Importance of financial planning

Financial management is one of those crucial things that could be the difference between you being successful or a complete failure. There are a ton of people who have become bankrupt but were millionaires at one point in their life. This was all primarily because of how they managed finances. There are also a ton of businesses that earn good profits that fail in the long run because of the way they planned and managed their finances.

importance of financial planning

Financial planning and management is not just making sure that your bills are paid and your records are clean. Proper financial management is making sure that you are not overspending and you’re also ready for any sort of expenditures that might arise. There are many other factors that make financial management a crucial aspect of business. So, lets discuss them in detail.

Long-term viability of a company:

Long term financial decisions are made in a company that affect its survival in the long run. Long terms decisions would be those that involve purchase of fixed assets, long term borrowings, long term investment decisions and so on. These decisions should be made considering both the positives and negatives of such a decision and should assess if the risk is worth the return.

If not done right such decisions could lead a company down its path to failure as most of these long-term decisions involve huge amounts of funds. A failure in taking the right financial decision now could lead to the company failing 5 years down the line. Any wrong decisions in the purchase and disposing of fixed assets leads to huge losses that a company cannot easily bear.

Everyday operations:

A company must be able to manage finances in such a way that they have funds to run everyday operations. If funds are not readily available and accessible everyday functioning becomes really hard. For example, if to complete a task a worker needs funds to say buy raw material or rent a few machines and the proprietor is not able to arrange the funds, then the employee is not going to be able to do the said task, this is going to end up being a waste of time and also money as the employee is paid for his services regardless and as a result of the funds not being ready he/she is not working on that particular day when he should be.

A lot of companies that don’t hold proper reserves for operating cash face such troubles regularly. Proper Financial management makes sure that such a scenario does not arise. If finances are not managed well on the day to day, then the day to day operations suffer as a result. Everyday operations also include making sure that you get payments on time. If you don’t have a proper system of managing your receivables then you might lose track what payments to you have pending and when such payments are pending.

Achieving goals:

A company in order to achieve its goals and objectives must have a sound financial management strategy in place. Without strong financial planning a company cannot possibly survive in the long run. While planning for the long-term growth, expansion and also sales in a business, a company has to also plan how it’s going to finance such operations, how it is going to meet day to day expenses and so on. Without such financial planning a company cannot meet its expectations realistically.

Helping with financing decisions:

Businesses need to be financed and there are many ways to finance a business. There are loans, issuing shares or debentures, then there are a number of private financing options. The list just goes on. In order for a company to be profitable and have good growth, it must be financed right. Financing may be done to meet both long-term and short-term requirements but it’s crucial that the financing is done right.

When you finance a business with borrowed money, there is an interest factor that one needs to consider. This interest factor adds costs over the other operating costs. Most long-term capital decisions are made using borrowed funds, so if these decisions are not made right, then the whole aspect of repaying the borrowed funds successfully becomes a huge problem. Usually there is a good mix of equity based and non-equity based funding in a business.

Lowering expenses:

By analyzing if the investments and expenses made offer at least minimum returns, one can make decisions that affect a business on the day to day and for the future that can significantly lower expenses. If the returns aren’t satisfactory, then such an investment or expense can be avoided.

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