The Importance of Financial Planning

The first, Nanda Home need to understand what finance planning is. Financial planning or budget is the process of determining a person’s or firm’s financial needs or goals for the future and the means to achieve them. In other words, financial planning is used to manage your budget, where your money come in and come out. The question is why organization How to prepare financial planning? That means Nanda Home has to provide overheads, estimates, expenses, cash flow to produce a financial planning

Step 1: Prepare budget to show volume of sales and profit Nanda Home would like to achieve, it should include the cost involve in it too Step 2: Estimate how much Nanda Home can sale- the volume of purchase- forecast and plan sales Step 3: Forecast cash flow monthly, yearly.

Forecast overheads yearly, which cost can be predict Step 4: Make sure Nanda Home have enough indeed reserve cash to cover cost3 There are a lot of types of budget planning such as resource budget, sales budget, cash follow budgeting, production budge, balance sheet etc.

For instance, in balance sheet, Nanda Home can see the expenditure and its income. When the income exceeds expenditure, Nanda Home get surplus, they can use it for other is goals or save in bank; when the expenditure exceeds incomes, they fall in shortage status, from that, Nanda Home need to adjust expense or to have a plan to increase income To know the importance of financial planning, we have to consider the benefit that activity can bring to Nanda Home.

The first, financial planning provides Nanda Home an overview about how to spend their money, how much money for each activity base on the forecast information, the forecasted income in shorter or long term. It also help to point out which period we need more money to expand business. In addition, financial planning also make investor or lender trust Nanda Home’s project more, they have more belief of success of Nanda Home, if Nanda Home provide a planning how to use money, and how to get money back. Financial planning also provides an future picture base on forecast information.

Financial planning enable Nanda Home to compare the real data with forecast data, from that Nanda Home can find out what factors affect financial needs, and provide relevant financial solutions. There some perspectives that Nanda Home has to consider when preparing a financial plan is surplus, shortage, and overtrading. Surplus Surplus here is in term of surplus of cash. Assume that Nanda Home have a lot of money. The cash flow is abundant, the cash go to Nanda Home when they sell products, receive payable credits or sell asset. At that time, Nanda Home should prepare a plan what to do next to grow up.

With surplus money, they can buy material in advance to store in case of price of material increases. Or they expand business, by opening real stores; hire employees, managers to operate business more smoothly, or run new project, invest in R&D to develop new product; expand business, and many other business activities. Another reason make Nanda Home should do financial plan to manage surplus is to use their money in the most effective way. Having a lot of money is good when Nanda Home knows how to use each coin to earn more money.

Thus, financial plan will help Nanda Home uses its money more logically. Nanda Home can uses it to invest more or saving it bank, but Nanda Home shouldn’t put it in strong box, it’s such a waste resources that Nanda has. Thus, Nanda Home need to do plan to know how to use their cash as well as forecast cost and benefit Nanda Home can get from those business activities. Shortage This situation often occurs in every business, and Nanda Home is not an exception. Nanda Home can fall in to this circumstance, if they sell a lot but haven’t received payable credit yet.

Or they run out of money when Nanda Home fails in any some projects. Or shortage can be understand as shortage in material, Nanda Home doesn’t have enough money to buy in advance to store it or Nanda Home are not able to store materials because of lacking of warehouse. Shortage in material can lead to very serious consequences. Thus, again Nanda Home must prepare a plan to avoid this situation. Through this plan, Nanda Home will know if they lack money, where they will borrow money, which source of finance is suitable for them and benefits them most.

For instance, they can borrow money from bank or consideration other method like leasing, selling assets, issuing share. In term of shortage of material, Nanda Home has plan ahead to buy material in advance, prepare to hire warehouse if Nanda home doesn’t have enough infrastructure. Overtrading Overtrading happens when Nanda Home cannot fulfill business activities because the requirements exceed available resources that Nanda Home has. It may lack working capital, human resources.

Thus to avoid this situation, Nanda Home has to prepare carefully, assess all resources they have to compare with requirements. If they can do that, Nanda Home may get in to trouble if they’re party of contract and cannot fulfill it. Overtrading also happens when Nanda Home does more than the resources they have. They will be having problem with cash flow or working capital. For instance, most business transactions are paid in receivable account. That means when business transactions are done, Nanda Home doesn’t receive money immediately, it may wait for more time.

At that time, if Nanda Home buy more or invest something, it may not have enough money because it doesn’t reach due day to receive money, and Nanda Home is in overtrading situation. From that, we can see the importance of financial planning. It will help Nanda Home observer the cash flow, and working capital status, not only the sources of cash but also cash in and cash out, in which date. Based on that information, Nanda Home can plan ahead suitable business activities like investment to avoid overtrading. Again, Nanda Home needs to understand the important of financial planning to prepare well and have success.