The Importance of Financial Planning for a Business

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Planning in business is very important. It provides a guide for the overall operation of the business. Likewise, financial planning provides a structure to the way finances are handled within the organization or company. Financial planning manages the flow of cash in and out of the business. Essentially, it’s impossible for an organization to function and be financially stable without financial planning.

Analysis of Financial Reports

  • Financial planning entails the analysis of financial reports. Without analysis, it’s difficult or impossible to make plans. When the business examines its financial records, it’s able to see the growth and present condition of the business. Financial planning helps to compare different situations and allows for a thorough understanding of how cash is earned and expended in the business. Eventually, it becomes an important factor in determining which areas the business needs to improve on in terms of finances.

Assets

  • In detail, the assets of the company or business are best monitored through financial planning. Since financial reports hold records of expended, earned and remaining assets, financial planning becomes crucial in keeping an up-to-date record of the company’s resources. Financial planning analyzes the current assets, fixed assets and intangible assets of the business. Financial planning or financial projection considers these three factors before deciding how best to expend and gain resources.

Liabilities

  • Just as financial reports hold records for the assets of the business, they also state the different liabilities of the company. Financial planning also requires an analysis of the company’s current liabilities, long-term debt and owner’s equity. This helps the business keep track of liabilities due in the near future. It also helps the company plan out how to finance and devote resources to its debts before they create any trouble for the operation.

Income and Profit Loss

  • Financial planning requires the review of financial reports to encourage an understanding of income and profit loss. This is important because it helps the business identify its sales or revenue, cost of goods sold/cost of sales, gross profit, operating expenses and net income. Knowing these factors can help the business identify which ventures have been profitable and which need improvement.

Pro-Activeness

  • Following the examination of financial reports, the business and those involved in it become more proactive. Through financial planning, different conditions, problems, losses and gains are predicted. Financial planning allows managers and top management to think ahead of the current situation and makes them more prepared. Different business opportunities can also be identified via financial planning.

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  • Photo Credit finance image by Chad McDermott from Fotolia.com
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