Financial planning is a necessary for the success of any business. In any economic system there is uncertainty, it is therefore necessary to make a detailed analysis of the impact of potential decisions on the financial results of management decisions and activities.
Nature of financial planning process
The nature of the planning process in a market economy is very different from planning in centrally planned economies, where the purpose of planning is to ensure that companies operate in accordance with the guidelines drawn up centrally by the state. In a free market system planning ensures that managers make rational decisions in terms of microeconomic criteria. This means focusing on financial planning, because the free market's value growth depends on positive financial results of companies operating on it.
Financial planning is therefore a process in which managers:
- analyse the dependencies and relationships between financial and factual aspects of the planned activities,
- reduce uncertainty by analysing how present decisions will affect the future situation in the company,
- selects the best possible options for action,
- control economic processes, and examine the extent of achievement of planned results.
Benefits of financial planning
Financial planning has many benefits. On one hand, it enables the company to identify which funds may be used to realize its investments and provides factual information about the supposed costs of various operations. On the other hand, it allows the analysis of the impact of alternative actions on company's bottom line, enabling decision-making processes based on the financial criteria. It aims to assess the effects of planned activities and to provide means to change of planned tasks in case of changing external conditions.
Financial planning determines ways to achieve company goals. The strategic objective of any business is to increase the market value of equity of its owners. This criterion does not prejudge how the management will strive for the this purpose. The financial plan is a set of steps that must be completed to achieve this goal. However, under conditions of market uncertainty, decisions often change, they must be prepared beforehand to give managers time needed to implement them. For example, if a company wants to build a manufacturing plant in year 2018, managers must begin to seek partners and funding in year 2016 or even earlier.
- Hillier, D., Grinblatt, M., & Titman, S. (2011). Financial markets and corporate strategy (No. 2nd Eu). McGraw-Hill.