What is Financial Planning | A Complete Guide

By Aileen Padua - Last Updated on January 4, 2021
A Brief Explanation About What is Financial Planning & How it works

Financial planning can be a tedious process to expand your life goals whether it being short or long term. There are various components to consider when thinking about financial planning. A few of those elements include investment management, cash flow and budgeting, tax planning, and social security planning.

It is known that 20% of U.S. citizens don’t save any of their annual income, which makes financial planning even more difficult to establish, especially when trying to achieve financial stability. Throughout this article, you’ll find out the basics of financial planning, and what it will take for you to succeed at it.

What is Financial Planning

It is a task that can help an individual or business determine a budget for different types of assets such as activities, materials, and resources. In order to achieve it, one must establish objectives that align with the values that support your business.

Objectives to Financial Planning

  • Determining Capital Requirements

    The first objective to consider for financial planning is your capital requirements. Ask yourself, “What needs to be the priority?” When working with capital requirements, one needs to think about creating projections for accounts payable and receivable. You want to determine your capital needs by comparing your actual costs to your projects, and then subtract your current liabilities from the current assets.

  • Determining Capital Structure

    When determining capital structure, it is best to use the debt-to-equity ratio, which is a formula that measures the balance between debt and equity. It’s important to determine capital structure because it can support the growth and other relevant assets of a company.

D/E = Short Term Debt + Long Term Debt + Other Fixed Payments

Shareholder’s Equity

  • Framing Financial Policies

    Financial policies will help effectively make it easier because it sets up an organized concept throughout financial planning. When framing financial policies, think about the types of resources that should be utilized in order to receive a maximum number of returns or investments. These types of policies can involve lending, borrowing, and cash control, among other things.

  • Ensure That Scarce Financial Resources Are Maximally Utilized

    Scarce financial resources lead to maximum returns on investment. Because of the scarce financial resources, ensuring that those types of financial resources are maximally utilized will bring lesser costs that can help your business.

Why is Financial Planning Important?

  1. Ensures adequate funds.

    Ensuring adequate funds will help balance the outflow and inflow of cash, which can maintain the stability of a client’s financial planning in general.

  2. Ensuring suppliers of funds that can be easily invested in companies that can exercise financial planning.

    Keeping track of who the suppliers are is a good practice. This can provide companies with a broader perspective in terms of investment.

  3. Helps in making growth and expansion programs

    In order for a company to survive in the long run, it can assist with creating strategies for growth and expansion of your finances. These specific strategies can lead to long term survival for a business.

  4. Reduces uncertainties with regards to market trends

    Market trends constantly change. The changes that with the reduction of uncertainty for business owners, who can encounter funds when it comes to investing in creating those market trends. A couple of certainties that should be a concern should be profitability as well as maintaining financial stability. This can also jump through any hurdles that can stunt the growth of a business.

The Financial Planning Process Consists of 7 Steps:

  1. Establishing and defining the client-planner relationship

    To start things off on a good note, it’s important that the client establishes a bond with the financial planner that will be handling the majority of your financial goals. The definition of your client-planner relationship should revolve around the goals that you want to set for the long term, especially for an investment such as a business.

  2. Gathering client data and establishing goals

    You got to be honest and tell the whole truth with your financial planner. If you want to have clarity with your plans, then it’s best to start with collecting the data needed for the financial planner to review. This will help with establishing goals efficiently.

  3. Analyzing and evaluating your financial status

    The third ultimate step is to find out what’s eligible and how you can reach your goals. However, before moving on to the next step, it’s important that you see where you stand with your financial status.

  4. Developing and presenting financial planning recommendations and/or alternatives

    Of course, it’s important that the client has a say in these types of situations. This crucial step to financial planning should include discussions about alternatives to solutions or other recommendations to add on when presenting financial plans towards the client’s goals. That’s part of the whole concept of developing financial plans.

  5. Implement financial planning recommendations

    Aside from alternatives to solutions, recommendations should also come with those said solutions. When it comes to dealing with financial issues, it’s best to learn more about your options. Having more recommendations can lead to effective ways to successfully plan out finances.

  6. Monitor financial planning recommendations

    After implementing said financial planning recommendations, your financial planner will monitor these recommendations in order for them to work. After all, the main purpose of a plan in the hope that it runs smoothly.

  7. Tackle high-intense debt

    Debt is inevitable. That’s why in this final step, one of the constant issues that will be encountered will be debt, especially if it’s categorized as “high-intense” debt. If your financial planner does their part, it’s only fair that the client does theirs.

Benefits of Financial Planning

  1. Manageable Cash Flow

    For upcoming businesses, one of the most important benefits is having a manageable cash flow. It can help with monitoring levels of business finances and keep you out of excessive debt.

  2. Secure Retirement Income

    As a business owner, having enough funds towards retirement income sounds ideal. However, one of the best practices to have is to put finances aside for your retirement. Having an idea of how secure your retirement income will be less of an issue.

  3. Reduced Risks

    Because of an established plan from financial planning, reducing your risk of falling into the same old mistakes of failed businesses is one of them. Finding a way to incorporate an investment policy towards your business will definitely reduce the risk of going downhill.

  4. Successful Financial Planning

    Seeking a successful strategy from start to finish will create retained ownership to ensure a clean transition for the next legacy to start. Hence, the benefits of going to a financial planner for advice can lead to, of course, a good source.

What Does a Financial Planner Do?

  • They Get to Know You and You Get to Know Them

    Establishing a professional relationship with your financial planner is a good start for financial planning. Once you start consulting with a financial planner, they will not only get to know what they have to offer but what you will be offering to them. Think of it as a mutual understanding with you and the person that you’re entrusting with your plans on budgets, investments, and other assets.

  • They Help you Clarify Your Financial Goods

    As a financial planner, it’s their job to make situations easier to understand for you as the client. It’s no secret that talking about finances can be a complex process, which is why a financial planner is there to simplify situations. With your financial goods, financial planners can tell you the good, bad, and ugly.

  • They Take Stock of Your Financial Resources

    Another perk about financial planners is that they can help manage financial resources. They have the advantage of keeping track of all types of assets including your income and financial other resources.

  • They Assist in Moving Towards Your Goals and Keep Track of Your Progress

    As for progress, financial planners also make it a priority to keep track of all types of transactions that are made towards sources of income and listed expenses. The main focus is to work with your financial planners who want you to succeed with your goals.

What’s the Difference Between a Financial Planner and Financial Advisor?

The two titles can sound confusing at first, but to tell the difference between the two is simple. When it comes to encountering a financial planner, you are dealing with a professional that’s helping you or your company create a plan that can meet certain financial goals for the long run. As for financial advisors, individuals and businesses can seek financial advice as well as trust a financial adviser to help manage money from accounts and other kinds of investments.

Final Thoughts

Financial planning isn’t just about figuring out how much one should invest in a certain resource, but rather about validating sufficient funds that can ensure financial stability. Furthermore, can be quite useful for a business. For one, it can assist in the tracking process of every transaction that’s been made.

Another instance of beneficial financial planning is that it can provide you with clarification with financial assets as well as have control over stocking financial resources. All in all, we hope that this guide provides useful insight into the next steps into financial planning.

Aileen Padua

Aileen Padua | Aileen Padua is an aspiring social media coordinator. She is currently majoring in Advertising at Fresno State University. With her understanding about the power of social media, Aileen is passionate about preserving and enhancing the image of one’s reputation in the public eye.

Aileen Padua

Aileen Padua | Aileen Padua is an aspiring social media coordinator. She is currently majoring in Advertising at Fresno State University. With her understanding a...

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