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- Financial planning usually involves a budget, a spending and saving plan, a plan for handling current and future expenses like rent or utilities, and a plan for short- and long-term savings. Financial planning can also include investments in terms of allotting savings to certain assets or projects that are anticipated to yield a profit in the future. These can be real estate, shares in a new or existing business, and more.
If we are to look at the term in the business sense, financial planning includes a cash flow statement, an income statement, and a balance sheet. It can also be taken to mean the annual income prediction for a company or department. The balance sheet includes the financial balances of the enterprise, be it a limited liability company, a partnership, a joint venture, or sole proprietorship. The balance sheet lists the assets, equity, and liabilities toward a given date, like the end of the fiscal year. The balance sheet also lists the net worth of capital, which is the difference between the assets and the liabilities of a business.
The income statement shows how the total earnings (prior to expense deduction) are transformed into net income, also known as the bottom line. The earnings in a given period are shown, as well as the expenses and costs in this same period, including the amortization and devaluation of certain assets and the taxes charged. The income statement is provided so that investors and managers can see if the enterprise has made or lost money.
The income statement is always based on a set period of time, whereas the balance sheet refers to a specific moment in time.
Charities and non-profit organizations do not provide income statements. What they produce is a statement of activity, which indicates the sources and amount of funding minus the program expenses and administrative costs, as well as other expenses.
The key concept of financial planning is the budget. The budget is a list of planned expenses and revenues, of saving and spending plans. Budgets serve to set a prediction for the planned revenues and expenses. In other words, budgets take into consideration the occurrence and implementation of certain events, strategies, and plans and how the company would do financially if that were to take place. Finally, budgets make it possible to measure the actual financial operation of the business against the forecast.
Other elements of financial planning include calculating the costs of starting a business, which starts with the necessary purchases, such as assets, sources, services, and collateral.
Financial planning is not limited to businesses. Financially savvy people also make budgets for saving and spending their future income. Some people use the services of financial planners – professionals helping people manage various financial issues, including investment planning, retirement planning, education planning, and cash flow management. Insurance planning and risk management are also part of financial planning. Financial planners specialize in estate planning and tax planning as well. Business succession planning is a service intended for business owners.
The most basic thing to do is to create a budget. To that purpose, the first step is to gather all financial statements, including utility bills, investment accounts, and banks statements. This will serve as a starting point. Writing down all sources of income and creating a list of monthly expenses helps in finding out one’s disposable income. Expenses include auto insurance, car and mortgage payments, utilities, dry cleaning, and other expenses. If expenses exceed income, adjustments have to be made so that one’s income is at least equal to the expenses. A good way to achieve this is by reviewing the budget on a monthly basis.