Definition: Financial Planning
Financial planning consists of preparing a global business budget, taking into account its existing resources, and focused on guaranteeing its economic viability and achieving long-term financial profitability objectives established in advance.
A company without planning and objectives is an unsuccessful company in the long term. Businesses must identify where the company looks in the short, medium, and long time.
To do this, intermediate objectives should be usual, and these should be supported, in turn, on strategies. The economic and financial details of the system were devised to achieve the goals included in the organization’s financial plan.
Characteristics of Financial Planning
The fruit of financial planning is the financial plan. This is a very extensive and elaborate document that allows you to control whether the business meets the liquidity, profitability, and solvency conditions it needs to survive in the long term.
Thus, part of the previously established objectives goes hand in hand with the company’s strategic plan or business plan. It is a crucial document to guarantee your financial and economic viability.
Objectives of business Financial Planning
Specifically, it allows analyzing the economic and financial profitability of the business plan, determining:
- In a newly created business, the initial investment and the financial resources are necessary to fulfill the strategic plan.
- The actual costs for the business to work.
- The need for business financing and the range of options to choose the most efficient one.
- Also, it allows projecting the financial statements of the firm.
Financial planning also empowers shareholders to determine the time in which they will be able to recover their investment and approximate the profitability that they will be able to obtain from their business.
Phases of Financial Planning
It completes up of four well differentiated phases. However, many details must analyze within each of them. Here are some of the main aspects:
Analysis of the current situation: You must answer questions such as the company’s financial situation. To do this, we start from the financial statements, income statements, cash flow statements, statements of changes in equity, and balance sheets. We must identify the income, expenses, fixed and variable costs, assets (fixed, current, intangible), and means of financing. Finally, obtain conclusions such as determining profitability by business lines, by geographical area, etc.
Definition of strategies: The strategies must aim at achieving the intermediate objectives and the final objective. In the short term, it is essential to ensure financial viability. Therefore, it will be necessary to focus on liquidity, tight cost policies, and avoid high debt that finances non-relevant aspects.
Evaluation of the results obtained: To determine if we are meeting the objectives set or deviating from the plan. At the most, it is essential to review the strategy from time to time, for example, every quarter, semester, or annually. We will also make the necessary adjustments, introducing new inputs that produce in the organization.
Advantages and Disadvantages of Financial Planning
Having the established course, it will be easier to make business decisions and avoid or control the risks derived from taking one action or another, coordinate departments around various previously established projects, know the investment needs, finance, and correct deviations of any kind.
However, too much planning or too rigid a plan could make it difficult for the company to adapt to changes.
Importance of Financial Planning
Financial planning is a vital tool for companies and organizations, especially when making decisions. Like people, companies have a budget and certain financial limitations within whose margins they must manage to achieve their objectives. Hence, a careful plan of how to invest money is always a good idea. This is the reason why so much support in this sector of business administration.
Development of Financial Planning
In a planning process, actions carried out aim to improve or solve any problem that the company may be going through; For this, it is necessary that the different parts that make it up to bring together. Financial planning is the one in charge of translating a company’s strategic and operational plans into economic terms, considering the time and space they will develop.
Through this type of planning, a commercial plan visualizes taking into account three extremely decisive issues: investments (knowing how to take advantage of the available resources accurately), capital or loans (having a fundamental knowledge of the capital structure owned), and shareholders (knowing what can offer to those who want to be part of the company, knowing what to expect in case of financial difficulties).