The decision-making by the entrepreneur, well in advance, regarding the future financial aspects of the enterprise, is called 'financial planning'. It is the process of estimating the fund requirement, specifying the sources of funds and utilising them in an optimum manner.
The proper planning for procurement and disbursement of funds, requires on the part of the entrepreneur to take the following decisions:
- The total amount of finance required for implementing the business plans (How much money is needed?).
- The forms and proportion of various securities to be used for collecting the desired amount (Where the money will come from).
- The policies of utilisation and administration of capital (How can the firm utilise these funds in the best possible manner?).
The intellectual process of financial planning is devised to achieve the following objectives:
- To assess the different types of financial requirements, viz. long, medium and short-term funds, i.e. capitalisation.
- To procure the funds from the suitable sources, keeping in view, the principles of economy, convenience, financial commitments, ownership, E etc., i.e. capital structure.
- To allocate the funds to various departments to achieve the predetermined objectives.
- To establish effective control on financial matters.
- To provide optimum amount of working capital for the enterprise.
- To build up reserves for future contingencies.
Sound financial planning is necessary for the success of a business enterprise as:
- It entails policies and procedures for proper coordination i between the various functional areas of business.
- It involves proper allocation of resources amongst various departments.
- In the absence of an accurate plan, the enterprise may have to face frequent difficulties that hamper its growth.