When it comes to sound financial planning, certain factors need to be met to make it effective. These are the contingency anticipation, economy, flexibility, foresight, liquidity, optimum use of funds, and simplicity.
Business enterprises will need sound financial planning to help them succeed. A good sound financial plan composes of procedures and policies that will properly coordinate the different functional areas in the business. With the proper allocation of resources for each department, any wasted resources will be minimized.
When planning for a company’s capitalization, these are the following essential factors that you should consider when making a sound financial plan:
1. Creating A Simple Plan
One of the first thing that you need to do is to make sure that you have an easily understandable plan. You need something that can be understood by everyone, and yes, even by a layman. Create a simple sound financial structure, which can be managed by everyone in the team. The plan should help the management and the promoters retrieve the needed amount for the business’ capital. It is also faster and easier to create a simple financial plan.
2. Creating A Foresight
The next thing that you need when it comes to financial planning is foresight. You need to measure the scope of your operation to determine the estimated capital that you will need. It will be a disaster if you start visualizing a plan for your company without any foresight, especially if it doesn’t meet the needed working and fixed capital. In short, foresight helps you create a plan for today that will help you in the future.
3. Create A Flexible Plan
Always put in mind that when it comes to businesses, you must always be ready to readjust anything related to your finances. You need to make sure that the financial plan that you’re going to create is adaptable. A flexible plan helps you cope when things suddenly go wry. If the business can adapt, there will be minimal or maybe no delay at all. This is an ideal plan that will help your business in the long-term.
4. Create An Optimum Use Of Funds
When creating a plan, you need to make sure that you optimize the use of your funds. This way, you will have enough capital which will be productively used. This plan should help the business from wasting its capital. it’s also not good to have idle capital since these funds can be used to increase the enterprise’s capacity.
Also, you need to include all your available financial resources and determine the best way to use them. it’s important to prevent the company’s profit from declining. Always remember, you should properly balance the working capital and fixed capital.
5. Create A Liquidity
In every business, there should always be a certain percentage of current assets that is in the form of liquid cash. This is because cash is needed to pay for wages, salaries, purchases, and other similar expenses. The amount of liquid cash will depend on the company’s size, age, credit status, rate of turnover, and as well as the nature of the company’s operation.
6. Expectation Of Contingencies
Another thing you need to do when planning is to determine and visualize the emergency or contingency situations you may find yourself in. Due to unforeseen events, keeping a specific surplus capital would be ideal. Always remember that it’s better to be one step ahead and to anticipate the contingencies in advance.
7. Planning The Economy
Lastly, you need to make a sound financial plan where the capital cost should be at a minimum. The capital should never become a burden on the business. This means that all of the fixed dividends, loans, and debentures should all be related to the business’ earning capacity. Fixed interest payments should never reduce the company’s profits because it will delay its growth.
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