Introduction to Financial Planning
Financial Planning is simply a process of identifying the financial needs and then forming strategies to fulfill those needs. It is also the process of setting, planning, achieving and reviewing life goals through the proper management of the finances.
Importance of Finance Plan
- Monitors savings and expenses to satisfy current financial needs
- Provides a financial cushion to deal with unexpected crisis
- Provides financial protection to the family if something goes wrong
- Plans for retirement and insurance by amassing enough to meet future expenses
- Meets future financial goals by helping in plotting the course
Process involved in Financial Planning
There is no standard process to form a financial plan. Anyone can follow any process if it fulfills the purpose of financial planning. The basic structural process in financial planning are:
- Identification of Financial Status
- Determination of Financial Goals
- Identification of Alternatives for Investment
- Evaluation of Alternatives
- Implementation of the Financial Plan
- Monitoring And Re-evaluation of the Financial Plan
Limitations of Financial Planning
Future is Uncertain
Any plan we make is for future events. As we all know, the nature of the future is uncertain and no one can predict the future. Due to this, all the financial plans we make are limited and unexpected. Such uncertainty decreases the reliability of financial planning.
Financial Planning is Expensive
A proper financial planning requires heavy investment of time and resources. Financial planning requires assessment of high quality data from reliable sources. Managing sources and extracting information from those sources requires proper research, which needs time and investment. Also, quality financial planning and proper forecasting can only be done by an expert and analysts. Due to this reason, not all can make an effective financial plan.
Availability of data
The quality of financial planning depends on the availability of the data. This means, financial planning is heavily dependent on the data-factor. In a financial plan, we make future financial projections based on our past financial actions. If we do not have proper data, the credibility of the financial plans decreases. Any discrepancies in the data directly affect the quality of the financial plan.
Ever Changing Environment
Financial planning is not a regular practice, as it is expensive and consumes time. But, the environment around the businesses are regularly changing. Changing the financial plan with a change in business environment is not possible. There may be some changes in government rules and regulations, supply chain ecosystem, customer changes and preferences etc. which may affect the plan adversely. Therefore, in such a changing environment, financial planning becomes less relevant.
Financial planning doesn’t change with the changing environment. This also means that the plan remains rigid once it is made. There is inflexibility and procedural rigidity when some changes need to be done. This is another limitation of financial planning.
Execution of financial planning requires coordination with all other business functions. All functions must align the purpose and perform for effective execution and result. Even indecision among the business function, in regard to financial planning, disturbs the process of financial planning.