Question

What are the contents and uses of a financial plan? Explain in detail.

Answer 1

A financial plan is basically a comprehensive of the financial planning process. Contents of financial plan might vary from the context of the plan. But it majorly consists of a Profit and Loss statement, BAlance Sheet, Cash Flow statement, Sales or the income forecast etc. Apart from these major ones there can be individual statements for a few of the components from these financial statements. Following are a few:

1).Net Worth statement:- This can be for a firm and individual as well, providing details for assets, liabilities and the net worth of that entity. This is crucial as financial plan, as this would help to forecast and thus decide your future. It provides us with current financial position of entity.

i) Statement for assets is there inside net worth statement to provide further details of nature of assets that the entity possesses.

ii) Similarly there can be also for liability payments, dues and others.  

2). Cash Flow statement:- This is also very crucial whether be an individual or a business. It reconciles all the transactions, expenses, incomes, investments, finances of an entity. This would provide with an estimate of what is the annual inflow and outflow of money for that entity, and plays important role for forecasting.

i) Projected cash flow, provides a detailed timing of the income, savings and expenses over the period of the plan. This also has savings and planned savings under it and show the transfer from cash & liquid assets to non-cash assets.

3). Income statements:- This shows precisely all the income and all the expenses incurred by the entity. It shows income from all the sources, from major operations and other side incomes as well. All the expenses incurred like living, operating expenses, interest payments, insurance premiums, taxes to be paid etc. This helps in forecasting and planning your future expenses based on your income.

4). Other investments:- These include your portfolio activities, gains on it or other changes in those accounts. This provides a tentative prediction about the mentallity of person and how that entity would be moving on in fiuture.

5). Apart from these there are also reports on retirement planning which is very essential part. These reports are useful to answer questions about 'what if'. What if something happens. This might also include the insurance planning of a person. There is also Estate planning being done in this.

6). From business point of view sales forecast is also very essential, as this would provide company with an estimate for how much should they spend to accomodate those sales and increase their business in future