Financial planning is important to maintain financial health. It is the process used to determine how an organization, company, or individual manages its financial resources to achieve its established objectives. In simpler terms, it is developing a financial plan, i.e., a budget or schedule of expenditure that allows money management to organize in a useful and convenient way.
This financial planning process uses deadlines, costs, and objectives in a detailed, personalized, and organized manner, for which it usually uses the following stages:
- Establishment of objectives and their priority expressed in financial terms
- Definition of the deadlines to achieve these objectives
- Preparation of a financial budget that identifies the items (or money segments) necessary to meet the objectives
- Measurement and control of the financial decisions taken and their comparison with previous financial plans
Financial planning should be something that every organization, company, or individual should be focused on to ensure financial stability. Whether you hire a professional or handle your finances independently, you have to make sure you plan ahead for your financial needs through a budget and accounting software.
Objectives of financial planning
The fundamental objective of financial planning is elaborating a finance plan, that is, a road map towards the business objectives set in terms of the management of finance and capital resources. That is a financial horizon, a money management strategy to make the most of it in favor of the fundamental guidelines of the organization.
For this, every financial planning exercise must draw up a rigorous and detailed examination of the current financial statement and the consequences, positive and negative, that its determined management would entail in the short, medium, and long term.
Of course, as there is no perfect or infallible plan, this also involves forecasts and projections to anticipate unforeseen events and to be as close as possible to the final objective.
In conclusion, these objectives can be summarized in:
- Avoid situations of lack of availability of financial resources as much as possible.
- Reduce maintenance costs also reduce the opportunity cost of the company.
- Guarantee the financial durability of the organization.
Types of financial planning
Based on its temporal scope, we can quickly distinguish two types of financial planning, which are:
- Long-term financial planning. Generally, these are projections between 2 and 5 years in the future, so they are handled with a much more comprehensive range of variables and uncertainty, requiring more general approaches.
- Short-term financial planning. In this case, these are much closer projections, generally equal to or less than a year, so they are considered immediate and require a more specific, narrower, and less general approach.
Why Financial Planning is Crucial – Top Five Reasons
Financial planning helps you in setting short- and long-term goals for your financial activities. You can make a balanced plan to fulfill those aims. Let’s consider the top five reasons for financial planning to tell you where you wish to be.
Cash flow – Track your expenses and spending criteria as there will be a possibility of increasing cash flow. If you want to enhance the ratio of your hard-earned cash, consider the best tax planning, careful budget, and prudent spending.
Family security – Don’t forget to plan your family’s financial security while making an effective financial plan. Provide you and your loved ones a stressless and peace of mind by owning proper coverage insurance and policies.
Investment – If you are considering your goals, personal circumstances, risk, and tolerance while making the best financial plan, you are on the right track. Take it as a guideline that helps you select the right type of investments to meet your needs, aims, and personality.
Assets and financial status – Having purposeful assets work like a nice cushion that only provide you peace, and it is one of the core desire of people. There are multiple liabilities attached that make it valuable to define the actual worth of assets. If you want to gain knowledge of canceling or settling the liabilities, you must understand your finances. You will not have a burden in the future as the overall process will help you establish assets.
Capital – It is a source that increases the level of your cash flow. There is a directly proportional relation between cash flow and capital as one increases. The other one will ultimately increase. Improve your entire financial well-being as it will let you consider investments.
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