Write short notes on Importance of financial planning
Explain any four points that highlight the importance of financial planning
Meaning: - Financial Planning is an important function of financial management. It is a continuous process in day-to-day administration of business. It is not possible for finance manager to go ahead unless he prepares 'financial plan'. Financial planning is not only required for profit making but even for survival of a firm. The term financial planning refers to assessment of financial requirements and arranging the sources of capital.
Definition: - "The financial plan of a corporation has two fold aspects, it refers not only to capital structure of the corporation but also to the financial policies which corporation has adopted or intends to adopt.'
Importance of Financial Planning:
- Elimination of Waste: -Due to financial planning, it is possible to eliminate the wasteful expenditure. There are several factors such as change in government policy on taxes, fluctuating interest rates. Etc. which can be anticipated and tackled with the help of financial planning.
- Co-ordination: -Co-ordination is the most vital part of management. Finance holds the key to all activities of organization such as production, distribution, marketing and personnel. These activities hamper if not supported by proper financial planning.
- Dynamism: -Financial planning is demanding exercise, which requires dynamism on the part of finance manager. It means finance manager mist take initiative and faces various changing financial situations as and when they arise. Accurate forecast of future trends are required for effective planning.
- Communication: -communication is an effective tool for management. Financial planning enables the finance manager to communicate various aspects of financial plan to the executives of other departments. Effective financial planning helps to finance manager to communicate easily with others in the organisation.
- Decision Making: -it is necessary for a firm to take appropriate and timely decisions to achieve its objectives. Financial planning prepares itself for attainment of these objectives. Any scheme, how so ever effective, cannot go through unless budgetary provision is made in the financial planning.
- Integration: -Financial planning gives a fairly good idea to the firm about its available resources. Financial planning is to be completed in full consultation and co-ordination of other departments. This promotes team spirit among all executives.
- Futuristic: -Financial planning is effective when it foresees events. It must take into account not only present but also future developments. This futuristic element of financial plan helps for advance programming.
Financial planning involves identifying the sources from where the funds can be obtained and ensuring that the required funds are available to the firm as and when needed. In this way, financial planning ensures that the various functions of the organisation are carried out smoothly.
Importance of financial planning:
1) Identifying the sources from where the funds can be raised and ensuring that the required funds are available to the firm as and when needed. For this, under financial planning, an estimation is made regarding the amount of funds which would be required for various business operations. In addition, an estimation is made regarding the time at which the funds would be needed.
2) To ensure that there is proper utilisation of funds in the sense that there is neither surplus nor inadequate funding by the firm. In other words, it ensures that situations of both excess or shortage of funds are avoided. This is because while inadequate funds obstruct operations of the firm, excess funding leads to wasteful expenditure by the firm. Thus, proper financial planning ensures optimal utilisation of funds by the firm.
4) Proper financial planning promotes better coordination of production and sales.
5) By clearly defining the targets and policies, it helps in evaluating current performances.