Effects of Financial Planning - Report Example

Effects of financial planning Effects of financial planning Like the marketing, production, and organization plans, the financial plan is an important part of the business. Financial planning determines the potential investment commitment needed for a new business (Enrhardt, 2002). A financial plan enables stake holders in a business to see the appropriate expenses. These include costs of goods sold, general and administrative expenses. Financial planning helps in managing well these general and administrative expenses (Anderson, 2006). Some of them include bills and salaries. For instance, bills have to be paid at different times of the year. It is important to determine the demands on cash on a monthly basis, especially in the first year. Sales maybe irregular and receipts from customers maybe spread out, thus necessitating the borrowing of short-term capital to meet fixed expenses (Enrhardt, 2002). Financial planning helps in managing of employees salaries. A business plan avoids fraud cases and chances of having ghost workers. Net profit after taxes is projected by estimating income taxes. There is also better management of selling expenses. This is a positive effect of better financial planning. Selling expenses such as travel, commissions and entertainment should be expected to increase somewhat as territories are expanded and as new salespeople or representatives are hired by the firm. All this is made possible by a financial plan which helps in forecasting (Perry, 2002). After planning well, the financial plan shows the financial condition. This is one of the major effects of financial planning. Summary of the assets of a business, the investment of the business person and any partners and retained earnings can be seen. Thus, the financial plan provides a business person with an overview of the amount and when money is being made in a company, where funds are going, how much cash is available and the projected financial position of the business. It provides the short-term basis for budgeting control and helps in prevention of problems for new business-lack of cash. There can be negative effects of bad financial planning. Without careful financial planning in the early stages, a business can suffer serious cash flow problems. The financial plan must explain to any potential investor how a business person will meet all financial obligations and maintain the venture’s liquidity in order to either pay off debt or provide a good return on investment. Good and careful financial planning results in a well prepared budget. A sales budget can be prepared by a sales manager, a manufacturing budget can be prepared by a manufacturing manager etc. A sales budget offers estimates of the expected volume of sales by month. From the sales forecasts, a business person is able to determine the costs of these sales (Anderson, 2006). In addition, the calculation of percentage of sales for each year is useful as a means of financial control so that the entrepreneur can ascertain whether any costs are too high relative to sales revenue. Another major effect of good financial planning is monitoring profits. This is the major reason why business people set business. Business plans help in comparison of profits made in different years. This helps in determining if a business is growing or losing. Bankruptcy occurs when a business begins to lose. In some instances, a business plan helps a business person to realize that his business does not begin to earn a profit until sometime. This often depends on the nature of the business and start-up costs. For-example, a service-oriented business may take less time to reach a profitable stage than a high-technology company or one that requires a large investment in capital goods and equipment which will take longer to recover. Another effect of financial planning is good management of liabilities. Liabilities are money owed to creditors. A financial plan has accounts which represent everything owed by creditors. Some of these amounts may be due within a year (current liabilities), and others maybe long term debts (Long term liabilities). A financial plan helps a business person to plan himself well in payment of these liabilities. This is the same for fixed assets. A business plan outlines all the fixed assets that a business has. Fixed assets help in management of a business (Anderson, 2006). Owner equity represents the net worth of the business. Revenues are added to owners equity and a financial plan shows that revenue increases assets and owner’s equity while expenses decreases owner’s equity and either increase liabilities or decrease assets. Effects of Governance There are numerous effects of governance. Good governance enables a business to have a loyal labor force. Employees become committed in an organization that is well organized. Also significant to potential investors is the management team and its ability and commitment to a business. Investors always want the managers not to run a company as a part-time venture while employed full time elsewhere. It is assumed that the management team is prepared to operate the business fulltime and at a modest salary. Good governance enables effective interviewing and hiring procedures. This is implemented to ensure that new employees will effectively grow and mature with the new business. Governance enables good management of marketing and sales which is always under the marketing department. Governance enables a smooth running of all administrative tasks such as bookkeeping, purchasing and shipping. Planning, measurement and evaluation, rewards, selection criteria and training are part of governance. All these are under different managers and they enable a smooth learning of a business. The production manager is responsible for quality control and assembly of the finished product subcontractor. The marketing manager develops promotion and advertising strategy and coordinates the efforts of the expanding rep organization (Perry, 2002). The administrative manager then assumes the responsible for all administrative in the business operation. Here the elements of measurement, evaluation, reward, selection and training become apparent. Governance prompts managers to respond to pressures such as an unsatisfied customer, a supplier reneging on a contract or a key employee threatening to quit. Resources are managed well when there is governance. This is the role of a business person to allocate resources. The manager must decide who gets what. This involves delegation of budgets and responsibilities. The allocation of resources can be a very complex and difficult process for the business person since one decision can significantly affect other decisions. The final decisions role is that of negotiator. Negotiations of contracts, salaries, prices of raw materials etc. are an integral part of the manager’s job and since he or she can be the only person with the appropriate authority, it is a necessary area of decision making (Perry, 2002). Another effect of governance is good communication between the management team and the employers. A manager must create a workplace where communication from the bottom up is encouraged. There is a board of directors who are part of a company. They are part of governance and they play an important role. They review operations and capital budgets. They develop plans which are long term for growing a company and support day-to-day activities. They solve conflicts among owners or share holders (Perry, 2002). They also ensure the proper use of assets and develop a network of information sources for the company. Governance of a company reduces chances of accounting irregularity, fraud, bankruptcy, insider trading, excessive management compensation and other illegal or unethical actions that have become newsworthy in the last couple of years. Effects of Ethical Issues in Modern Economics Ethics plays an important role in protecting the rights of consumers and stake holders of a company. Ethics provides a way of making sure that resources are divided equally between a company and the stake holders of it. These are the people who have a vested interest in the firm including employees, customers, supplies, and the society in general. If division of resources can’t be done equally, then a stake holder is being exploited by a company. It is seen that there is proof that some business owners take advantage of others so as to get profit; it is important therefore that the entrepreneurial process be used to help those who have been exploited and help in establishing a viable company (Perry, 2002). It is not ethical to take part in corrup business transactions because consumers will suffer a great deal. This will result in delivery of products that have not met the right standards and may harm the health of a consumer. This is also illegal. Business ethics should follow a process of discovery, studying new ethical issues, considering proper ethical guidelines for dealing with these issues (Di Gregorio, 2005). Ethical issues about the economy should be added to the framework, such as issues about the justification and protection of intellectual properties, plundering and protecting knowledge resources, and the role played by government in the protection of intellectual property. Employees are important assets to a company. It is therefore crucial to be transparent when working with them. In spite of these, there are employees who take advantage of them so as to cut expenses. For example, there are some employees are given incentives instead of salaries. This employee will spend less time looking for customers and much time looking for another job. Creative cost cutting at the expense of an employee is not the way to establish the trust and integrity in a company. Culture affects the ethical standards of a business in many ways. For instance, there are some cultures (religion) that don’t tolerate some advertisement that bring moral decadence in a society. Marketing is affected on some products like condoms (Di Gregorio, 2005). Cultures play a significant role in ensuring that business delivers products that are of the right standards. Financial Implications Ethics plays an important role in prevention of fraud cases and misconduct and this works. Massive frauds lead to bankruptcy. Fraud is characterized by insufficient working capital or credit, extremely high debt with rigid restrictions imposed by creditors. The other one is dependence on few products, services or customers (Enrhardt, 2002). There is management of the organization or department dominated by one or a few individuals. There is also an understaffed financial and accounting function. The effects of giving false information can be dangerous. A lot of damage is done when a firm gives false information to investors, the financial markets and even competitors. These ethical issues should be improved (Perry, 2002). They should be improved because companies that provide bad information to outsiders end up hurting themselves. Internal financial reports are supposed to help executives determine which parts of their company need improvement. But some companies lie about their performance. References Anderson, D. (2006). The critical importance of sustainability risk management. Risk Management, 53(4), 25-30. Di Gregorio, D. (2005). Re-Thinking Country Risk: Insights from Entrepreneurship Theory. International Business Review, 14(2), 209-214. Enrhardt, Brigham. (2002). Financial Management. Perry, S. (2002). A Comparison of Failed and Non-Failed Small Businesses in U.S.A. Journal of Developmental Entrepreneurship, 7(4), 415-421. Read More