Why Businesses Need Financial Planning

Finance is a broad term for many things regarding the creation, management, allocation and utilization of funds and assets. In particular, it usually deals with questions of why and how an entity, organization or government get the funds required for its continued operation; usually called capital within the business context. The term also refers to the tools and techniques of an entity’s management uses to maximize the return on its invested capital; sometimes referred to as operating capital. A company’s or an organization’s capital structure is usually described by a set of financial transactions known as financing.

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Why Businesses Need Financial Planning

Finance is a broad term for many things regarding the creation, management, allocation and utilization of funds and assets. In particular, it usually deals with questions of why and how an entity, organization or government get the funds required for its continued operation; usually called capital within the business context. The term also refers to the tools and techniques of an entity’s management uses to maximize the return on its invested capital; sometimes referred to as operating capital. A company’s or an organization’s capital structure is usually described by a set of financial transactions known as financing.

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Financing in simple terms is allocating money from the assets of an organization or company to various working capital needs such as purchasing raw materials, paying wages, and marketing goods and services. This is done to ensure that enough cash is available to fulfill these working capital requirements throughout the financial operations of the enterprise. A company may use one type of financing – such as working capital options – or may apply for more than one type of financing depending on its financial operations and creditworthiness.

Fixed Capital: This type of financing occurs when an entity receives a loan for specific assets. For example, when an organization needs equipment to produce goods and perform its daily business operations, it may apply for a loan that allows it to purchase this equipment permanently in order to avoid repayment during its next operating period. Fixed capital serves the dual purpose of enabling the lender to secure the payment of a loan while keeping interest rates low during the life of the loan. Typically, fixed capital loans are secured by real estate, accounts receivable and/or inventory, and/or assets that generate cash flow.

Net Working Capital: Net working capital is the difference between the cash assets and the cash liabilities of an organization or company. It represents the potential increase in business cash that would result from normal operations. Net working capital provides financing options that do not require repayment during the life of the loan. This finance is most often obtained through the use of accounts receivable and/or accounts payable.

Fixed assets are those assets that are physical structures (buildings, equipment, property, supplies) or intangible assets (goodwill, property leases). Variable assets, on the other hand, are those assets that could potentially increase in value (such as inventory, accounts receivable, or financial investments). Many businesses use fixed capital for long-term investments such as purchasing land, building equipment, or property for expansion. However, fixed capital can also be used for short-term financing needs, such as for acquisition of current assets or for the repayment of debts.

There are many sources of funds that businesses can tap into to finance their activities. These sources include bank borrowing, raising investment capital, issue debt, issue equity, and sell product. However, before these methods can be implemented, financial institutions need to establish and follow appropriate policies to provide credit lines and make investments in different forms of capital. The purpose of business finance is to provide businesses access to financial markets. It is also essential for businesses to plan their financial activities and assess their progress in meeting their objectives.

Although finance is very important to any business, too much finance risk can lead to financial distress and a poor financial performance. Businesses should therefore establish good finance policies before they start their business operations. A good finance policy will enable them to make sound investments in their business and manage their finance in an efficient manner.

In order to achieve the desired level of success in business, finance must be well-planned and implemented. When there is too much money financing, there are too many risks and consequently, too much risk failure. Finance can be a very powerful instrument, if properly applied. Therefore, a business may want to consider financing as a strategy to ensure that it can successfully compete in today’s highly competitive markets.

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