Long-term Financial Planning for Businesses

A probably angry Lee Iacocca was indicating that finance is something that has to be preplanned, planned, re-planned and even post-planned. Financial planning in itself does not involve just setting budgets, wage rates, or deadlines. It is all about getting to know realistic work schedule, the manner in which they can be executed, back up plans that can be used, and the least cost with the help of which the entire project can be executed. So in general, these aspects and growth forecasting, both involve the answers to the four important questions: why, when, where, and how (answers have to be cost oriented).

Steps in Long-term Financial Planning

Step 1: Let us take the example of a coffee shop, where a financial planner has to find legitimate answers to 4 questions, namely:

1. Why should we produce a specific item on the menu card? (consider cost of production and sales price)
2. When should we produce such an item and for what time duration? (bear in mind, seasonal costs, inflation of raw material prices)
3. Where should we produce the item: right in the shop or some production center? (consider transport cost, nature of goods, and selling cost)
4. How should one produce the item, manually or mechanically? (consider equipment and personnel cost)

Step 2: The second step is to assess your business environment. In this step, surveying the competitors’ performance, pricing, and distribution is an absolute necessity. In such a scenario, you may also prepare a cost sheet of the financial features of production, namely the money that you would have to invest as a manufacturing cost, its sales cost, and the profit that it would yield. Logically, the sale price should be more than the cost price, and the return-over-asset ratio/return-over-investment ratio should be healthy. While finalizing these three figures, you will need to take into consideration three important aspects:

1. Average spending capacity of your customers
2. Your competitors’ quality, quantity, and price
3. Popularity of the product, potential market, customer retaining capacity of the product, etc.

Though the trend of such products is more experimental in nature, they might become full-time, public favorite products; hence, it is also important to make a financial provision to recover losses that arise in the experimental period, until the product establishes itself in the market.

Step 3: The third and fourth step are more analytical in nature and from the finance point of view, they are also quite expensive. The idea that you need to implement in the third step is allocation of resources in such a manner that you tend to make a genuine profit in sales during the long run. In this step, you will be using and analyzing cash flow statements on almost a daily basis. The key is to have uniform cash outflows for consecutive days/months/years. Cash outflow is typically all expenses and losses. Losses are quite uncontrollable, but expenses are surely controllable. Hence, search for raw material sources, manpower, and production processes that will help you to maintain uniform and low per-unit cost for the item/product. For example, have regular suppliers, who will supply at an agreed and uniform cost. This uniformity will eventually come in handy to curb and control unexpected losses, and will also help you to keep a good hold over the market.

The second part of the third step is making monetary provisions. This is absolutely essential due to the fact that no business is risk-free. Such provisions include advance to the raw material supplier, insurance, provisions for bad debts, extra services, etc.

Step 4: Retain, sustain, and entertain; this step is quite an advanced one, and typically includes many different aspects that aim at retaining the customers. The first important function of this step is to generate regular data and cash flow statements. With the help of these statements, you will realize whether that very item on the menu is proving to be profitable or not. At the same time, you also need to maintain a statement that records cash inflows and outflows over a longer period of time (in months or a quarter). Thus, you will realize what is profitable for your business and what your customers want.

To sum up the whole theory, it can be said that long-term finance planning is a three-dimensional graph, with customer, product, and market being the dimensions. The essence of cost and time is added to every dimension. After all, the key to success is to facilitate all three dimensions logically, bearing in mind this essence.

How to Become a Financial Planner

Financial planners or advisers are professionals who educate people about the necessity and advantages of investing money, and also guide them in making lucrative decisions regarding the same. They analyze an individual’s current salary, lifestyle, priorities in life, and also his goals, and make a plan that would help in reaching the set goal. They help people in insuring their money for emergency purposes. Some people take up the responsibility of money management themselves. However, there are chances that they may make mistakes due to inadequate knowledge and inexperience in this sector, causing them to lose their hard-earned money.

Taking the help of a planner has become quite common in recent years, either because people are too busy, or because they do not want to take a risk of investing their money wrongly. In this age, when people are very busy, they rely on experts to make important decisions regarding their money. This job is, therefore, very hectic, and involves huge responsibilities. Here are certain important things you need to know if you plan to get into this field.

Becoming a Financial Planner

It is not necessary to have a bachelor’s degree to get into this profession. However, it definitely adds points to the work profile and earning potential. It would be beneficial to complete your graduation in the field of finance, economics, mathematics, statistics, business, or law. Studying these subjects would help in understanding issues and intricacies of financial management. Graduating as a Chartered Financial Analyst or a Chartered Financial Consultant would also help. You can also enroll into courses related to estate planning, investments, risk management, and taxes.

To practice as a professional financial adviser, you need to have certification. Those who aspire to be certified, should have a graduate degree, and most importantly, at least three years of experience in the field. The three years of working is when you would receive the actual training for your career. You would be dealing with the practical aspects of the theories you have studied. During this time you would learn how to how to deal with customers. Your main job would be to guide them in planning their finances according to their individual needs. This would also help you in building business relationships with the clients.

Once you complete the experience requirement, you would have to give an exam, that tests your skills. You would also have to undergo an ethical practice and background check. After you are certified, you can either work for an investment company or financial management company, or choose to set up your own business.

The salary varies greatly. Initially, when you start your career, you would enjoy a fixed salary, though it would not be a very huge amount. However, once you become a certified financial planner, your income would depend on commissions, or direct payment for the service you have provided to the client.

Careers in finance have become one of the most sought-after ones in the recent years. Along with educational qualifications and experience, you also need excellent communication skills for this job.

The Financial Planning Process

It is essential that all of us have some goals in life. Short-term goals include a good job, great career, and small investments. Long-term goals include buying a house, children’s education, retirement policies, etc. Financial planning is one of the most crucial decision of one’s life. If you start planning early, you can get out of a financial mess that can arise later in life. It is very common to spend more than what you earn. Of course, there are facilities, like credit cards, buy now pay later schemes, installments, etc., which compel one to overlook their finances. At the end of the month, when bills keep pouring in your mail boxes, you find yourself in a sticky situation. And this mounting bill payment adds a semi-colon to your long-term dream of owning your own house. Sometimes, medical emergencies also forces you to dig into your children’s education fund. Marriage plans for your only daughter? You borrow some money from your retirement fund. There goes the trip to Egypt, you have planned all those years!

The answer to all the above mortifying financial situations is ‘Financial Planning’. The planning process helps give a direction to your financial decisions. It helps you decide various investments that can bail you out of your financial problems. For example, investment in mutual funds may help you repay the loan or save enough for your retirement. Once your financial goals are set, it helps make your life more secure and flexible for any financial emergency that may arise.

You can carry out your own financial planning by taking a guidance from self-help books, newspapers, magazines, the Internet, or discussing your financial needs with your spouse. If you feel, you can’t handle it yourself, then opt for a professional financial planner. This Buzzle article, will help explain process related to financial planning.

Six Steps of Financial Planning Process

It is important to be well versed with the entire process of financial planning. This will help you plan major updates of your life as well as unseen occurrences. It is you who needs to be in control of your finances, not the other way round.

Establish Mutual Relation

Develop a relationship of trust and respect with your financial planner. The purpose is to help both parties know what is to be expected. During this stage, the services that the financial planner will offer you should be discussed in detail. It is also the right time to decide how will the financial planner be compensated for his/her services. You can also come to a decision as to who will keep a track of the finances once invested.

Assemble Data

The financial planner will meet you and discuss your financial situation. You should come to a mutually agreed goal regarding your financial and personal goals. You should decide the time period and the expected results from your investments. You should be made aware of all the risks, if any, involved. The financial planner should help you make the financial goals, which can be made possible from utilizing your current income into savings and investment program.

Estimation and Assessment of Current Financial Status

Your current financial situation should be assessed by your financial planner to decide the plan of action. This may include estimation of your current assets, liabilities, and cash flow. The insurance coverage, investments, and tax strategies are also considered.

Presenting Recommendations and Alternatives

The financial planner should prepare an investment program based on the information provided by you regarding your financial goals. The planner should explain the recommendations and inform you about all the minor details. This will help you decide your financial move. He should also be able to come up with alternatives, if you are not satisfied with the recommendations offered.

Execution of Financial Planning Recommendations

The planner becomes your guide during the implementation of the recommendations of the financial goals. He takes decisions on your behalf and coordinates with your attorney and stock brokers.

Management and Auditing Financial Plan

You and your planner should decide who will keep a track of your investments. If your planner is in-charge, he should give you periodic reports on your financial situation. If there are any sudden changes in your life, he should be able to give you alternatives for the same.

It is wise to set goals, which are achievable during the financial planning process. If you understand the importance of becoming financially stable, planning for the future will become very easy. You should take into consideration all the possibilities that can affect your life due to your financial decisions. It is good to start early in life and not wait till you near retirement age. You should get over the notion that financial planning is for rich people. Investments should not be considered as financial planning. You should be in-charge of your money and monitor it at every step. It is wise to plan your finances according to your income. Better be well-prepared financially, before a crisis comes barging at your door. In this unpredictable world, it is best to have a safe financial security, not just for yourself, but for the future of your whole family.

Importance of Financial Planning

A broad definition of personal financial planning can be stated as, “a process of determining an individual’s financial goals, purpose in life, and life’s priorities, and after considering his resources, risk profile and current lifestyle, to detail a balanced and realistic plan to meet those goals.”

Financial Planning

It is a process which presents before an individual, organization, or even a country, the current financial position and the adjustments in the spending pattern, in order to meet the goals.

Importance of Financial Planning

It is important to plan finances in order to reap long term benefits through the assets in hand. The investments that one makes are structured properly, and managed by professionals through financial planning. Every decision regarding our finances can be monitored if a proper plan is devised in advance. The following points explain why financial planning is important.

– Cash Flow: Financial planning helps in increasing cash flow as well as monitoring the spending pattern. The cash flow is increased by undertaking measures such as tax planning, prudent spending, and careful budgeting.
– Capital: A strong capital base can be built with the help of efficient financial planning. Thus, one can think about investments, and thereby improve his financial position.
– Income: It is possible to manage income effectively through planning. Managing income helps in segregating it into tax payments, other monthly expenditures, and savings.
– Family Security: Financial planning is necessary from the point of view of family security. The various policies available in the market serve the purpose of financially securing the family.
– Investment: A proper financial plan that considers the income and expenditure of a person, helps in choosing the right investment policy. It enables the person to reach the set goals.
– Standard of Living: The savings created by through planning, come to the rescue in difficult times. Death of the bread winner in a family affects the standard of living to a great extent. A proper financial plan acts as a guard in such situations, and enables the family to survive hard times.
– Financial Understanding: The financial planning process helps gain an understanding about the current financial position. – Adjustments in an investment plan or evaluating a retirement scheme becomes easy for an individual with financial understanding.
– Assets: A nice ‘cushion’ in the form of assets is what many of us desire for. But many assets come with liabilities attached. Thus, it becomes important to determine the true value of an asset. The knowledge of settling or canceling the liabilities comes with the understanding of our finances. The overall process helps us build assets that don’t become a burden in the future.
– Savings: It is good to have investments with high liquidity. These investments, owing to their liquidity, can be utilized in times of emergency and for educational purposes.

The argument made by people from low income groups is that they don’t need to plan their finances due to the less money they possess. However, no matter how much one earns, better planning of income always helps in the long run.