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Importance of Financial Plan and Analysis for Small and Big Businesses

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Words: 1062 |

Pages: 2|

6 min read

Published: Jan 29, 2019

Words: 1062|Pages: 2|6 min read

Published: Jan 29, 2019

Financial planning links the goals a business wants to achieve in the future and the resources it will need to achieve these goals. It is also concerned with evaluating the financial resource of a business.

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Financial management is about setting the goals throughout the business and deciding what resources will be needed to achieve these goals. The main objective of financial management is to properly account for the income and expenditures of a business in order to maximize the value of that business to its owners. To achieve this managers must balance the following objectives: Addressing the present financial position, determining the financial elements of the business plan, developing budgets estimating cash flows, preparing financial reports, interpreting financial reports, maintaining record systems, planning financial controls and minimizing financial risks and losses. By having a financial plan and analysis, substantial businesses improve their financial status and become less likely to fall under bankruptcy.

Funds are the money a business uses to finance its operations. There are two sources of funds:

  • Internal, which includes owner’s equity and retained profits.
  • External, which consist of short-term borrowing mainly overdrafts and bank bills and long-term borrowing, such as mortgages and debentures.
  • Leasing, which includes operating leases, and finance leasing
  • Factoring Venture Capital Grants

In managing funds, a business will use a mix of debt finance and equity finance (Heer, R). There are costs, benefits and risks associated with both types of financing. Gearing is the proportion of debt finance to equity finance. The success of the level of gearing will depend on the circumstances, including the economic cycle. “The accounting framework is necessary for a business to be able to record its flows of revenue and expenditure accurately” (Murphy, D). The financial reports issued by the Australian businesses are general-purpose reports that meet the interests of users. The two basic financial reports are:

  • Revenue Statement, which show income and expenditure and can be used to calculate profit.
  • Balance Sheet, which presents details of a firm's assets, liabilities, and owner’s equity at a given point in time.

A fundamental element of the accounting framework is the accounting equation, which shows the relationship between the business's assets and its liabilities. In this equation the amount of assets must equal to the sum of total liabilities and owner's equity. “Assets = Liabilities + Owners Equity Assets are the item of value possessed by a business.” (Murphy, D.).

There are two groups of assets:

  • Current Assets (short term, less than 12 months will be cash)
  • Non-Current Assets (long term, more than 12 months to turn into cash)

Equity is the ownership in a company. There are two main types of equity Owners equity, which is the money invested by the owner Shareholders Equity, which is the money invested by shareholders financial ratio analysis is one of the most common methods of analyzing and interpreting financial statements. The objectives of financial planning are to figure out capital requirements because this will help determine cost of fixed and current assets. In the capital requirement process long and short term requirement has to be evaluated. A company must determine the capital structure of their organization, such as composition of capital and what capital needed for the business (Hее, 2012).

In a business it is important to have a system in place to protect the lending and cash control situations. One of the positions that can help with financial planning is a financial manager which is a manager that can make sure the resources of the company is being utilize to their best of the company ability. Financial planning is an important process that each company needs to use created objectives, implement policies and procedures. It is important to have adequate funds for the organization. Financial planning helps companies to keep track of outflow and inflow of funds, which can create stability for the company is vital for the company to make sure the suppliers investments are put back into the company.

Financial planning is a process that can continue to help the company grow and expansion at the rate necessary for the company success. There is a lot of uncertainty with companies’ financial abilities but with the proper financial planning the uncertainty can be avoided. A company's financial plan is used to help make the day-to-day decision within the company operations (Vietz O). By using the right financial information can determine the health of the company financially. No matter what company a person has it is important to have financial plan in place. A company must plan right because financial burden come up and the company needs to be in a position to have funds available for the burden.

A company must have capital to survive in the business world. A business knowing the proper way to financially keep the company making profits is a crucial step in doing business. A business use financial planning to help determine when revenue is up for the period and when revenue is down for the period. This is an important process because this will help determine when to buy product or services and when not to buy. It is vital for the owner to take these low points of revenue into account because expenditures will need to be tight (Ehrhardt & Brigham, 201) the company has poor cash management the payroll can be affected. By having a financial plan in place will help keep financial stability for the company. A company can have a competitive advantage by being financially ready to purchase inventory at a reduced price.

Financial planning helps long-term business decisions work through planning and time management. The planning process can maintain financial stability for the company growth and make sure the company is moving in the right direction it is vital for the company to implement a strong financial plan for the company's future growth.

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Growth is an opportunity for the company to stay competitive in the markets and develop strong financial ideas. A business needs to compare actual results to quantifiable targets in order to be able to know if the financial plan is working for the company. An example of the financial plan working effectively would be the company gives “the marketing department an increase in the advertising expense account, which leads to a large jump in sales”. This is financial planning at its best working to improve the company's profits. When the profits are growing then the business can continue to grow and develop.

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Cite this Essay

Financial Plan and Analysis for Small and Big Businesses. (2019, January 28). GradesFixer. Retrieved July 15, 2024, from https://gradesfixer.com/free-essay-examples/importance-of-financial-plan-and-analysis-for-small-and-big-businesses/
“Financial Plan and Analysis for Small and Big Businesses.” GradesFixer, 28 Jan. 2019, gradesfixer.com/free-essay-examples/importance-of-financial-plan-and-analysis-for-small-and-big-businesses/
Financial Plan and Analysis for Small and Big Businesses. [online]. Available at: <https://gradesfixer.com/free-essay-examples/importance-of-financial-plan-and-analysis-for-small-and-big-businesses/> [Accessed 15 Jul. 2024].
Financial Plan and Analysis for Small and Big Businesses [Internet]. GradesFixer. 2019 Jan 28 [cited 2024 Jul 15]. Available from: https://gradesfixer.com/free-essay-examples/importance-of-financial-plan-and-analysis-for-small-and-big-businesses/
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