Financial Planning: Economy, Businesses and Households

The volatile global financial scenario has challenged many of our convictions about the financial sector. The fundamental; financial literacy has enabled this change in belief. It is imperative developing and developed economies partake in this transformation through financial literacy thereby successfully indulging in financial planning.

The Economy

There is practically no country that has developed and grown with a lagging financial sector. This growth is only possible when individuals and households are financially literate and make informed financial related decisions. Much like an economy, the growth of a household also depends upon quality financial planning to sail through present and future inflation.

India’s growth in the financial sector was on an impressive upward trajectory before the 2004-2008 global financial crisis. One of the key factors to contribute to this growth was an increase in savings rate of individuals. Individuals and households today realize the importance of ‘financial planning’ thereby changing the financial demographic. This trend has welcomed several positive financial transformations in the economy. As per experts, if we aspire to achieve more growth in the financial sector, is it vital that the savings rate through individuals and households increase.

To ensure successful financial planning through financial literacy, it is also important financial markets design and offer products that households with low income generation can avail. On the other hand, it is equally important to make people financially literate so they know what they need and are equipped to choose between an array of financial products in the market.

The Business

A company’s financial plan is the business plan it foresees. The financial data and projection give a fair estimation of how a business will fare in the long run. By using existing financial data, accountants plan the coming year’s business goals and investments in numbers.

It includes an assessment of the business environment, goals, resources needed and their budgets, contingencies etc.

Here are 5 major benefits of financial planning-

  1. Cash Flow Management- For a startup, it is necessary to establish the need of the business, i.e., product/market fit. Then on, it is necessary to estimate company cash flow to justify the existence of the business and its future growth and security.
  2. Budget Allocation- Budget allocation is closely related to a business’s cash flow. Once a company estimates its sales income, investments etc., it is essential to determine how it will be spent. Ideally, the approach should be to allocate funds into team budgets and a separate provision for investments must be maintained.
  3. Cost Reduction- Expenditure is an inevitable part of a business but a proper financial plan ensures controlled expenditure. As a cash flow is prepared, unwarranted expenditure can be identified thereby providing a scope to mitigate or reduce such costs.
  4. Risk assessment- The financial team make provisions to avoid or navigate risk at the time of financial or economic crisis. While risks are hard to predict, it can be accounted for on the safer side.
  5. Crisis Management- The year 2020 exhibited how a natural calamity can disrupt the economy and how businesses must always brace themselves for the worst. While many businesses sailed through the crisis owing to their strong financial plans and balance sheets, it reinforced the importance of investments, savings and contingencies.

The Household

Encouraging people towards financial planning through customized product stacks will also ensure ‘financial inclusion’ in the final analysis. Devising innovative products and services that cater to middle and low income households, who’ve recently started financial planning will further the long-term plan of achieving a financial boost. The masses we speak of seek ‘safe, return and liquidity’ products and to stimulate the growth in investments, financial sectors should offer audience centric products and services.

Financial planning has also seen a boost due to the growth in literacy rate amongst the youth. An educated and informed generation will further boost the attempt to build a financially literate economy. Literacy has equipped them to plan and budget their income simultaneously saving for a financially secure future.

Financial planning as the definition goes is the evaluation of an individual’s current pay and future financial state using current variables to predict future income, asset values and withdrawal plans. While it is an approach to meet one’s life goals through savings, investments and planning.

Conclusion

As quoted by Charlie Munger, “People make bad choices all the time, usually because of fundamental inability to operate over long time frames.”- You may have several different financial plans and goals they wish to achieve but it is rather important to plan how it will be achieved over time while considering all the elements associated with it.

Leave a comment

Your email address will not be published.