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Finance & Accounting

FINANCE: Definition, Types, Importance

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When you hear or see the word finance, what comes to your mind first? Let me guess, money, business, accounting, investment, capital, assets, liabilities, etc. Well, the truth is you are not wrong. Finance is very vast but it still cuts across all these terms and more.


This article encompasses everything you need to know about finance, which is not limited to definitions, types, importance and finance management.

Below is a proper definition of finance to help you understand it better.

Definition of Finance


People finance is the study of how money works, how to tackle money-related risks which will eventually lead to better forecasting and the right way to invest it.

We can also define finance as the management of funds, transaction with money, and how money can be acquired.

Here are a few basic terms;

  • Investment
  • Budget
  • Funds
  • Revenue
  • Capital
  • Insurance
  • Account
  • Net profit

Types of Finance


All institutions need funding needs and are directly involved with money, which is why it has three types of Finance.

There are three basic categories of Finance;

  1. Personal Finance
  2. Public Finance
  3. Cooperate Finance

#1 Personal Finance

Just like the definition of Finance, Personal Finance involves private funds management, i.e. families and individuals. It means financial analysis of an individual or family current financial situation. This analysis will include knowing the financial goals of the individual or family. And then analyzing the financial decisions they have made in the past, which includes budgets, savings, spending, insurance, investments.

For example, suppose Williams decides to create a family budget to help curtail expenditure, it means there will be proper financial management in the family. 


However, personal finance strategies are dependent on what the individual or family earns and their long term goal. One exciting thing about this type of finance is that everybody is directly involved. This is where financial literacy comes in handy.

#2 Public Finance

Public Finance involves the role of government in Finance. The way government manages revenue and expenditure. Public finance cuts across every financial decision made by the government and why they made them.

For instance, if a country decides to practice a closed-form of the economy it means that the finance professionals have previously analyzed the financial benefits of a closed economy and how it can make more positive impacts in the country.

Additionally, if farmers get federal government grants, it would be because the financial analysts have conducted a thorough analysis including the long-term results of providing that grant. One good thing about public finance is that it keeps the government accountable for how revenues and funds are managed.

Some basic terms in public Finance;
  • Tax
  • National Debt
  • Expenditures
  • National budget

#3 Corporate Finance (Business)

Corporate Finance is the type of Finance that deals with funding and capital sources of a corporation. It has to do with all the financial activities involved in running a corporation. Most of the times, it is a department that foresees all financial activities in a firm. They make decisions that range from how to invest, how much to invest, to how shareholders receive dividends.

Corporate Finance has a primary goal which is to maximize their shareholder value. It can be done by implementation financial strategies which have been initially planned.

Finance management

Finance management is essential for every organization. It is the process of strategically planning the management of financial resources in an organization. This process of controlling and monitoring Funds is to enable the organization to achieve its goals and objective.

However, in financial management, the general principles of management are applied. Any firm with proper management of Finance will function efficiently. That is to say that organizations without proper finance management will face a bunch of problems that will eventually lead to their doom if not adequately corrected.

5 top management consulting services in high demand

Objectives of finance management

  1. To make sure investments are made at an adequate rate and in the right venture.
  2. Oversee the financial matters to ensure shareholders have their returns which means making a reasonable profit.
  3. Maintaining sufficient cash flow.
  4. Regulating prices and trying to reduce cost in the best possible way.
  5. To ensure funds are used smartly and make sure all finds are correctly accounted for.

Importance of Finance

The importance of Finance cannot be overemphasized. No institution can function adequately without Finance, yes! that how important it is. Finance can make a break an institution. Imagine a family that doesn’t know how much they earn versus spend, a country without investments or a business firm without proper accounting and finance management. Just imagination of it alone seems impossible.

I will break this down in three different categories, almost based on the types of Finance above. Importance of Finance in;

  • Families and Individuals.
  • Countries
  • Business.

Families and Individuals

  • To meet financial needs.

Financial security should be the aim of every family. However, without proper planning and management that cannot happen. A family that creates a family of budget invests rightly, protect their property via insurance and even has a retirement plan has created financial security. This family is financially secure and can meet the needs of its members.

  • Scale of preference

It helps family and individual become conscious of spending habits. They can make their preference list and know what they need more than the other. A scale of preference will help them not spend beyond what they plan.

  • Increases financial understanding

Have you ever felt like you don’t understand how your earnings were spent? Like you feel robbed when you are very sure you did the robbery. Proper finance management can make you avoid all these feelings. It keeps you accountable to yourself. It might not be something you will understand in a day, but with time and effort, you will be able to get better every day.

  • Manage Debts properly

Being in debt is not a problem but the ability to manage the debt is where the trouble begins. Financial knowledge will help you make a proper analysis and informed decisions concerning your debt. How you handle debts says a lot about how our financial future will look like. Finance plays a significant role in individual and families life.

Business and firms

1.Generating funds

Funds and business sound almost like the same thing. Because business needs funds to function. The process of making a capital investment in a company is Finance. Another crucial part that Finance plays in income generation of a business is how to set up the business strategy to generate income.

Example;

Mr Peters just launched his business and in as much as he hasn’t started getting returns. finance has already played a huge role. From marketing strategy to the kind of people he would employ, to the kind of raw materials he bought and of cause how he insures them. All these steps took strategic planning of financial professionals or literates.

2.Manage cash flow

Managing cash flow in a business is a big deal because it can make or mar that business. So a proper financial skill is always needed for it. Adequate accounting of revenue which include, how workers are paid, how much to reinvest. Finance influences every decision on how money moves in and out of business to create more returns. That is to say that proper finance management can take care of the cash flow in a business.

  • It helps to sustain economic downturn well

In every business, there is always a time when the economic activities will have a general downturn. No business goes a hundred percent smooth all years long. But the ability to manage this downturn and bounce back is where Finance plays its huge role in business again. Financial literacy will help you understand the economic downturn properly and the implications it has in your business. This is the first step to solving the problem because you know when you need the help of a professional or the type of business consultant you need.

  • It helps a business set more realistic goals

Every business has a long term and short term goal. These goals are not something set out of random motivation or wants. To set realistic goals, there has to be a good overview of the business, both past and present this will help not just to set goals but to set realistic and attainable goals. Keeping records of everything happening in the industry makes the set goals informed decisions backed with data rather than random plans.

In government

  • Economic growth

A sustainable high economic growth rate is the goal of almost every country. However, for it to be achieved, the government needs to use some financial tools. These tools will increase aggregate demand and supply, which directly leads to economic growth. Some of these tools include taxes, subsidies, public expenditure, public debt. Etc.

  • Price stability

Inflation and deflation is one major determinant of price instability in a country. So in a case of inflation or deflation in an economy, the government use financial strategies to reduce the money in circulation, and that will reduce the inflation rate.

Example,

If ”country A” has inflation, the government will decide to increase interest rates which will decrease the demand for a loan and in turn reduce the amount of money in circulation.

1.Proper allocation of resources

Allocation of resources by the government requires some level of financial experts. The government monitors the resources (human-made and financial) with this it knows the kind of production to impose taxes on and the ones to subsidize. Meanwhile, financial management in a country needs experts to make informed and effective decisions like this.

2. Import and export regulation

When the imports in a country become more than the exports, the government tries to regulate by using some financial strategies. Most of the time, they increase the import duty to discourage importation. In the same hand, decrease the export duty to encourage importation.

In conclusion, now you have come to understand that the importance of Finance goes across all types of Finance which directly affects all intuitions (everybody). Finance is an essential part of practical living; this is an indisputable fact.

Free recommended PDFs on Finance

  1. Basics of Finance
  2. Introduction to finance by J.wang
  3. Essential Finance by Nigel Gibson
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Finance & Accounting

GENERAL LEDGER: Easy Templates, Examples And all you need (+ Free pdfs)

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The ability to see the big picture is helpful in most areas of life but when it comes to your business, it is imperative that you take a holistic view of things. These days, it is easy to stay on top of your business finances and keep track of all your transactions with the help of a general ledger.

What is a General Ledger?

A general ledger is a record of all of a company’s past transactions, organized by accounts. General ledger accounts contain all of the debit and credit transactions that affect them. They also contain detailed information on each transaction, such as Date, Description, Amount, and can also contain descriptive information about the transaction.

How Does a General Ledger Work?

A general ledger is the foundation of a system that accountants use to store and organize the financial data that is used to prepare the deals. Transactions are posted to individual sub-ledger accounts as defined in the company’s chart of accounts.


The transactions are then finalized or summarized in the general ledger and the accountant creates a trial balance that serves as a report on the balance of each general ledger account. The trial balance is checked for errors and adjusted by posting additional required entries. The adjusted sample balance is then used to prepare the annual financial statements.

How a General Ledger Functions with Double Entry Accounting

A general ledger account is the main part of a general ledger. A general ledger account records all transactions for that account. Transactions related to various elements of accounting, including assets, liabilities, equity, income, expenses, gains, and losses.


Companies that use the double-entry accounting method use a general ledger. This means that every financial transaction affects at least two general ledger accounts and each posting contains at least one direct debit and one credit transaction. Duplicate transactions, known as journal entries, are recorded in two columns with debit entries on the left and credit entries on the right. There must a balance for the total of all debit and credit postings.

The accounting equation on which double-entry accounting is based is as follows:

Stockholders’ Equity=Assets−Liabilities

The balance follows this format and shows detailed information at the account level. For example, on the balance sheet, multiple asset accounts, including cash and accounts receivable, are listed in the “Current Assets” section.


The double-entry method is based on the accounting equation requirement that the transactions posted to the accounts to the left of the equal sign in the formula must equal the total number of transactions posted to the account (or accounts) to the right. Even if the equation appears differently (e.g. assets = liabilities + equity), the balance sheet rule always applies.

There are other Financial management strategy that you may need to know.

General Ledger Examples

Some of the most common financial activities recorded in the general ledger are:

  • Deposits to your bank accounts
  • Liability accounts including trade payables, trade payables, provisions, and customer deposits
  • Checks made out to multiple providers for operating expenses
  • Payslips for your employees
  • Shareholder equity accounts such as common stock, retained earnings, treasury stock, and other total accumulated income
  • Income taxes paid to state and federal agencies
  • Sales activity and related debtor activity
  • Record of payments received from clients and customers
  • Inventory adjustments like receiving the product or adjusting stock levels
  • Invoices received and posted
  • Any owner contributions to business or withdrawals from the owner
  • Any journal entry used to record transactions such as interest and bank charges.

Why Do I Need a General ledger?

Actually, it’s always up to you and your financial advisor to decide what is right for your small business. In case you’re wondering, there are seven compelling reasons you might want to use a ledger for your small business:

  • Provides an accurate record of all financial transactions.
  • Helps you create a test balance and thus balance your books
  • Make tax returns easy because you have your expenses and income in one place
  • Reports actual income and expenses so you can keep track of expenses
  • Helps you spot unusual transactions immediately
  • Helps you identify (and stop) fraud
  • It helps in creating important financial statements that are critical to assessing your profitability, liquidity, and overall financial health. This includes the cash flow statement, the income statement, and the balance sheet.

What is the Best Accounting Software to view my General ledger

Any accounting software application that supports double-entry accounting can also generate a general ledger report. Below are just a few of the software applications that have great general ledger reporting capabilities.

GnuCash

GnuCash is unique in many ways. It is free, open source software that you can download and install on a desktop, workstation, or laptop. GnuCash is a single user system and is therefore well suited for smaller businesses or companies that only need one user.

GnuCash offers great reporting options with detailed active and passive reports as well as a comprehensive general ledger report. The reports offer little customization, but there are so many reports available that customization is unlikely to be a problem.

As an open source application, GnuCash is completely free. Simply visit the GnuCash website to download the application to your desktop, workstation or laptop.

FreshBooks

FreshBooks is a great way for small businesses to manage their general ledger. It currently offers four plan options that will help ease the transition to a more powerful plan. FreshBooks is designed to be easy to navigate, making it easy for new users to navigate.

QuickBooks Desktop

QuickBooks Desktop provides great general ledger reporting options for small and growing businesses. It is designed for the single-user office as well as growing multi-user businesses and offers three plans to choose from.

QuickBooks also offers other great reporting options with 100+ standard reports in QuickBooks Pro, while the Premier and Enterprise plan comes with 150+ reports. You can access Report templates are in the QuickBooks desktop applications, and you can easily customize a general ledger report to include only the accounts that you want to view.

You can also learn How to Enter A Bounced Check In Quickbooks

Free General ledger Template

The main purpose of these templates is to record all expenses incurred within a certain period of time. With a unique style and creative background, these templates are very useful and therefore very suitable for the users.

How do I Create a General Ledger Template?

Creating a simple general ledger template takes a lot of intensive field research before the desired conclusions can be drawn. Here are some tips:

  • Design a suitable template outline
  • Submit any required information that works well for the benefit of customers
  • Make an appropriate outline to show the information to the audience
  • The templates designed should be easy to use and very effective in their approach.
  • Draw up a suitable chart to calculate expenses that include taxes and other charges.
  • It also includes data on the interest rates that have been applied to the amount of stocks in debt.

Below are free Sample Ledger Paper Templates. These expertly designed templates are among the top rated templates on the market. With a futuristic design and eye-catching texture, these templates are very productive and therefore benefit customers. Additionally, each of these templates has all of the information that they can improve for the business. Click on the button below to download.

General Ledger Paper Template

Printable General Ledger Template

Ledger Paper Template

Conclusion

The general ledger is your main document for all financial transactions for your company. Understanding how it works can be overwhelming at first, but it doesn’t have to be. All you need to do is understand the basic principles of double-entry accounting, the basic accounting equation, and how to transfer journal entries to the general ledger.

Once you understand and use the ledger, you will see how powerful it is. It offers several compelling benefits for your business. Perhaps most importantly, it is the foundation for preparing financial statements, which are vital to assessing your financial affairs.

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Financial Institutions: The A-Z Guide With Top 10 Examples (+ quick easy tips)

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Financial Institutions are a part of our daily lives. This is because almost everyone living in a developed economy has a need for the services of financial institutions.


They encompass a broad range of business operations within the financial sector including banks, trust funds, credit unions, underwriters, insurance and investment dealers.

So, if you’ll like to learn more about financial institutions, then you just got lucky as this article will teach you all you need to know about financial institution, its types, importance, and functions.

Let’s get started!

What are Financial Institutions?

Financial Institutions are businesses that focuses solely on financial and monetary transactions such as loans, deposits, investments and currency exchange.


According to Wikipedia, financial institutions, otherwise known as banking institutions are corporations that provide services as intermediaries of financial markets.

Hence, you can say that financial institutions are responsible for the supply of money into the financial market. Without them, no financial transaction can happen.

Large financial institutions such as JP Morgan Chase, HSBC, Goldman Sachs or even Morgan Stanley can control the low of money in an economy.

Furthermore, almost everyone deals with various financial institutions daily. Whether it is depositing money, applying for loans, exchanging currencies, investing into the stock market, or acquiring a new venture.


Thus, this makes them very important to the economy of a nation, and governments personally oversees these institutions.

Importance of Financial Institutions

Financial institutions are very important factors that contribute to the growth or failure of the economy of a nation. Hence, they are very crucial factors.

Below are some of the highlighted importance of financial institutions

  • Firstly, financial institutions promotes direct investment by the customers
  • Secondly, they explain all the risks associated with financial transactions to their customers
  • Thirdly, they provide various kinds of financial services to their customers
  • Next, financial Institutions helps in forming the liquidity of the stock in case of an emergency
  • Finally, they are known to provide an attractive rate of return to their customers

Functions of Financial Institutions

Financial Institutions perform a wide variety of financial functions to its customers. It involves a wide range of business financial activities including trust funds, banks, insurance companies, brokerage firms, and investment dealers.

Below are the functions of financial institutions.

  • Financial institutions provide loans and advances to customers.
  • They serve as a depository for their customers.
  • They offer high rated consultancy to the customers for their beneficial investments.
  • Some financial institution offers a high rate of return in the case of investment.
  • They help to minimize the monitoring cost of the company.
  • All the finance related work is done by the financial institution or on behalf of the customers.

Types of Financial Institutions

Financial institutions offer a wide range of products and services for individuals and commercial clients. Hence, they vary by size, scope and geography.

There are three major types of financial institutions. They are;

  • Depository Institutions
  • Contractual institutions
  • Investment institutions

#1. Depository Institutions

These are financial institutions that accept and manage deposits and make loans. A depository institution provides security and liquidity in the market, uses money deposited for safekeeping to lend to others, invest in other securities, and offer a fund transfer system.

Hence, they must return the deposit in the same order it was given.

Additionally, they serve as a connection between the public companies that issue financial securities and the investors or shareholders.

Depository institution includes banks, building societies, credit unions, trust companies and mortgage loan companies.

RELATED POST: Financial Planning: Overview, Types, Importance, Concept (+ Free PDFs)

Functions of a Depository

Below are the functions of depository institutions according to corporate finance institute.

#1. Serves as a link between the public and investors/shareholders

A depository financial institution functions as a connecting link between the public companies that issue financial securities, and the investors or shareholders. The securities are issued by agents associated with depositories, who are known as depository participants. The agents are responsible for transferring the securities from the depositories to the investors.

#2. Eliminates risk related to owning physical financial securities

A depository institution allows traders and investors t hold securities in dematerialized form; thus, eliminating the risk related to holding physical financial securities. The buyers and sellers now do not need to check whether the securities have been transferred successfully without any loss or theft. The depository system reduces such risks by allowing the securities to be held and transferred in electronic form.

#3. Allows the provision of loans and mortgages to interested parties

A depository holds the securities of customers and gives them back when the customers want. The customers receive interest on the deposits, while the depository earns even more interest by lending the deposits to other people or businesses in the form of loans or mortgages.

#4. Accelerate the process of transferring securities

When a trade occurs, a depository transfers the ownership of securities from the account of one investor to another. It helps in reducing the paperwork associated with the finalization of a trade and accelerates the process of transfer of securities.

Types of Depository Institutions

As mentioned earlier, the following are the main categories of depository financial institutions.

#1. Banks

A bank is a financial institution that accepts deposits from the public and creates a demand deposit while still making loans.

The bank can decide to lend directly or indirectly through capital markets. Banks can either be commercial or cooperate banks. However, we will stay within commercial banks.

The range of services offered by commercial banks depends on the size of the banks. For smaller banks, their services are limited to consumer banking, small mortgages, simple deposits and loans.

However, for larger banks, their services can include foreign exchange-related services, money management and investment banking.

#2. Building Societies

A building society is a financial institution owned by its members as a mutual organization. They offer banking and related financial services, especially savings and mortgage lending.

Building societies are similar to credit unions in organizations.

More so, rather than promoting thrift and unsecure business loans, building societies provides home mortgages to its members.

#3. Credit Unions

Credit unions are financial cooperatives owned ad controlled by the members of the group. It operates on the principle of people helping people, providing its members credit at competitive rates, as well as other financial services.

The profits are either paid to the members as dividends or reinvested into the organization.

Since credit unions are non-profit institutions, they pay no federal or state tax.

#4. Trust Companies

A trust company is a financial institution that acts as a trustee or agent of trusts and agencies. It can be owned or owned by a bank or law firm.

A trust company manages investments, keeps records, manages assets, prepare court accounting, pay bills, medical expenses, charitable gifts and other distributions of income.

#2. Contractual Institutions

Contractual institutions are financial institutions that get their funds through contractua agreement.

Usually, when they obtain these funds, they invest them into the capital markets. Also, Contractual institutions have a steady inflow of funds from their contractual agreement, hence, they don’t experience difficulties with liquidity.

This makes them perfect for investors, as they can make them long-term investments in securities and common stock.

More so, they can predict their liabilities, fairly accurately and thus they don’t have to worry about losing funds.

RELATED POST: PRINCIPLES OF FINANCE

Types of Contractual Institutions

The following are the main categories of contractual institutions.

#1. Insurance Companies

The most familiar non-bank financial institution are insurance companies. They are the oldest form of financial services and hey provide insurance to either individuals or corporations.

There are several types of insurance companies, but the most popular under this category are the life insurance companies.

Life Insurance Companies

Life insurance companies sell life insurance policies that protect the beneficiaries against financial hazards that follow the death of the insured person.

Depending on the contract, other events such as terminal illness or critical illness can also trigger payment.

The policy holder ( insured person) typically pays a premium, either regularly or as one lump sum. Other expenses, such as funeral expenses, can also be included in the benefits.

These financial institutions acquire funds through payments of premiums by individuals who pay to keep their policies in force.

Life insurance companies can calculate liabilities with a fair degree of accuracy using mortality tables. As a result, they use funds to buy longer-term securities—primarily corporate bonds and mortgages. 

#2. Pension Fund

Pension fund is any plan, fund, or scheme that provides retirement income. They usually have large amounts of money to invest and are the top investors in listed or peivate companies.

Additionally, Pension funds are very crucial to the stock market especially there’s a large number of institutional investors.

The Federal Old-age and Survivors Insurance trust Fund is the world’s largest public pension fund which oversees $2.72 trillion USD in assets.

#3. Investment Institutions

Investment institutions, as the name implies are financial institutions that are focused on investments.

They know which security, or stock market to invest in and can guarantee rate of return on an investment.

Generally, they facilitate investments in financial assets by individuals and institutions by pooling resources and investing them according to desired objectives.

Types of Investment Institutions

The financial institutions under this category are;

  • Investment banks
  • Underwriters
  • Brokerage firms.
#1. Investment Banks

Investment banks specialize in providing financial services designed to improve business operations, such as capital expenditure, financing, and equity offerings, including initial public offerings (IPOs).

According to Wikipedia, an investment bank is a financial services company or corporate division that engages in advisory-based financial transactions on behalf of individuals, corporations, and governments.

Traditionally, investment banks are associated with corporate finance, and assist in raising financial capital by acting as a client’s agent in the issuance of securities.

More so, an investment bank may also assist companies involved in mergers and acquisitions (M&A) and provide ancillary services such as market making, trading of derivatives and equity securities, and FICC services ( fixed income instruments, currencies, and commodities).

While an investment bank is also referred to as a regular “bank”, its operations are entirely different and big companies depend solely on them.

RELATED POST: CORPORATE FINANCE: The Complete Guide (+ free courses)

#2. Underwriters

Another type of investment financial institution is Underwriting services. Underwriting services are provided by some large financial institutions and involve a situation whereby they guarantee payment in case of damage or financial loss and accept the financial risk for liability arising from such a deal.

An underwriting agreement may be created in different situations like insurance, issues of security in a public offering, and bank lending.

#3. Brokerage Firms

Brokerage firms are financial institutions that help you buy and sell securities. They act as the middle man between the buyer and the seller of the securities and become the principal party to the deal.

Depending on the brokerage firm type you choose, you can either buy securities through telephone, smartphone, or internet.

Also, brokers can represent the buyer or the seller but not the both at the same time. And they are very crucial in the purchase of financial instruments.

Usually, brokers have the tools and resources to screen potential buyers and sellers for the perfect match. This is because, they are compensated by commissions after a successful transaction.

Brokers are generally cheap especially in smaller markets with smaller accounts, or with a limited line of products.

Wondering which financial institution to work with? Let’s go over the top financial institutions in the world below.

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List Of Financial Institutions

There are several financial institutions in various countries of the world. However, only a few make it to the top as some of the best financial institutions.

Below is a list of the top financial institutions in the world as well as their assets, capital, and revenue.

Bank (Rankings according to Accuity)

BanksAssets( $M)Capital ($M)
Industrial & Commercial Bank of China Limited4,319,862.0080,709.00
China Construction Bank Corporation3,649,392.0035,870.00
Agricultural Bank of China Limited3,569,338.0061,676.00
Bank of China Limited3,266,821.0042,236.00
BNP Paribas SA2,427,625.0030,358.00
China Development Bank2,367,945.0060,437.00
JPMorgan Chase Bank National Association2,337,646.002,028.00
MUFG Bank Ltd2,217,261.0015,830.00
Crédit Agricole SA1,982,329.009,705.00
Japan Post Bank Co Ltd1,950,237.0032,364.00

Insurance Companies (Rankings according to Insurance Information Institute)

Insurance CompaniesRevenue( $)Industry
Berkshire Hathaway254,616Property/casualty
Ping An Insurance184,280Life/health
AXA148,494Life/health
China Life Insurance131,244Life/health
Allianz130,359Life/health
Japan Post Holdings109,915Life/health
Assicurazioni Generali105,921Life/health
Prudential93,736Life/health
Legal & General Group90,615Life/health
Aviva89,647Life/health

Conclusion

Financial Institutions are all around us, offering different type of financial products or services.

So, as a customer you should first of all determine what type of financial service you want before choosing which financial institution you’d like to work with.

Additionally, it is imperative that you do proper research before investing your money in a financial institution.

I hope this post helps you.

Good luck!

PS: Don’t have a business plan yet? Or you’re still a bit confused about the idea of a business plan? Don’t worry, we got you! Click on the button below to have access to our list of workable business plans that has helped a lot of business owners in over 10 countries of the world.

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Financial Planning: Overview, Types, Importance, Concept (+ Free PDFs)

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Financial planning for a business is one of the critical aspects of running a business. The process is designed to predict the business’s financial future and to determine the best way to use the companys financial resources.


The end product, which is a financial plan, serves as a roadmap that guides all your future financial endeavours.

Want to take your business to the next level? Then let’s get to know all about the financial planning process.

It’s your lucky day because this article is going to teach you all you need to know about financial planning for your business.


Let’s get started!

What is a Financial Plan?


A financial plan is a document containing your business current financial situation and the several methods you intend to take to achieve your financial goals.

To create a solid financial plan, you’ll need to analyze the main components of your business. In other words, the part of your business where the majority of the money goes. Hence, to discover this, ask yourself these questions.

  • How much money are you taking in and paying out?
  • What are your biggest costs, and where are they likely to increase spending the most in the near future?
  •  Where will you be able to cut costs?
  • How is competition likely to affect your business?

Having the right answers to these questions will enable you create a financial plan that captures your current financial situation and future expectations.

Now, to the main topic of the day.

What Is Financial Planning?


Financial planning is the process of determining how a business will achieve its goals and objectives. Generally, for every business to grow, it needs to have money to expand, hire more staff and buy tools required for production. So, creating a financial plan for your business will help you make better finance decisions.

You can decide to create it independently or with the help of a certified financial planner.

However, to properly plan your business, you need to have a well-defined business vision, goals and objectives. This is because, the Financial Plan describes each of the activities, resources, equipment and materials that are needed to achieve these objectives, as well as the timeframes involved.

It involves the following activities:

  • Analyzing the business environment
  • Identifying any risks and issues with the budget set.
  • Confirming the business vision and objectives
  • Calculating the total cost of each type of resource
  • Quantifying the amount of resource (labor, equipment, materials)
  • Summarizing the costs to create a budget
  • Identifying the types of resources needed to achieve these objectives

Since financial planning is one of the major aspects of financial planning, it is important you critically think it through and analyze it before deciding to implement it.

Because a poorly crafted financial plan from a bad financial planning process can cost you your business.

Yes, I really mean it.

RELATED POST: Financial Risk Management: All you need to know (+practical examples)

Importance of Financial Planning

The importance of financial planning cannot be overemphasized. Just as you need a business plan to properly direct your actions towards the success of your business, you also need a financial plan that will guide you on the several financial investments you’d take over the course of your business.

So, below are some of the importance of financial planning for a business.

  1. Firstly, financial planning provides your business plan with enough details required to pull the business through. It shows that the business can be established financially and can equally be monitored till it starts bringing in profits.
  2. Secondly, it shows the commitment of a company to sound business practices. That is the ability to meet financial goals and spend wisely. This can encourage external investors and increase the potential for long-term success.
  3. Thirdly, it ensures there’s a balance between the inflow and outflow of money in a business.
  4. Next, It helps to sustain growth and expansion programs that move the business forward.
  5. Again, it ensures the company has enough funds to operate
  6. Finally, financial planning reduces uncertainties of a business which can hinder the company’s growth.

Regardless of all these importance, some business owners still neglect the need for a financial plan. Some may even bypass the idea and believe they have it all figured out which isn’t entirely so.

The truth is, financial planning isn’t just for large companies. Even with your small startup, you can create a financial plan for it to enable you remain on track towards the success of your business.

So, while you can’t guarantee that everything will play out as you’ve planned, having a financial plan for your business prepares you for what is ahead.

Objectives of Financial Planning

There are a lot of financial goals to set, hence the need for financial planning. Below are some of the objectives of financial planning.

#1. Determining Cash Flow

The main need for financial planning for your business is to know where your money is going. Having a record of all the finances that go into your business will enable you to know what you really need to spend on and what expenses you need to cut down on.

One way to determine this if you don’t have a financial plan yet is to check through your credit card and checking account statements. Together, there would be traces of what you spent your money on before you realized that you need to do financial planning for your business.

To track your average spending per month, add up all your expenses in your statement and divide it by 12. This way you wouldn’t overestimate or underestimate what you spend monthly.

#2. Determining Capital Requirements

Determining your capital requirements depends on factors like cost of current and fixed assets, promotional expenses and long- range planning. Capital requirements have to be looked with both aspects: Short- term and Long- term requirements.

#3. To ensure that financial resources are maximized in the best way possible to get maximum returns on investment.

#4. To determine the amount of capital required in the business. This includes decisions of debt-equity ratio, both short-term and long- term.

#5. To create financial policies with regards to lending, borrowing, and cash control

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Types of Financial Planning Process

The financial planning process for a business involves the steps taken to come up with a good and workable financial plan. Hence, below are the types of financial planning processes you can adopt.

  • A short-term financial plan
  • Medium-term financial plan
  • Long-term financial plan

#1. Short-term financial planning

This type of financial planning process lasts for as long as a year. Here, you take into consideration your current financial status and the financial resources at your disposal that can help you meet your financial goal.

#2. Medium-term financial planning

In this type of financial planning process, you are planning for a longer period of time. Anything between two to five years. You take into consideration your current income status, your business sector, If there’d be any switch to another sector, future income increment, and growth prospect.

#3. Long-term financial planning

Here, you are planning for a longer period of time, From 5 years and above. You take into consideration, the different types of investment opportunities that are open to you. To do this, you need consistent and systematic planning, savings, expenditure control, tax savings and carefully following the financial planning strategy.

Concept of Financial Planning For a Business

Generally, the concept of financial planning revolves around the following;

  • Cash flow management
  • Investment management
  • Debt Management
  • Tax Management

#1. Cash Flow Management

This involves managing the cash flow of your business. In other words, keeping an eye on the inflow and outflow of funds.

To properly do this, you need to estimate your present and future expenditure, an keep the expenses under control, because that’s the fastest way to achieving your financial goals.

In addition, it involves creating a reserve of emergency funds for unforeseen circumstances. I call it, “your life support”.

#2. Investment Management

To acheive those financial goals, you’ve set, you need to invest in various investment instruments through out your life.

Doing the right investment is the surest way to accumulate enough funds to spend on the very important aspects of your life.

#3. Debt Management

This involves managing all the cash you borrowed in time past. Although they say you don’t always pay off all your debts, the best thing is to keep it at a minimal level.

If your business can’t afford to sustain an expansion or a diversification into an entirely new product. Then there’s no need going to borrow money for an expansion in the first place.

Putting your debts in check helps you control the amount of money your business spends externally.

#4. Tax Management

Paying of taxes is a major factor in your expenditure list. Hence, to maximize your real income, tax exemption and tax liability is of utmost importance.

Consult investment planners or tax consultants to recommend the best tax saving instruments you can invest in, through various government and private investment scheme.

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What is the Financial Planning Process?

Financial Planning is process of creating objectives, policies, procedures, programmes and budgets regarding the financial activities of a business. This ensures effective and adequate financial and investment policies.

However, to come up with a good financial plan, there are steps you must take that complete the financial planning process.

Below are the steps involved in the financial planning process.

#1. Set financial goals

The main reason you are coming up with a plan is because there is a goal that you need to meet. So, wonder why it’s the first step to financial planning?

Set realistic financial goals. Keep it achievable within the period of time you’ve set for it. Separate your needs from your wants.

Also make it inspirational. What do you want your business to look like in the next five years? How many assets do you want to acquire in the next 10 years?

Your goals need to inspire you or you wouldn’t work towards achieving them.

#2. Gather your financial information

In this step, you need to gather all the current financial information about your business. This is because the financial planning process depends on the quality and clarity of the information you have at your disposal.

Here’s a guideline.

  • Find out what your income and expenses are, assets and liabilities, as well as, risk attitude.
  • Know where your money is. Know exactly what’s coming in, what’s going out, and how it is going out.
  • After you have created a financial plan, then the next thing to do is to
  • Find out if there are cash diversions anywhere and tackle them squarely.

#3. Analyze your business financial information

For this segment, you can decide to hire a financial adviser.  It involves monitoring all the financial information you have gathered about your business. Ensure what is on paper is exactly what’s happening in your business.

Through analysis, you or your financial adviser will be able to determine what exactly your financial situation is, identify areas of strength and weakness, and narrow down your financial actions to what will truly benefit the business.

#4. Create a financial plan

Having followed the above steps till now, its time to create a financial plan. The plan is developed bassed on the final information you have from step 2 and 3.

Additionally, the financial goals you’ve set will be included, to help you work towards achieving it.

Your financial plan will include:

  • Net worth statement (a balance sheet)
  • Annual consolidated tax calculation
  • Annual cash flow report (displaying surplus or deficit)

Now, you have a clearer picture of what you are looking to attain.

#5. Implement your financial plan

Once all the other steps are done, its time to implement what you have created. Usually, there’d be a recommended course of action to follow in line with the new financial planning process.

A typical course of action may include;

  • Income and expenses adjustment
  • A new investment strategy
  • Or additional insurance.

Either way, you’d implement the results from your planning process, and come up with suitable plans for your business.

Personal Financial Planning Process

This process involves strategically planning your finances for your future. It involves monitoring your income, expenses and debt.

This process is not just for those with a lot of money. Its for everyone who has an income and expenditure. And at least 70% of Americans belong to this category.

A well-planned finances will go a long way in saving your future.

Here are the steps to take

#1. Define your financial goals

The first step in financial planning is often times the hardest. Because to clearly define your financial goals, you need to start asking yourself questions like. where do your see yourself in five, ten years?

This helps you to consider what you value in life and determine what kind of life you want to live in the future.

#2. Prioritize your goals

Now that you have an idea of your financial goals for your future, its important that you prioritize them above anything else.

Prioritize the important aspects of your life and save towards them. For example;

  • Save for retirement
  • Save for your children’s trust fund
  • For a down payment on a home
  • Save to go out of a debt

Remember the 50/30/20 rule? Where 50% of your income goes to regular bills and expenses, 30% goes to personal needs and 20% goes to saving? Yes, employing it at this stage is really advisable.

#3. Create a budget plan

Yes, after you’ve arranged your needs in order of importance, create a budget plan and stick to it for the rest of your life.

The budget will be based on all your incomes and expenditures. Here’s how to create one.

  • Make a list of your income and expenditure over a 30-day period
  • Group your expenditures into fixed and variable costs. Fixed means it’s the same amount, e.g rent while variable costs mean that it changes over time e.g groceries, night outs, etc.
  • Analyze your variable expenses and identify areas you can cut back.
  • Save that amount you’ve decided to cut back from your expenses
  • Review your budget monthly for possible adjustments.

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Top Financial Planning Apps

Below are some apps you can use to aid you in the financial planning process.

Financial planning pdfs and research papers can be found online from financial reearchers across the globe.

In Summary

Financial planning for a business can be really hard because of some variables that affect the business. For instance, consumer behavior toward a new product or a change in the price of an old product is hard to predict, and this affects the finances of a business.

Regardless, its still something that is worth trying as its better to plan and have a model, than to leave your business finances in the hands of your business. Literally.

As you read this article, I hope it helps you make a good financial planning decision.

Good luck!

PS: Don’t have a business plan yet? Or you’re still a bit confused about the idea of a business plan? Don’t worry, we got you! Click on the button below to have access to our list of workable business plans that has helped a lot of business owners in over 10 countries of the world.

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