In the world of finance and business, financial planning is the practice of setting and achieving realistic financial objectives and plans for the use of funds. In simple terms, financial planning is the process of putting together a financial strategy or program to achieve specific financial objectives. Financial planning is an integral part of any well run organization. It can be defined as the procedure by which an enterprise determines how to acquire and utilize available resources in the most efficient and cost effective manner possible.
In simple terms, financial planning is an intensive examination of an individuals current and future financial situation by the use of currently known factors to predict possible future income, capital values and expenditure plans. This analysis is undertaken in order to provide a workable budget program for achieving desired short and long term financial objectives. A financial plan helps to achieve long term goals such as retirement, investment and wealth building, or retirement pay. Also, it helps to set up and maintain an organizations financial structure and guide the organization through periods of financial hardship. However, financial planning must not be confused with budgeting, which is usually a longer term planning process that helps to achieve short term goals.
The major aim of financial planning is to set up an efficient and effective savings and investment programs to achieve specific financial objectives, these objectives being the purchase of goods or services that are financed by savings or by investment, and the maintenance of certain assets, such as capital assets and fixed assets. The objectives of savings programs include reducing current expenses, increasing investment returns, saving for the future, or increasing long term wealth. Investments aims at creating a financial standing of the corporation by buying beneficial assets such as stocks, bonds, real estate property, and securities in financial markets. The objective of savings and investment planning programs is to achieve definite financial goals that cannot be realized immediately within a company’s budget. The methods of implementation vary from firm to firm; some firms may adopt the techniques of direct savings and investment management, where all the income and expenses of a company are reported, and allocated to specific financial objectives; while others may use the techniques of financial planning, where financial objectives are developed through a formalized procedure, and monitored by trained financial experts.
A financial planner assists the company in determining the savings requirements and the manner in which these needs can best be met by the corporation. To ensure a systematic approach, financial planners form a special committee, usually consisting of a senior management person and one or more accountants, to develop the corporate savings plan. The procedure for formulating a financial planning policy and procedure usually varies with the size and scale of the company, although there is usually a common approach. The development of a financial planning policy usually takes into consideration the overall financial needs of the company and the financial objectives to be achieved.
In addition, the company is required to prepare information regarding its assets, liabilities, assets’ classification, current financial situation and estimated future financial situation. This information is then presented to the members of the board of directors for their knowledge and guidance, as well as for review at a General Meeting called a Annual General Meeting. At this meeting, duly authorized officers of the company are questioned concerning the company’s financial planning policy, operations and achievement of objectives. At this meeting, any changes in the company’s policies regarding savings, investment, operating, finance, budgeting and investment will be put before the Board of Directors for approval.
Financial planning is therefore an important practice to achieve the long term goals of the company. It helps to build a solid and stable foundation for long term success by creating an environment that allows the company to achieve its set goals. As such, it is considered as a strategic planning instrument. For this reason, the success of any company largely depends on its ability to develop a sound and effective financial planning system.