Financial planning is a process that evaluates the situation of a business in relation to it’s financial resources and needs and determines how to manage the liquid assets, taking the future inflows and outflows of funds into accounts.
The main purposes of financial planning are:
- Avoid situations of shortage of financial resources that can be detrimental to the accomplishment of the goals of the organization. A business can be profitable in the long term, but a bad financial management can lead to short term bankruptcy.
- Avoid a high opportunity cost of maintaining a high stock of financial assets.
- Allow the organization to take advantage of business opportunities.
Financial planning must be aligned with the goals and the vision of the organization. It is not an objective of financial planning to establish long term goals, but financial planning can influence short term planning.
The making of cash flow reports and budgets are important activities of financial planning. Budgets are a tool of planification that show the financial behavior of different parts or units of the organization. Cash flow reports contain inflows and outflows of cash.
Financial planning should take into account the variables of the environment in which the organization operates and the possible impact that changes in those variables can have in the financial resources of the business. A good financial management should react quickly to changes in the environment and to changes of internal variables.
Financial planning makes estimations of future values of several variables, like:
- Level Sales
- Operative costs
- Assets of the organization and its liquidity
- Interest rate
- Future investments