Meaning of financial planning and it's objectives. Also the need and importance of financial planning.

Financial planning means deciding in advance how much to spend on what to spend, according to the funds at our disposal. Financial planning is the process of determining the objectives, policies, procedures and programmes to deal with the financial activities of an organisation. Financial planning is mainly concerned with the economical procurement of funds and profitable use of funds.

Literally meaning

Financial planning is composed of two terms 'finance' and 'Planing'. Finance may be defined as the provision of money at the time when it is required. Planning means deciding in advance the future course of action. Thus, financial planning is deciding in advance the future requirement of capital, its sources it's structures and laying policies for the same.

Financial planning is used in two senses:-

(a) Financial planning in narrow sense:  In this sense the financial planning means the pre estimation of capital of the enterprise or firm.

(b) Financial planning in broad sense:  In wider sense the financial planning means the determination of financial objectives, building of financial policies and development of financial techniques.

According to Prof. William king," Financial planning is the process of thinking and making explicit strategy, actions or relationship necessary to accomplish an overall objective."

According to Prof. Bonneville," The financial plan of a corporation has two fold aspects, it refers not only to the capital structure of the corporation but also to the financial policies which the corporation has adopted or intends to order."

According to Prof. Walker and Boughan," Financial planning pertains only to the function of the finance and includes the determination of firm financial objectives formulating and promulgating financial policies and developing financial procedures."

                    Thus, financial planning is a process consisting of determining the amount of capital required and the capital structure and laying down the financial policies. It is not an isolated process but is a part of the overall planning of any business enterprise.

Objectives of financial plan: 

The main objectives of financial plans are follows:

1. To ensure supply of sufficient funds: A financial plan would ensure the availability of sufficient funds to achieve the goal smoothly. It doesn't mean to have excess or unutilised funds.

2. To minimise cost of capital (fund): A financial plan would determine the sources of fund taking in consideration three factors (i) Cost (ii) Risk (iii) Control.

3. To ensure a logical Debt equity mix: To match cost with risk so as to protect owners against the cost the loss of control on business.

4. To ensure flexibility: To provide flexibility in the plan so as to protect owners against the loss of control an business.

5. To ensure simplicity: The financial structure should be simple to understand.

6. Long term view: A financial plan should be prepared keeping in view the long term requirement of funds for expansion, modification, diversification,etc.

7. To ensure liquidity: It means ability to produce cash, specially the firms ability to produce cash to its dept. The importance of liquidity should be kept in mind during the preparation of financial plan. During the period of deflation, it is liquidity which can keep a concern going.

8. Economy: The cost of raising funds should be minimum. The methods of issuing security should be properly evaluated.

Need for financial planning (Significance/Importance/Advantage)

The success of a business organisation depends very much on the finance planning. The importance of financial planning may be discussed in the following heads:

1. Successful promotion of a business:

Effective financial plan ensures availability of funds at the time of its requirement from the most favourable sources. Financial planning eliminates waste of resources. This is done by providing policy and procedures which bring out a closure coordination between various functional areas of business such as personal, production and marketing.

2. Efficient direction of a business: Successful operation of an organisation requires adequate find at the right time from the right sources. At the same time it ensures well coordinated function planning such as purchasing plan for purchasing fixed assets as well as current assets, production planning to control the production cost and to meet the demand in most effective manner,etc. Thus, a good financial utilities the available fund in most effective way.

3. Expansion and development of a business: Financial planning provides a part of its profit in the name of various reserves and surpluses with an intension to develop sufficient fund as retained earnings to meet future requirement of its expansion and growth.

4. Reducing financial uncertainties: It provides a detailed plan of action for reducing uncertainty and for proper direction of individual and group efforts.

5. Helps in avoiding business stocks and surprises: By anticipating the financial requirements financial planning helps to avoid stocks and surprises which otherwise firms have to face in uncertain situations.

6. Economy in operating activities: Financial planning leads to the most effective utilisation of funds by establishing effective coordination in different operative function and unity in action by all executives at different levels. Thus, it serves as a guide to effective coordination among various operative functions and unity in action. At a different levels the executives follow financial policies, procedures and objectives as set out on the financial plan.

7. Adequate return on capital employed : An effective financial plan avoids the possibility of over and under Capitalisation by utilising the available funds upto the optimum level. Thus, it leads to adequate return on capital.

8. Adequate liquidity in business: A good financial plan enables the enterprise to maintain sufficient liquid funds to meet its obligations as and when it becomes due. Availability of over trading and strains it's repayment capacity.

9. Changes in price level: In the dynamic economic world price levels keeps on changing. In such a situation the replacement of existing assets requires more funds than the provision made for the same. Replacement of obsolete assets is possible only through efficient planning.

10. Conservation of capital: Plant and machinery acquired by an enterprise become absolute soon after the arrived of new machinery in the market with improved technology. Thus, sound financial planning is inevitable for conservation of capital investment in assets.

11. Rapid growth of public sector: The public sector enterprises procure borrowed capital from commercial banks and specialised financial institutions. Hence the private enterprises find it difficult to obtain the necessary funds from these institutions for financing their plans. Therefore, the business enterprises should forecast their financial requirement well in advance by means of effective financial planning.

12. Serves as a means of communication: Financial plan serves as mean of communication among all levels of management about objectives, strategies and major policies within the parameters of this strategies and major policies the lower level of management develop the operational plans. In the absence of such plan, their is very possibility that different levels of management formulate their own policies and procedures which would produce confusion and waste.

                The complexity, high degree of competition and business of the future environment make financial planning more necessary that ever before organisation which does not keep a knowledge of environmental changes will under utilise and waste their resources, miss opportunities and will fail to achieve objectives.