Importance of financial planning
After estimating the requirement of funds the next step of financial planning is deciding how to raise this finance. Finance may be internally generated by the business or capital may have to be raised from external sources such as equity shares, preference shares, debentures, loans. Financial planning is broader in scope as it does not end by raising estimated finance. It includes long term investment decision. Its focus is on capital expenditure plan and determining equity mix. Financial planning is done for long term as well as short term. Budgets are also drawn as a part of financial planning.
Sound financial planning is essential for success of any business enterprise. The financial planning estimates the precise requirement of funds which means to avoid wastage and over-capitalization situation. Funds can be arranged from various sources and are used for long term, medium term and short term. Financial planning is necessary for tapping appropriate sources at appropriate time as long term funds are generally contributed by shareholders and debenture holders, medium term by financial institutions and short term by commercial banks. Financial plan suggest how the funds are to be allocated for various purposes by comparing various investment proposals.