Financial planning is a complicated process that gives you more control over your money. But it is important to understand the theory behind it. So, which activities support the central idea about financial planning. Read our guide to learn more.[snippet]
Here Are The Activities Support The Central Idea About Financial Planning:
The central idea about individual financial planning is supported by activities such as saving money in a piggy bank, investing extra money to earn interest, and purchasing stock in a growing company.
Businesses, however, focus on sales forecasting, expense outlay, assets and liabilities, cash flow projections, break-even analysis, and operations plans.[/snippet]
So, let’s explore some of the key components of financial planning and the purpose of financial planning, so that you can gain a comprehensive understanding of the central ideas about financial planning.
The Six Key Components Of A Financial Plan Include:
Typically, a business’s financial plan is split into six parts: sales forecasting, expense outlay, assets and liabilities, cash flow projections, break-even analysis, and operations plans.
Individuals who are curating a personal financial plan will focus on calculating net worth, determining cash flow, prioritizing expenses, retirement strategies, risk management, long-term investments, tax reduction, and an estate plan.
Whether you’re creating a financial plan for an individual, or a business, the core concepts of saving, lowering risk profiles, minimizing taxes, and long-term considerations are ubiquitous. This is because both business and personal financial planning share the same purpose.
What Is The Purpose Of A Financial Plan?
Financial plans are created and curated to help you or your business make the most of your money and put it to its best use to achieve various long-term financial goals, such as buying a home, sending children to college, or simply, growing as a business and/or become more profitable.
To put it in simple terms, a financial plan is created to help you keep track of your money, spend it responsibly, and make provisions for a comfortable financial future.
Understanding The Financial Plan:
So, if you think a financial plan can help you to succeed in the long run as an individual or business entity, you need to understand the following concepts:
Because a financial plan is designed to aid in making the best use of your money, you need to determine what your long-term financial goals are and it is all about devising a strategy to achieve them by managing your income, expenditures, long-term investments, and risk tolerance.
Individual financial plans can also be curated for couples sharing their wealth
Your net worth is important because it helps you to determine your current financial position. Many small businesses will undervalue their assets, for example, or don’t take into account various liabilities.
Individuals can also be unaware of their current financial position, making it hard to determine their goals or quantify what is and is not affordable to them.
A business’ net worth can be found in its balance sheet, which is an objective view of its financial health and is more comprehensive than profit and loss statements or cash flow statements. It takes into account assets and liabilities, while also taking the business’ performance into account.
Individuals calculate their net worth by listing their assets, such as homes, cars, cash savings, and major investments such as a 401(k) retirement plan. They also need to calculate a list of liabilities such as student debt, car loans, mortgages, and credit card debt.
Net worth is calculated by determining the total value of your assets and subtracting the total value of your liabilities.
Budget and cash flow
Also, known as a cash flow projection for businesses, this is a projection of the cash flows that can be expected for the next year.
It allows a business to get ahead of any potential future financial issues, and solve problems before they even arise.
It gives the business a clear overview of how much money will be in the business at the end of each month, which enables them to safely plan out any business expansion or further investments or expenses.
Individuals will determine their cash flow to form the foundation of their financial plan as well because it is important to know where your money is going.
The easiest way to do this is to thoroughly inspect your bank statements to see when money is entering your account and how you’re spending it, taking into account fixed expenses, disposable income, and other expenses which you can either eliminate or reduce.
For individuals who may earn or spend money seasonally or at irregular rates, it’s possible to gain a clearer perspective of your budget and cash flow by adding up an entire year’s expenses and income and dividing it by 12 to determine a good budget.
Now that you have a good understanding of where the money is going, it’s time to prioritize your financial goals and cut out the fat.
Do you really need that new car? Is it necessary to go out to dinner eight times a month? Does your office really need an espresso machine and weekly staff parties?
This is the stage where a business or individual needs to practice introspection and eliminate impulsive buying and other toxic spending habits that are, bit by bit, negatively affecting your financial future. All of those small additional expenses add up over time and you probably don’t even realize it!
This does not concern businesses, but you can refurbish it as a long-term investment strategy to ensure the sustainability of your business.
For individuals, however, your retirement plan is critical because you would like to preserve a comfortable financial future for yourself once you’ve surpassed working age (traditionally 65-years-old).
Regardless of your priorities, your financial plan must include a strategy for accumulating wealth that will form your income in your retirement years and ensuring that you’re not a financial burden to others.
Emergency funds are another critical part of any financial plan because everybody runs into some bad luck every now and then.
Far too many people have spent their whole lives sticking to a financial plan only for a bad accident like damage to their homes, health issues, or job loss to completely disrupt them on their path to financial security.
Therefore, you need to set aside an emergency fund that can be tapped into when you take on an unexpected expense.
Businesses also need a comprehensive emergency fund that allows them not to be put out of business by a legal dispute, for example, or a market crash.
There are so many external factors that could disrupt a business’ fortunes, and there’s very little that can be done about it if you don’t have a large sum of money set aside to incur the expenses involved in any potential catastrophes.
As we’ve discussed, debt plays a major role in financial plans and liabilities are key considerations for establishing your strategy. Falling behind on repayments and having unsustainable debt will threaten any individual or business’ financial security.
Therefore, it is important that you are able to manage your debt well. Before taking on any new debts, ensure that your income can accommodate the extra expenses. Furthermore, make sure that you have gotten the best deal possible with your loans.
Thoroughly read through agreements and take note of every stipulation. Get the loans that offer you the best interest rates and ensure that you’re not getting a raw deal on an expense that will directly affect your cash flow for years to come. Ensure that you will be able to service all of your debts at the end of each month.
In financial planning, a comprehensive risk management plan for life and disability insurance, property insurance, business insurance, personal liability coverage, and medical insurance will play an important role.
This is especially true as you get older, your assets have grown, or when your business has expanded to a point that your emergency funds will not cover any devastating loss of assets or disruptions to your operations.
An estate plan is simply a way for an individual to leave a legacy and to protect the wellbeing and financial future of your dependents and beneficiaries. For most people, especially older individuals, this is important mostly for peace of mind, but still should not be overlooked.
Financial planning is critical to secure you and your business’s long-term financial wellbeing, and it’s incredibly important that you understand the central idea about financial planning and the activities that support it.
By understanding the six key components of a financial plan, its purpose, and other considerations, you will be able to prepare yourself for a comfortable financial future and all-but eliminate any doubts or uncertainty.
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