The Importance of Financial Planning in Business

Financial planning is the most crucial part of maintaining a successful business. It is the process of planning estimated amounts that the company will spend on investment, expenses, maintenance, etc. Even though financial planning is a costly procedure but still a little investment by small businesses in this exercise would definitely assist in the growth of the business in the long-run. Let’s discuss the importance of financial planning for businesses in the points mentioned below:

  • Minimizing cost: Budgeting costs accurately beforehand is a very effective way of managing your overheads. It gives you a road map to follow throughout the year to reach a particular limit of overheads you can spend on. Budgeted overheads can then be compared to actual overheads to calculate variances. These variances allow you to evaluate any over absorbed or under absorbed expenses and the reasons behind it which you can later work on to achieve minimum variances.
  • Cash management: Planning the cash inflow and outflow before the financial year begins is a major precaution you can take to avoid liquidity problems. Often, your products get sold during a particular season as compared to the annual sale. Forecasting the sales revenue you will generate each month will ensure that you don’t incur expenses more than the cash you will receive from sales, keeping receivable turnover in mind. Not planning your budget beforehand may lead to liquidity issues in managing payroll or accounts payable.
  • Marketing strategy: Financial planning assists in designing marketing strategies and tactics to increase revenue. For example, your company sells wedding dresses and your analysis team generates a report informing you of the most fruitful months for your business. You can judge from that report when the wedding season comes and prepare a plan for marketing during that particular period.

After a thorough analysis performed by your marketing team, you may decide on the strategy that is the most profitable for your business, for example, you may offer cash discounts or put up an annual sale during that period of time.

  • Expansion of business: Financial planning also includes assessment of important decisions to be made for business expansion. The investment appraisal process is a means of calculating the net present value (NPV) of a particular asset. NPV is the present value of net cash flows occurring due to investment in a particular asset in question. The NPV then decides whether an investment is profitable for your business in the long-run or not. A positive NPV is an indication of profitability whereas a negative NPV indicates a loss in the long-run from investing in such asset. Investment appraisal is a reliable and accurate way to ensure that no wrong decisions are made that would result in losses for your business in the future.
  • Think ahead: Estimating your incoming profits or losses, cost of goods sold and operating expenses ahead of time is also going to specify the problems you’re going to face in the future to achieve those estimated costs and revenues. This would bring out a pro-active attitude in the management as well as employees to try and avoid any such problems. It is also going to give the management some time to think of solutions for the problems when they actually arise.
  • Liabilities: Financial planning will also help in managing your debts and the interest payables. It will help you plan your resources accordingly to ensure timely payment of installments. Analysis of your liabilities will also help you keep track of all your upcoming liabilities that are about to mature.