Financial Planning – Why Financial Planning Is Important
Financial planning is a very important activity for a business of any size. Without adequate financial planning, even a successful company will not be able to reach its potential, as it shows poor care and attention to the key aspects of the company’s financial health and future. A robust planning process will encompass cash management, a long-range view of the company, and ways to measure success. This type of process can also supplement efforts to obtain additional financing and appropriately plan for major expenditures.
The highest priority goal when creating or modifying a financial planning process is usually accurate cash management. By correctly forecasting the cash on hand requirements, a company can identify periods when excess cash could be invested in alternative funds to obtain a higher rate of return. This will also allow a company to determine if there will be any potential cash shortfalls during the year. Through early identification of potential problems like this, management will have the necessary time to procure additional financing or short term loans. Without this additional time, managers could be forced into less than ideal loans with high interest rates or fees.
For some companies, management makes decisions based on meeting immediate and short-term goals. This can yield positive results for a time, but will often cause a company to not meet its full potential. Financial planning provides a better long-term view. This allows for managers and owners to make decisions that will provide the greatest overall benefit for the company and the stakeholders, instead of the decisions that will provide the greatest short-term benefits. Using a long-range view of the company’s goals and achievements is the best way to reach lasting success.
Finally, as counter-intuitive as it may sound, many companies do not know how to measure the success of their company. For a local restaurant, a manager may measure success in the number of customers each weekend. However, if they understood the financial goals of the business, they would realize that they need to focus not on getting the volume of customers through the door, but also on getting them to spend more while they are there. Putting goals into defined and measurable markers, one is able to clearly understand what actions lead to success versus actions that do not directly contribute to success.
Using the wealth of information that financial planning can yield, managers are able to make better decisions and do their job better. However, for people that are not skilled in this type of business planning, it is very important to get the assistance of an expert. There are many consultants that can assist a company in defining their goals and setting up a process to meet their immediate and long-term financial needs.