnover or new branches in the city or country.
However, it is suggested to set realistic and attainable goals only.
Step 3: Prepare for Unexpected
Prepare for the unexpected situations means arranging or saving money for unexpected situations. The business owner can also avail a flexi loan facility to meet unforeseen finance requirements.
Step 4: Keep an Eye on Credit
Credit is an important part of the business. Almost every business runs on the credit facility. So, it is important to always be sure that the business can avail a loan at any time. And for this, it is imperative to check CIBIL score once a year and if it is below the required threshold, the businessman must work towards improving CIBIL score.
Step 5: Start Saving
It is important to save money in order to have funds for contingent situations. After knowing where all your money is going, the businessman can save money by cutting on extra expenses. Outspending all the profits never let the businessman be in a situation to grow his small business.
Have a look at the expenditure and determine where the spending is more the required. If a lot of money is being spent on travel? If more than required resources are hired? In any of the situations, cost-cutting is important. In addition, the businessman can also start saving some percentage of the profit every month.
Step 6: Track your Financial Plan
Now with knowing the expenditures and savings, the businessman must stick the plan. And this can be done by tracking financial plan and reviewing it quarterly or semi-annually. Also, in case of a little up or down, don’t be confused and focus on long-term goals.
Step 7: Prepare Exit Strategies
Prepare an exit strategy in case of any contingency. An exit strategy is when the things do not go as you decided. In case the things do not turn up according to your wish, you must have a Plan B that would help you meet all the situations. So, instead of going away with the emotions at the time of failure of Plan A, the businessman must have a Plan B ready.
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