Aspects of Financial Planning

1. Amount of capital to be raised: Financial planning anticipates the amount of capital required to establish an enterprise and also to carry out the operations of the business.

2. Determining the form and proportionate amount of securities to be raised: The financial manager must decide on the capital structure (i.e., the amount, type, and proportion of different types of funds).

In particular, the financial manager must determine the company’s ratio between owned and borrowed funds.

3. Setting policies for the administration of capital: Financial managers must chalk out a plan, set a policy, and adopt a strategy to make ensure that available funds in the business are best utilized.

Role of Financial Planning in Financial Management

Financial planning estimates a company’s financial requirements and makes arrangements to secure the required amounts at the proper time and place.

The significant role of financial planning in financial management is justified on the following grounds:

1. Optimal availability of funds: An intelligent financial plan makes correct estimates of available and prospective funds. Plans are also made to ensure that funds are utilized effectively, ensuring the fund surpluses and shortages are avoided.

2. Ensuring coordination between different functional areas: Every functional area of the business needs financing. To ensure coordination between the different organs of the business, finance can be used as a common link.

3. Effective financial control: Financial planning estimates the financial requirements of different functional areas and allocates funds accordingly. It prevents extravagance and facilitates financial control.

4. Goal of profit maximization: It is often claimed that the goal of financial planning is profit maximization. In most cases, the greater the profit, the greater the operational efficiency of the organization.

5. Goal of wealth maximization: Financial planning is not only confined to profit maximization. In addition, wealth maximization is an aim of financial planning because it suits the interests of both investors and the company.

6. Safety of capital: Financial planning is essential for capital safety. Fixed assets are replaced after some time, which means that replacement planning must be carefully thought about.

7. Changing price levels: When inflation causes prices to change rapidly, historical cost valuation is useless because, in the present day, the cost is not the same as the acquisition cost. Hence, financial planning should consider changes in price levels.

Frequently Asked Questions

What is financial planning?

Financial planning is the first step in finance management. It involves making financial forecasts that help manage an organization’s finances. Financial planning sets the stage by looking at past performance, current activities, and future goals to provide management with an idea of how much money will be needed over a given time frame.

What are important aspects of financial planning?

There are many aspects of financial planning, but the key points are: - Amount of capital to be raised - Determining the form and proportionate amount of securities to be raised - Setting policies for the administration of capital

What is the purpose of financial planning?

The purpose of financial planning is to estimate the financial requirements of an organization and to make arrangements for securing those funds at the proper time and place.

What is the role of financial planning in financial management?

The significant role of financial planning in financial management is justified on the following grounds: - Optimal availability of funds - Ensuring coordination between different functional areas - Effective financial control - Goal of profit maximization - Goal of wealth maximization - Safety of capital - Changing price levels

What are the advantages of financial planning?

Financial planning helps the organization: - To determine and estimate its financial requirements - To assess and estimate capital requirement for a new project or an expansion of an existing one - Helps in designing financial structure so as to optimize returns on equity and risk-bearing capacity of the company

True is a Certified Educator in Personal Finance (CEPF®), author of The Handy Financial Ratios Guide, a member of the Society for Advancing Business Editing and Writing, contributes to his financial education site, Finance Strategists, and has spoken to various financial communities such as the CFA Institute, as well as university students like his Alma mater, Biola University, where he received a bachelor of science in business and data analytics.

To learn more about True, visit his personal website, view his author profile on Amazon, or check out his speaker profile on the CFA Institute website.