Principles of financial planning
From CEOpedia | Management online
Principles of financial planning are based on analysis of financial data company and goals to be achieved by specific budgets.
Basic rules
The main principles of financial planning are:
- Maximization of enterprise value
- Maintaining financial stability, the financial condition, which would guarantee confidence and total control over the finances.
- Improving financial performance, which depends on the systematic monitoring of performance in the short term, taking into account overall guidelines and main goal.
- Preserving liquidity, which require fulfilling company's current financial obligations. It requires long term control over cash flow.
- Creating appropriate financial strategy tailored to the internal needs of the enterprise. This strategy determines the direction of a company in the field of finance, which would help in achieving its objectives,
- Controlling of company's finances based on proper control measures which should be planned and implemented.
- Optimization of costs by finding a level of costs that would avoid problems in the area of finance. It involves looking for new solutions in the field cost grouping and calculating but it is not limited only to reduce costs,
- The optimal organizational structure that provides the fastest and most accurate flow of financial information.
- Appropriate investment policy which should be prepared in accordance to company's financial capabilities.
Elements of the financial plan
Examples of cash flow planning:
- Planning of global enterprise revenues, and predicting their growth,
- Cost planning, by using proper methods of measurement of various inputs (labor, machine, energy, supply, etc.).
- Planning of due taxes and methods of obtaining tax benefits,
- Budgeting (planning of revenues)
Examples of detailed principles of financial planning
- Risk Management: Planning for and managing risks that can affect financial goals and objectives. This includes investing in various financial instruments, diversifying investments, and establishing savings and emergency funds.
- Cash Flow Analysis: Analyzing cash flow to ensure that expenses are managed within budget and there is enough money available to pay for investments and other financial obligations.
- Retirement Planning: Establishing a retirement plan that meets the needs of the investor and their financial goals. This may include setting up 401(k) plans, IRA’s, or other retirement accounts.
- Investment Planning: Developing a portfolio of investments that will help achieve financial goals. This includes researching different types of investments, such as stocks, bonds, mutual funds, and real estate.
- Tax Planning: Planning to minimize taxes by taking advantage of available deductions, credits, and other strategies.
- Estate Planning: Planning to ensure that assets are distributed according to the wishes of the investor. This includes setting up wills, trusts, and other legal documents.
- Debt Management: Developing a plan to pay off debt in a timely manner and managing credit responsibly.
- Insurance Planning: Determining the types and levels of insurance needed to protect assets and provide for family needs.
- Education Planning: Establishing an education fund to pay for college expenses and other education-related costs.
Advantages of Principles of financial planning
The principles of financial planning are an essential tool to ensure that an organization is able to meet its financial goals. Below are some of the advantages of financial planning:
- It helps to identify and analyze the financial objectives of the organization. This allows the organization to plan and prepare for the future while maximizing the use of available resources.
- It helps to develop and implement a financial strategy that is tailored to the organization's specific needs and goals. This ensures that the organization is able to meet its short-term and long-term objectives.
- It helps to provide an understanding of the financial environment and the impact of financial decisions on the organization. This allows the organization to make informed decisions and to identify potential risks.
- It helps to monitor and control the financial performance of the organization. This allows the organization to identify areas of potential improvement and to adjust the financial strategy accordingly.
- It helps to identify opportunities for cost savings or investments that can help the organization achieve its goals. This allows the organization to make informed decisions about how to allocate resources.
Limitations of Principles of financial planning
The principles of financial planning provide a valuable framework for analyzing financial data and setting budgets to meet specific objectives. However, there are several limitations to consider when relying on these principles. These include:
- Inability to accurately predict future events: Financial planning relies on projections of future events, but these projections can be inaccurate due to unexpected changes in the economy or in the business.
- Lack of consideration of external factors: Financial planning does not take into account external factors such as political or legal issues, which can have a significant impact on a business.
- Over-reliance on historical data: Financial planning often relies heavily on historical data, which may not accurately reflect the current market.
- Difficulty in controlling all aspects of the plan: Financial planning can be difficult to implement, as it involves numerous different factors, such as cash flow and investments, which may be difficult to control.
- Limited scope of financial planning: Financial planning is limited in scope and cannot address all aspects of business operations, such as marketing or customer service.
In summary, financial planning principles are based on analysis of financial data and goals to be achieved, however, other approaches also contribute to successful financial planning. These include:
- Cash flow planning: This approach focuses on the analysis of cash flows in and out of the company, and developing strategies for managing cash flow effectively.
- Asset allocation: This approach focuses on how to allocate investments across different asset classes to maximize returns while minimizing risks.
- Retirement planning: This approach focuses on the need to create a retirement savings plan to ensure that you have enough money to live on when you retire.
- Investment planning: This approach focuses on creating a portfolio of investments that will generate returns while minimizing risks.
- Tax planning: This approach focuses on finding ways to lower tax liabilities and maximize returns.
- Estate planning: This approach focuses on how to manage and pass on wealth to future generations.
Overall, these approaches are all important factors in successful financial planning and implementation. They help to ensure that financial goals are met, while also helping to minimize risks and maximize returns.
| Principles of financial planning — recommended articles |
| Capital planning — Financial controlling — Total risk — Portfolio construction — Business plan — Financial perspective — Cash control — Future cash flow — Business portfolio analysis |
References
- Kallberg, J. G., White, R. W., & Ziemba, W. T. (1982). Short term financial planning under uncertainty. Management Science, 28(6), 670-682.
