Big Importance of Financial Planning for Companies

Narendra Kumar

12 Dec, 2020

A company’s financial planning is critical since it involves big decisions including how and how much a company should spend based on available funds. It’s an important process that small startups and Fortune 500 companies should do. The amount of effort needed to do financial planning is based on the number of funds that are involved.

The process of financial planning often includes a budget that organizes the company’s finances. It also might include a group of steps or goals for future spending/saving. The plan assigns future income to different types of expenses a company has including rent, utilities, etc. It also saves some income for short/long-term savings. Financial plans are sometimes called investment plans. The process can be done by individuals and companies.

Financial Planning Objectives for Companies

• Manage Cash Flow

It’s important to note that while companies often focus on a cash flow shortage having excess cash can also cause management accounting issues. It’s not surprising that when a company has a shortage of capital it’s going to have problems operating. Those funds are needed for various expenses including the company’s day-to-day operations. When cash flow is an issue it can cause a lot of problems for companies if they’re unable to cover the costs of supplies, utilities, salaries, etc.

However, it’s also important to note that excess cash can also cause a problem. For example, if the capital isn’t used in an effective way and is instead wasted it can cause your company a lot of problems. When a company has extra cash it’s important to use the funds wisely and invest it. The company should always be thinking about the future. That includes plans to invest their funds and expand their business. The expansion can include adding new product lines, selling in new geographic locations, and expanding its target market. These are all practical options a company should consider when it has extra cash.

• Availability of Ample Funds

Planning is important to making sure your company has funds for daily expenses, buying long-term assets, and handling emergency expenses. This is done to ensure that money is required quickly. It also helps a company know where to raise funds when they’re required. It’s always important for companies to have sufficient funds for their current and future expenses. This highlights the need to do enough planning to make sure your company has the money needed for short/long-term expenses.

Financial Planning’s Importance/Value

Financial planning adds major value to any company. In fact, it’s impossible for a company to operate efficiently without using it. It’s critical for a company to consider the several benefits financial planning can provide. Here are some of the most critical issues:

• Raising Funds

It’s not only important to determine the number of funds your company needs but also the way it’s going to raise the funds. There are various options including issuing debt or shares or taking out loans from financial institutions like banks. The first step in the process is to make the decision about how your company will raise funds. It’s critical to making a decision that’s the best one for the company. Any key players in the company should be involved in the decision-making process.

The next step is to determine who the company will issue shares/debt to, or which banks they’ll request loans from. Companies often use a complex mix of these sources of income so it’s important to make the process as efficient as possible. It’s important to take the right steps to make sure your company is finding the best mix of planning the company’s financial future.

• Short/Long-Term Funds

It’s important for a company to have funds for daily and long-term expenses. This helps to ensure the company’s operations will go as smoothly as possible in the short and long term. For example, the company should have an ample supply of raw materials and keep production going. These are critical factors for any company and it needs enough funds to achieve that goal. Financial planning is the way your business to create a blueprint to ensure it can pay its bills today, next week, and a decade from now.

• Sufficient Funds

It goes without saying that a company needs enough funds in order to operate. However, while companies often focus on the issue of not having sufficient funds there’s also the situation of having a surplus of funds. Planning is useful for collecting, storing, and using the proper amount of funds. This is an important process to help make a company as efficient as possible. This will help the company to boost productivity and sales, which are critical goals of any company.

• Funds Allocation

Another issue of financial planning takes care of determining how funds are allocated to each department in a company. There’s often a difference between the funds a department wants and what it needs. There are different months/situations when different department requires more/ fewer funds.

• Financial Control

Financial planning is also a critical foundation for financial control. Your company’s finance teams must know how much money has been spent for which activities. They’ then know whether they’re over/under budget. In the case, new steps must be taken they’ll have a base for making corrections. This is important to ensure the company is still on the right track. It’s one of the most important factors for maintaining a productive and efficient company.

• Affordable/Profitable Options

When a company determines its investment options it’s critical to determine which option is the most affordable and profitable? These are both important issues. On one hand, you’ll want to make sure you’re picking the option that’s most affordable and profitable. This is a critical step to make sure your company is making the best decisions in terms of minimizing costs and maximizing profits. Both of these factors are critical to help streamline your company’s expenses.

• Emergency Funds

It’s important for a company to have emergency funds available for events that involve crises and out-of-control situations. These funds are needed to get the company through those times. Financial planning involves the process of making sure a company has enough capital for those events and that the reserves are replenished when they’re spent.