Limitation of Financial Planning Homework Help

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Financial planning is referred to the process of planning a set of goals and targets for your business and then contemplating ways to fund those predefined aims. A financial plan is all about developing a sound idea as to how to manage the necessary resources and equipment to capitalise your business prospects.

Under normal circumstances, the steps to come up with a proper financial plan are inclusive of:

  1. Consider the environment surrounding your business.
  2. Understand the necessities to meet a pre-estimated set of objectives of the business that could help sustain it as also enable growth.
  • Build up a structure outlining these necessities and the extent to which they will be required for the business to flourish.
  1. Think of the sources that could fund these requirements, materialising all your hopes for the business.
  2. Do the math and come up with a budget highlighting your total expenditure for these requirements.
  3. Study the possible risks you might venture into.
  • Monitor your plan by reviewing them at intervals and observe the ongoing changes which need adjustments.

A good financial planner while formulating a plan would keep the following in mind:

  • Future profitability of the firm.
  • Greater return on assets.
  • Ability of the business to expand its market share.
  • Problems solving tendencies for the foreseeable future.

Based on the time frame, financial planning can be categorised into two:

  • Short term financial planning-

Roughly, this refers to a period of twelve months within which a firm needs to hold or generate enough cash so as to meet its basic expenses.

  • Long term financial planning-

This essentially, gives some thought to the long term objectives of the firm for which investment is mandated. But this has to be aligned with the related issues of dividend payout policy of the firm, the external financing and also debt ratio.

Despite the bundle of advantages that financial planning brings to a business, it cannot be bereft of loopholes. The limitations of financial planning are:

  • Cost of innovation

The major role of the finance department of any business, big or small, is concentrated on financial plan, building one that would comply with the targets set for the business to run smoothly. But budgetingwould require extensive use of updated technology without which things would lose out on their efficiency levels. For instance, you might face trouble dealing with tons of excel spreadsheets, if there is no way you can make them into one. This adds to the cost burden of the business.

  • Lack of accuracy-

The major financial decisions taken in any establishment is based on data. While if the data itself is inaccurate, there is no point sweating over any research work as no correct result would be reached.

  • Lack of transparency-

This again plays an important role. It is to be ensured that the financial planners are not kept in the dark. They should know every single business proposal and strategy you are currently looking at and those you will in the future. Only then will the financial plan make sense.

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