financial planning

What is Finance Planning?

Financial Planning is the process of analyzing a firm’s investment options and estimating the funds requirement and then deciding the source of funds.

In other words, financial planning indicates a firm’s growth, performance,investment and requirements of funds during a given period of time, usually three to five years. It involves the preparation of proforma profit and loss account, balance sheet and fund flow statement. It assists the manager to regulate flows of fund which is his primary concern.

One of the most important objective of any firm is the growth in sales. An increase in the market share of the firm results in higher growth. In order to sustain higher growth in sales, firm need assets. For this, firm have to invest in additional plant and machinery to increase its production capacity. In addition, it also requires additional current assets to produce and sell more goods or services.

The firm also have to acquire raw materials and need to convert them into finished products. It also has to sell the produce on credit in order to boost up the sales. This gives to rise in accounts receivables or debtors. To finance current assets and fixed assets, firm can use its internally generated funds. However when a firm grows at a higher rate ,internal funds are not sufficient. In such case, firm has to raise fund externally either through equity or debt.

Financial Planning Process

Process of Financial planning involves the following steps –

  • Evaluating the current financial condition of the firm
  • Analyzing the future growth prospects and options.
  • Appraising the investment options to achieve the stated growth objective
  • Projecting the future growth and profitability.
  • Estimating funds requirements and considering alternative financing options.
  • Comparing and choosing from alternative growth plans and financing options
  • Measuring actual performance with the standard performance.