Financial Planning – Meaning, Objectives and Process

The financial planning refers to the projection of future financial course of action to be carried for efficient execution of operating plans and effective accomplishment of corporate objective. Financial planning begins with the preparation of strategic plans that in turn guides the formulation of operating plans and budgets. Financial planning provides road map for guiding, coordinating and controlling firm’s financial action in order to achieve the objectives. 

Financial Planning

Therefore, a planning that spells out future course of action, budgets and capital expenditures required for execution of operating plans is known as financial planning.

Objectives of the Financial Planning

Most corporate organizations spend significant time and labor in preparing the financial plan as it enables a firm:

  • To identify significant actions to be taken in various aspects of firm’s finance functions.
  • To develop various options in the field of finance functions, which can be exercised as condition change.
  • To state clearly the relationship between present and future financial decision.
  • To systematize the interaction required between investment and financing decision.
  • To ensure that the strategic plan of the firm is financially viable.
  • To provide standard against which future financial performance is compared.

Financial Planning Process

A firm’s financial planning largely involves the forecast and use of various types of budgets. These budgets are prepared for every key area of firm’s activities such as production, marketing, research and development, purchase and so on. The major steps involved in financial planning are as follows:

  1. Project financial statements and use these projections to analyze the effects of the operating plan on projected profits and various financial ratios. The projections can also be used to monitor operations after the plan has been finalized and put into effect.
  2. Determine the funds needed to support periodic plan which includes funds for plant and equipment’s, inventories, receivables, new product development, research and developments and for other major activities.
  3. Forecast availability of funds over the planning horizon. This involves estimating the funds to generate internally as well as those to be obtained from external sources.
  4. Establish and maintain a system of control to govern the allocation and use of funds within the firm.
  5. Develop procedures for adjusting the basic plan, if the economic forecast upon which the plan was based do not materialize.
  6. Establish a performance based management compensation system.

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