Financial planning is crucial to a business and its long-term objectives. A financial plan generally refers to several different processes estimating required capital and assuming other factors contributing to strategic decision-making. For example, diversification is when a business aims to diversify into a new market requiring financial planning and consideration of different factors, especially costs that will be incurred.
Financial planning assists a business in seeing the larger picture and allows them to set short-term goals based on long-term objectives. Furthermore, it allows a business to understand its financial future and map out strategic financial decisions. Financial planning is not necessarily involved with new projects but could be based on existing operations.
The first step is to carry out a Political, Economic, Sociological, Technological, Legal, and Environmental (PESTLE) analysis and a Strengths, Weaknesses, Opportunities, and Threats (SWOT) analysis technique which would allow you to conclude whether operating in a different country is a viable option.
Once these factors are considered, information that relates to undertaking a new project is then identified. For example, hotels in India incur taxes including Entertainment Tax, Luxury Tax, Road Tax, Value Added Tax, and Stamp Duty.
Therefore, when carrying out financial planning, the business must carry out several appraisals before preparing a budget for their project. Costs including site purchase/lease, taxation, purchase/lease of assets, liabilities, overheads, etc., must be considered. For example, Jumeirah Group can use different techniques such as break-even, payback period, Net Present Value, internal rate of return, and the average rate of return to estimate how long it would take them to recover their initial cost on the investment and perhaps break-even or generate profits.
Every business must have a financial plan, whether it is for existing or prospective operations, without which long-term objectives cannot be met. Financial planning is at the base of every operation and is a determining factor between success and failure. However, it is also important to remember the non-financial factors that contribute to financial planning.
Decision-makers could refer to all the stakeholders involved in a business. A stakeholder refers to any party that has a ‘stake’ in the business; that is, interest or involvement in the business. Stakeholders can range from suppliers to shareholders to potential investors. When discussing information needs, it usually refers to the business portfolio, which consists of details about the business, their vision, mission, aims, product, brand, etc. However, it also refers to financial information, including Profit and Loss, Balance Sheet, and Cash Flow statements.
The business owners are considered ‘The Principals,’ and the individuals that work in a business are considered ‘The Agents.’ The individuals working in the organization are the owners’ agents and work towards objectives set by them. In this context, we can assume that shareholders, financial institutions, employees, suppliers, customers, and the government are the main group of decision-makers as they make decisions that affect the business.
Shareholders: These are considered owners as they have invested in an organization. Some of them are on the Board of Directors who, in an annual general meeting, reviews the financial performance of the business, decisions taken by the CEO and the senior management, etc. Therefore, they are to be provided with financial performance information such as the profit and loss accounts.
Potential Shareholders/Investors: can also be considered decision-makers as they can invest within an organization, so their information needs consist of financial performance information.
Financial Institutions: Financial Institutions such as banks require financial information and financial planning information before acting as funding sources. For example, before lending, they might look at the business profit and loss account, review their fixed asset value, and demand collateral in exchange for the loan.
Suppliers: Suppliers require financial information to identify their financial position before selling, perhaps on trade credit, and achieving a credit term policy.
Government: Government bodies that review the financial performance, such as the Securities and Exchange Commission in the United States, by law, require a business to be transparent and provide annual financial reports to ensure that there is no illegal activity occurring. This protects the interest of the public and ensures fair competition within the economy.
Customers: Customers of a business must be provided with transparent information regarding the product they are being sold; the business must have a fair pricing policy.
Employees: Employees in the organization are perhaps the most crucial decision-makers as they undertake the strategic decisions and their consequences. Therefore, information from various aspects must be provided to enable senior management to decide on different subjects such as budgeting, profits, costs, etc.
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