What financial planning for a business is, why it is important, and what can happen if not done accurately.
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During this lecture, we will discuss how proper financial planning and management allows businesses to accomplish short and long term goals.
As we begin this lecture it is important for you to understand that financial planning and management are essential activities for an organization of any size to operate effectively. I think it would be helpful to begin by defining what financial planning and financial management is. Financial planning is simply planning for the future of a business to ensure there will be positive cash flow in the years to come. Financial management is a business monitoring its cash flow to ensure the continuation of the businessâ€™s operations is as effective and efficient as possible.
Letâ€™s dive right in and discuss the importance of financial planning and management.
Without appropriate financial planning and management, even the most successful business can lose its way. Let me give you an analogyâ€¦Letâ€™s say that you and your family are planning a road trip vacation to a place you have never visited before. Before you leave you quickly check to make sure you have everything you need to get you and your family to your destination. As you begin the journey you are in familiar surroundings and are comfortable so things are going great. However, halfway there you realize that you did not plan properly for the trip by making sure you had everything you needed as for you did not bring a map and you and your wife both left your wallets at home. At this point you are just driving aimlessly having no idea which direction you should go in to reach your goal with no money to help you get there. The same is true for businesses that do not properly financially plan and manage their money for the future as for they are just traveling aimlessly without a destination because they did not plan to bring a map (plan) or wallets (sufficient funding), make sense?
Iâ€™d like to shift gears and now discuss the importance of financial management.
A businessâ€™s priority when creating a financial plan should be accurate cash management. When a business correctly forecasts the cash they have available, they will be better able to identify times when extra cash could be available to be invested to receive a higher rate of return on their investment. Accurate cash management will also help the business see if there could be the potential for a cash shortage during any particular time of the year. By seeing this ahead of time, management will have time to secure additional financing if necessary to get them through the rough patch. The bottom-line is that financial planning gives managers a better way to make better decisions for the business and do their job better by seeing the long-term cash requirements. Another important element of financial management is correctly budgeting and forecasting for the future. In order for a business to properly plan for the future, it has got to have a budget so they know how much money they have to work with.