Question

Why is financial planning important? What are the major planning areas?

Answer 1

Financial Planning is process of framing objectives, policies, procedures, programmes and budgets regarding the financial activities of a concern. This ensures effective and adequate financial and investment policies. The importance of financial Planning can be outlined as-

1. Financial Planning ensures that the suppliers of funds are easily investing in companies which exercise financial planning.

2. Financial Planning helps in ensuring a reasonable balance between outflow and inflow of funds so that stability is maintained.

3. Adequate funds have to be ensured.

4. Financial Planning helps in making growth and expansion programmes which helps in long-run survival of the company.

5. Financial Planning reduces uncertainties with regards to changing market trends which can be faced easily through enough funds.

6. Financial Planning helps in reducing the uncertainties which can be a hindrance to growth of the company. This helps in ensuring stability an d profitability in concern.

Under Financial Planning, the following are the major planning areas :

1. Determining capital requirements- This will depend upon factors like cost of current and fixed assets, promotional expenses and long- range planning. Capital requirements have to be looked with both aspects: short- term and long- term requirements.

2. Determining capital structure- The capital structure is the composition of capital, i.e., the relative kind and proportion of capital required in the business. This includes decisions of debt- equity ratio- both short-term and long- term.

3. Framing financial policies with regards to cash control, lending, borrowings, etc.

4. A finance manager ensures that the scarce financial resources are maximally utilized in the best possible manner at least cost in order to get maximum returns on investment.