GLOSSARY

Legal Dictionary

Financial planning is a useful process to help you effectively manage your finances. A financial plan determines how you will manage your money to achieve long-term monetary goals.

This is an ongoing process that involves a series of different steps to ensure that you carry out successful wealth management over an extensive period of time. A financial plan enables you to have a comprehensive understanding of your current finances, goals, and the strategies you will use to achieve these objectives.

Creating a financial plan differs based on your specific needs and financial situation. Notably, financial planning from a business or enterprise perspective varies significantly from that of an individual.

Read on to learn about the uses of financial planning, its different types, and how to create a financial plan for both an individual and a business.

Why Is Financial Planning Important?

Financial planning and analysis are helpful for any individual. It ensures that the most can be made of your assets and that you reach your future goals in areas such as estate and retirement planning.

For a business, financial planning plays a different role, focusing more on policies, procedures, and budgets. The following are some of the crucial reasons for a company to create a financial plan:

  • Allocation of adequate funds
  • Ensuring a reasonable balance between outflow/inflow of funds
  • Creation of expansion programs
  • Reduction of market trend uncertainties
  • Management of challenges to growth and profitability

Financial Planning Objectives

Various financial goals can be achieved through financial planning. For an individual, numerous different areas can be covered by this process. The most common of which involve the following:

  • Estate: financial planning for when someone passes away, creating a clear asset allocation process after someone’s death, often created in combination with a will.
  • Tax: saving as much as possible in your returns and minimizing tax liability.
  • Retirement: deciding what type of lifestyle you want after your retirement and trying to achieve it.
  • Investment: deciding what types of investments make sense for your financial situation and creating an effective investment plan.
  • Budget: deciding how to spend or save your money according to your future goals.

A financial plan is also a crucial part of a business plan for an enterprise. However, in this context, it serves a different purpose. Below are some of the primary goals for a company when financial planning:

  • To define capital requirements
  • To determine capital and debt structure
  • To create financial policies
  • To optimally manage financial resources

How to Create a Financial Plan?

To successfully create an effective financial plan, you must use a clear strategy and methodology. The typical financial planning process involves a series of steps to ensure that money is accurately evaluated and goals are reached. The most important of these are:

  1. Analysis of your current financial situation
  2. Determining your financial objectives and goals
  3. Establishing backup strategies
  4. Evaluation of all possible alternatives
  5. Implementing the financial plan
  6. Continuous evaluation and improvement

Another important part of a financial plan is to decide who will act on your behalf in the event of any limitation or incapacitation. This is known as a financial power of attorney (POA), a legal document that entrusts an agent with the authority to represent you in financial matters.