Understanding the Basics of Financial Planning

In business terms, financial planning is the process of creating a systematic strategy for realizing one’s long-term profit expectations. In laymen’s terms, it is the ability to foresee future needs and motivations so that you will be able to anticipate their effect on current activities and your future profitability. Financial planning is the key to a successful business, as it can make or break a business. This article will highlight some of the main reasons why businesses undertake financial planning and also provide a brief glossary of terms used in the industry.

By creating a detailed budget and setting up savings targets, financial planning helps entrepreneurs to pinpoint exactly where they need to make changes to improve profitability. In layman’s terms, a financial goal is the objective in which a company seeks to achieve over a given time frame. A budget will serve as a guide to achieve these financial goals, which will then be reflected in the company’s financial statement.

Another important reason why businesses undertake financial planning is to create and maintain effective working capital management policies. Effective cash flow planning (also known as positive cash flow) is crucial to the smooth operations of any business, as it provides a well-researched framework by which to determine how savings should be invested. In layman’s terms, this includes the identification and determination of feasible avenues for obtaining funds without having to rely on future borrowing. The main factors considered by financial planners in cash flow planning include the amount of cash that a company requires, its potential growth, existing customer and banking relationships, and its operational costs.