Planning is a process of achieving specified objectives. Planning involves the selection of objectives and the means of achieving them. It presupposes that alternative procedures for achieving the same objective exist. Planning involves taking decisions in advance on the following:
- What should be done?
- How could it be done?
- When should it be done?
- By whom should it be done?
These are the basic questions a planner should answer and they are basic factors that should be taken into consideration in the planning process. There exists a gap between objective and achievement, and planning helps the planner to fill the gap.
In this unit, however, we shall be concerned with financial planning. We shall define financial planning; consider the process of financial forecasting.
After a careful study of this unit, you should be able to:
- define financial planning;
- enumerate and discuss the steps in the forecasting process;
3.0 MAIN CONTENT
3.1 FINANCIAL PLANNING DEFINED
What is financial planning?
- Financial planning is not just forecasting.
- Financial planning does not attempt to minimise risk.
There is a relationship between planning and budgeting. Planning helps to identify the output desire but budgeting helps to identify the inputs required.
A financial plan is a budget. A budget, therefore, interprets all the elements of a plan in financial terms. In corporate financial planning, the first thing that is done is to set objectives and goals (an objective is broader than a goal; a goal is more specific).
3.2 PROCESS OF FORECASTING
We can use financial ratios to identify symptoms and look for remedial action. Ratios can also be used to forecast and predict the future of the business. The terms FORECASTING and PREDICTION are commonly used as synonyms (used interchangeably), but they refer to different things. Forecasting is used to cast forward the past performance into the future. The forecasting is based merely on the historical experience of a single time series.
Prediction, on the other hand, is based on available information including economic condition. Prediction is frequently used in planning for funds. The objective of prediction is to increase accuracy and correct planning.