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What is Financial Planning? Objectives & Components of a Successful Financial Plan

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Financial planning is a respective approach to meet the goals of any business. A financial plan serves as a guide in your professional life as you go through life’s journey. Essentially, it helps you control your income, expenses, and investments so that you can manage your wealth and achieve your goals. It guides to create a realistic strategy with well-defined steps to benefit your business.

# What is Financial Planning?

A financial plan is a comprehensive picture of any strategy that you currently set to achieve your financial goals. A good financial plan should include complete details about your cash flow, savings,loans, investments, insurance, and any other elements of your financial life. Financial planning is a continuous process as your goals change. Due to the unpredictable changes of the domestic and global economy and with so many constantly changing variables, understanding and managing all dynamics, making and analyzing non-emotional financial decisions can be a daunting task.

# What is Business Financial Planning and Why is it Important?

The main objective of financial planning is that it helps the business in making day-to-day decisions. Comparing forecast numbers to actual results gives important information about overall financial health and business efficiency. Even if a company run by only one person is required to make a financial plan. A financial plan is an overview of the financial status of your business and a forward-looking projection for the growth of the business. If seen, a complete financial plan has six parts such as sales forecast, expense outlay, financial position statement, cash flow projection, break analysis, and an operational plan.

# Objectives of Financial Planning

The main objectives of the overall financial plan are:

  1. To raise the funds in such a way that the cost of capital is minimized. 

  2. To ensure simplicity in the capital structure.  

  3. To ensure sufficient liquidity of funds.  

  4. To provide sufficient funds to the business.

  5. Money should neither be less than the needs of the business nor more.  

  6. To ensure flexibility in the capital structure so that the sources of funds can be changed according to the changing circumstances.

# Significance of Financial Planning

These are some Significance of financial Plan, Helpful-

  • In the efficient conduct of business activities. 

  • In proper capitalization  

  • In the optimum capital structure  

  • In proper utilization of funds 

  • In the expansion of the business

# Limitations of Financial Planning

Financial plan suffers from the following limitations:

  • A financial plan is based on a forecast of future conditions. 

  • Once a financial plan is prepared, it becomes very difficult to change it. 

  • Assets associated with huge capital could be purchased and raw material, labor, and other costs might have been incurred. 

  • Sometimes it is difficult to change the financial plan due to the obstinate attitude of the management.

# Benefits of Financial Planning 

  • Financial planning provides direction and meaning to your financial decisions.

  • This allows you to understand how each financial decision you make affects other areas of your finances.

  • Such as, buying a particular investment product can help you pay off your mortgage faster or it can significantly delay your retirement.

  • By looking at each financial decision overall, you can consider its short and long-term effects on your life goals.

  • You can more easily adapt to the changes in life and feel more secure that your goals are on track.

# Components of a Successful Financial Plan for Business

1. Income Statement:- Income statement is also known as a “profit and loss” statement. This is the most basic and important element that needs to be included first in every financial plan. An income statement gives you a clear picture of your business as to how and why your organization made a profit or loss at some point. Mostly it is prepared for 3 months, so the data provides accounting for 3 odd months. There can be an accounting and finance logo on the income statement to always keep the company’s core beliefs in mind. 

Various forms of profit and loss statements are used, often taking into account some of the following, such as total revenue earned from goods and sales, cost of goods sold, including goods. You will get a profit or gross margin by a decrease in total revenue along with price, cost of goods sold (COGS). These three items; Revenue, COGS, and gross margin help the organization to take action and plan circulars. Read more about P&L Statement

2. Cash flow Statement:- Cash flow statement is as important as your income statement and portfolio. Businesses run on cash – there are no two ways around it. A cash flow statement is an explanation of how much cash was brought to your business, how much cash is paid, and its closing cash balance, usually this most important information per month can be easily found by cash flow. Read more about Cash flow Statement

3. Balance Sheet:- If a person wants to get informed views about the financial position of his company, then he should look for the balance sheet. This gives a brief understanding of the finances of the organization. The balance sheet contains information about the asset, such as inventory, current money in the bank, money to receive, and so on. It also includes obligations and similarities. Liabilities include; Credit card bills, installment of the loan amount, accounts to be paid, etc. Equity includes investor shares, earned income, stocks, etc. 

Your balance sheet is a snapshot of the financial condition of your business – how do you work at a particular time? How much cash do you have in the bank, how much do your customers give you, and how much do you give to your vendors? You get all this information easily through the balance sheet. Maintaining a proper and up-to-date balance sheet is a very necessary task. No matter how small or large the size of your organization is, if you are doing business, keeping a balance sheet is very helpful for your business.

4. Sales Forecast:- Probably every business needs to prepare for upcoming sales. They prepare long-term plans to retain their short-term profits and customers. Forecast sales are very important from the point of view of lenders and investors, as a good expansion forecast will bring a sense of certainty to the uncertain world.

Different businesses have different approaches when forecasting their sales. Upcoming festivals or any events are also anticipated while preparing for the upcoming sale. You should estimate your sales revenue for each month, quarter, and year. Identifying any patterns in your sales cycle helps you understand your business better; It is also invaluable with planning marketing initiatives and development strategies. A seasonal business may aim to completely improve sales in the prior off-season to become a one-year enterprise.

5. Tax Planning/Management:- Most people neglect this essential aspect of financial planning, so they lack the knowledge to make the investments necessary to reduce the cumulative effect of taxes on their organization or personal income, which they work with Will be unable to maximize and preserve your investment returns, it is important to keep an eye on tax management. 

6. Break-Even Analysis:- Break-even analysis is also a good way to determine your pricing. This section analyzes the fixed costs relative to the profit earned by each additional unit you produce and sell. This is necessary to understand your business revenue and potential costs. Your expenses are eliminated, as described above, making your break-even analysis more accurate and useful. 

# Conclusion:

Financial planning provides a structure to the way finance is handled within an organization or company. Financial planning manages the flow of cash within and outside the business. Essentially, it is impossible for an organization to function without a financial plan and to be financially stable. It is extremely useful in making operating budgets. While financial planning helps to determine strategies, goals, and operating procedures for a business.

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