Need and Importance of Financial Planning

The financial planning means different things to different managers, depending on the nature of the business, the firm's size, and so on. In a narrow sense, financial planning is estimating the capital needs of a firm and determining its capital structure. But this is one aspect of financial planning.

The success of a business depends, to a great extent, on sound financial planning made by it. It has been rightly said that financial planning is the key to the successful business operation. Its importance can be explained as under:

1. The anticipationof future trends

Financial planning is the cause of forecasting future trends and changes in the market.

2. Achievement of firms objectives

Financial planning is helpful in achieving firms’ goals. It specifies the company’s operating philosophy, primary and secondary objectives and so on.

3. Maximizing shareholder welfare

The firms objective is to maximize shareholder welfare and also to increase the worth of firms assets. This can be achieved by making good financial plans.

4. Monitoring and control

Financial planning serves as a tool for controlling the expenditures, costs, cash, flows and other operating expenses. If the operational costs of the firm rise beyond planned targets, cost-cutting actions can be taken.

5. Elimination of waste

Financial planning helps in preventing all the wastage, allocating, available funds in the best possible manner.

6. Evaluation of performance

The success of an organization often depends upon the information contained in a plan for future performance. It is possible to continually evaluate the performance of the firm on the basis of the financial plans.

7. Co-ordination in business activities

Managing Financial planning makes possible a total integration and coordination of all the other functions of the firm.

8. Brings efficiency

Finance creates efficiency. With financial planning, a firm secures and employs capital resources in such ratios as may increase the efficiency of the factors of production.

9. Facilities growth and expansion

When preparing a financial plan, the future expansion of the firm is also considered. It evaluates the growth chances.

10. Ensures fair return on investment

Financial planning is an important tool in the hands of management to get a proper return on the funds invested by the firm.

11. Saves time and providesdirection

The financialplan saves the time of top managers. A clearly developed financial plan, when made known to managers at different levels, tends to relieve top management from detailed and time-consuming processes.