Financial planning

The essentials

Financial planning is the process of preparing a financial blueprint of the organisation's future operations. It estimates how much money will be needed, when it will be needed, and from where it will come. It usually covers both long-term plans (often three to five years) and short-term plans (up to one year), such as budgets.

Key points

• Twin objectives: to ensure availability of funds whenever required, and to see that the firm does not raise resources unnecessarily (since idle funds have a cost).
• Importance: helps in forecasting what may happen in different situations; helps the firm prepare to face surprises and avoid business shocks; helps coordinate various business functions such as sales and production; reduces waste, duplication and gaps in planning; links the present with the future; links investment and financing decisions; and makes evaluation of actual performance easier by providing targets.
• Financial planning starts with the sales forecast, because the funds needed depend on the expected level of activity.

Exam tips

• If a question mentions avoiding both shortage and excess of funds, it is pointing to the twin objectives.
• Financial planning helps in controlling because it gives detailed targets to compare with.

Common mistakes

• Thinking the only objective is to raise as much money as possible. Raising too much money is also undesirable.
• Confusing financial planning with financial management as a whole. Financial planning is one part of it.