The concept of financial planning involves various steps by which an entity can fulfil one’s financial goals. A financial plan is like a guide or mentor that can help an individual or organization regarding financial matters. It ensures that an individual or organization stays in control of investments, expenses, and income. Thereby, efficient fund or money management is possible, thanks to financial planning. The process of estimating the amount of capital required can easily and efficiently be determined with proper financial planning.
Objectives of Financial Planning
In order to better understand the concept of financial planning, one must have knowledge of its objectives. The objectives of financial planning are as follows:
- To identify capital requirements- This is on the basis of factors like short and long-range planning, promotional expenses, and costs of current and fixed assets.
- To determine capital structure- Knowing which kind of structure is suitable for the business. This includes decisions of debt-equity ratio.
- To frame financial policies- This is done in accordance with the borrowings, lending, cash control, etc.
- To ensure maximum utilization of resources- This means utilization that ensures maximum cost-benefit and returns on investment.
Importance of Financial Planning
The importance of the concept of financial planning must be studied for a better understanding. The importance of financial planning can be understood from the following points:
Increasing savings and profit
The concept of financial planning makes the saving of money possible. On creating a financial plan, an organization or individual is able to have a sound understanding of its income and expenses. This allows the tracking down of costs and eventually, their reduction becomes possible. Consequently, the savings and the profit margins increase.
Proper future planning
With financial planning, one would be in a better position to plan for the future. Organizations can make efficient investment plans, expenses plans, and revenue-making plans. As such, organizations can make reliable future policies. They can also help determine which direction to take in the future.
Preparation for emergencies
As sufficient funds become available, organizations or individuals will be in a better position to deal with emergencies. Many organizations even create an emergency fund for better financial planning. This way, one would be in a better position to manage emergency situations without the need to procure funds.
Different Types of Financial Planning
The different types of financial planning are as follows:
- Budgeting: This is one of the most important types of financial planning. Here, a planner ensures that the correct amount of money is being spent without being excessive.
- Tax planning: This is another important aspect of financial planning that deals with certain tax issues. It helps the maximization of tax refunds while ensuring the minimization of tax liability. Also, it ensures that the taxes are paid on time.
- Insurance planning: Here, an evaluation of insurance needs takes place. This way, one would be able to determine the right type of insurance policy depending on one’s situation.
- Estate planning: This involves making sound plans regarding estates expenses. It also helps in better preparation regarding the estate tax one is subject to.
- Retirement planning: This allows employees to plan for their future financial needs after retirement. This assists employees in ensuring a desirable lifestyle after retirement.
- Investment planning: This planning type can assist one regarding investment portfolios. In investment planning, one needs to map out the required amount of investing in different sources. Consequently, what results is efficient asset and liability management.
Conclusion
Financial planning is an approach by which an entity can fulfil one’s financial goals. A financial plan is like a mentor that can help regarding financial matters. The various objectives of financial planning are- to identify capital requirements, determine the capital structure, frame financial policies and ensure effective and efficient utilization of resources. The importance of financial planning involves increasing savings, proper future planning, and preparation for emergencies. The different types of financial planning are- budgeting, tax planning, insurance planning, estate planning, retirement planning, and investment planning.
