The question ‘What is financial planning?’ is frequently asked by persons who are thinking about starting a company. In essence it means to organize a financial plan for the starting up, maintaining and sustaining of a business. It is also referred to as capital plan. A financial plan incorporates the total amount of monetary and other resources that are required for the company. The finance sources that are considered as most economical should be chosen. This also assists the planner in how to make the best use of the financial options. The financial plan provides a complete representation of the company’s financial activities that will take place in the future.
There are answers to particular questions contained in a financial plan. These include: how much long-term or short-term term finance will the company require? Where will the finance be sourced? How will the funds be applied or used when they are accessed? It is essential that the financial plan is prepared in the initial stage as a financial plan that is not correctly carried out will certainly result in undercapitalization or overcapitalization. It is also important to note that an inadequate financial plan is hard to fix, therefore great care and attention should be applied in the preparation of such a plan.
In the process of finding out what is financial planning and what it entails, potential planners will discover that there are three forms of finance plans:
• Short-term plan: financial preparation for not more than one year. It deals with the company’s working capital.
• Medium-term plan: financial preparation for a minimum of one year to a maximum of five years.
• Long-term plan: financial preparation for over five years. Included in this plan are the company’s financial objectives for the long-term such as capital structure and activities for expansion, among others.