Financial planning deals with the systematic estimation and calculation of money-fund flows into and out of the business. It is the pre-planning of all kinds of fund inflows and outflows that will arise during the activities of the enterprises. It is the harmonization of cash inflows and outflows in terms of both amount and time. The purpose of financial planning is to create optimal liquidity. Financial analysis is based on historical data of the enterprise.
Financial planning, on the other hand, aims to determine the course of action for the future. Financial planning is not just forecasting, and financial planners must consider unlikely events as well as probable ones.
What is Financial Planning?
It is a process that covers subjects such as the analysis of possible investment and financing preferences for the enterprise (Company), the estimation of the future results of the current decisions, deciding which alternative will be applied, and measuring the performance of the objectives determined in the financial plan.
3 Conditions for Effective Planning
It should not be reduced to a mechanical application. A simple trend detection based on historical data has limited value. When a group of forecasts about the company are presented, it should not be taken at face value. It is necessary to investigate the basis of the forecasts and define the economic model on which it is based. To ensure consistency in the estimates made, it should be based on common macroeconomic assumptions.
- Choosing the Optimal Financial Plan
The finance manager should choose the best one. However, there is no model that can solve all the complex structure of planning and abstract problems.
- Monitoring the Plan Put Into Practice
Financial plans become obsolete as soon as they are implemented, or, as is often the case, even earlier. A good plan should be easily adaptable to unfolding events.
Benefits of Financial Planning
Goals and future targets are converted into quantitative form with financial planning. In addition, it provides the determination of the standards to be used in the evaluation and control of the activities. It makes it possible to foresee the problems that may be encountered in economic life and helps to ensure coordination between various departments in the enter prise.
Financial planning, which has many benefits, guides the understanding of business goals and strategies and the execution of activities. In addition, it enables more efficient use of resources.
Points to Consider While Making Financial Planning
While making financial planning, internal factors such as the long-term goals and objectives of the enterprise, the current financial structure of the enterprise, the characteristics and marketability of the products produced, and the bargaining power of the enterprise should be taken into consideration.
In addition to internal factors such as these, the general economic situation and the time value of the economic market, the competition in the business and industry conditions, tax applications, credit resources, individual and institutional investor behaviors, possible changes and behaviors in demand, and the situation of sellers are important details to be considered.
Financial Planning Models
Financial planners use a financial planning model to help them uncover the results of alternative financial strategies. These models start with simple models and extend to models containing hundreds of equations. The entire financial plan has three components: inputs, planning model, and outputs.
The inputs to financial planning consist of the firm’s current financial statements and future projections. Often the key forecast is sales growth because many variables such as labor requirement, stock level, etc. are dependent on sales.
The financial planning model does the computation of intertwining managers’ estimates for profit, investment, and finance. This model involves estimating how a change in sales will affect costs, working capital, fixed assets and financing requirements.
The outputs of the financial planning consist of financial statements such as income statement, balance sheet, statements explaining the sources and uses of cash, and these statements are called pro forma. Pro forma means estimates based on inputs and assumptions contained in the plan.