Financial planning and analysis is a financial strategy that provides with a forecast of the profit and loss. Along with monitoring our finances and investment activities.
It includes focusing on budgeting and money management. The whole purpose is to achieve financial freedom and stability. Not only for businesses but also individuals.
Therefore, everyone must understand the concept of financial planning and analysis to become financially prepared.
Financial planning and analysis not only reports, forecasts and variances moreover, it uses that data to advise on how to improve performance, minimize risk, etc.
In this article we will discuss various aspects of financial planning and analysis to provide an in-depth knowledge that will help you to be financially confident.
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What is financial planning?
Financial planning is a process of estimating the financial required and determining its sources to achieve the financial goals.
In other words, financial planning and analysis is the way towards framing financial policies. Thus, it requires budgetary arrangements, acquirement, investment and administration of funds of an organization.
Apart from framing policies it also includes reviewing past performance, following trends and analyzing mistakes. As a result, it helps in taking corrective measures and forecasting the financial position for the future.
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Why is it important?
It not only gives you clarity in life, but also provides direction and meaning to your financial decision. We have listed its main advantages below:
1. Provides direction to our goals and dreams: It helps us to understand our goals better in terms of how they impact other aspects of our lives and finances.
2. Be prepared for emergencies: In addition, it helps to save funds for emergencies (advisors suggests to be equal to our six months salary). Therefore, helps in your financial well-being in case of any financial emergency.
3. Enjoy a better standard of living: The saving created from financial planning can prove beneficial in a difficult time.
4. Family securities: Having the proper personal finance coverage, for example, insurance can provide peace of mind for you and your loved ones.
Objective of financial planning
Its main objective is to assist in evaluating the fund requirements of an entity or individual and determining the sources of the funds. We have listed some major objectives below:
1. Ensuring availability of funds: It helps in generating funds as well as making them available whenever required. As a result, it ensures timely availability of finance to meet our day-to-day expenses.
2. Estimating the time and source of funds: Delivering the fund at the right time at the right place is very much crucial.
3. Avoiding unnecessary funds: Excess funds are just an idle asset that cannot generate any revenue but have their own cost. It is an important objective of financial planning to prevent the rising of unnecessary funds.
4. Investments are tied to goals: Your each monetary decision is in line with a financial plan. Hence, it keeps you away from temporary investments and you do your tax planning in advance.
5. Cash flow management: Helps you to manage your cash flow. It helps you to utilize your resources in the best possible way to achieve your goal and cut out unnecessary expenses.
Steps to financial planning
The process of Financial planning mainly includes six steps:
1. Determine your current financial situation: Firstly, you must clarify your present situation by assessing our assets and liabilities, savings, pensions, insurance, investments, etc.
2. Developing financial goal: Secondly, you should determine your objectives and goals by gathering all the information about your financial situation.
3. Identify Alternative Courses of Action: Thirdly, develop alternatives. Considering the possible alternative make you more effective and efficient to take a wise decision.
4. Evaluate Alternative: It is must to evaluate possible courses of action, considering life situation, personal values and current economic situation.
Your decision must consider the risk involved and your risk tolerance before making any decision as it can differ for each individual depending upon various factors.
5. Create and Implement a Financial Action Plan: In the process of financial planning, you should develop an action plan. To implement this action plan you must need assistance from others.
6. Re-evaluate and Revise Your Plan: Regularly reviewing your plans will make you bring your required adjustments in line with your current life situation.
Financial planning and forecasting
Financial planning and forecasting is an annual projection of income and expenses for a company division or department. It can be also an estimation of cash need and decision on how to raise cash.
Above all, forecasting is used to make financial plans which includes an assessment of their future financial need. This is the aggregate prospective of the whole firm rather that looking at individual projects.
To view more about how forecasting helps with financial planning and analysis, click here.
Drawbacks of Financial planning
1. Difficulty in forecasting: People always take into the account the expected situation in the future. However, the future is uncertain and things may not happen as expected. So, utility of financial planning is limited.
2. Difficulty with change: Once you prepare a financial plan is difficult to change. On the other hand, as the situation changes, you need to change your financial plan which can be a tough task.
3. The problem of co-ordination: Financial function is the most important of all the functions. As a result, the proper coordination among all the functions, the preparation of a financial plan becomes difficult.
4. Rapid changes: Method of production, marketing devices and consumer preferences create new time demand every time. This new change requires a change in financial planning every time.
Once the investment is made in fixed assets, then these decisions cannot be revised. It becomes very difficult to adjust a financial plan for incorporating the fast-changing situation.
Undoubtedly, financial planning and analysis are strategies for any company or on a personal basis. Therefore, it provides a parameter for setting a financial goal, investment, income and profit and loss.
As a result, it can help us in terms of economic benefit and prevent any kind of financial loss.
In short, it is the only way that can help you account for your money and help you save up for future investment.
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