The importance of financial planning

The article was written by Steve Diacono, Intern at Calamatta Cuschieri

Proper planning has won battles, ended wars, and enables the average student to finish his/her assignments on time. It is with this notion, that planning has been and is being used in most areas of business, so as to achieve the desired results.

In saying so, financial planning; even in small amounts, stand to benefit an organisation by enabling it to plan its cash wisely. To this result an organisation must enable itself to have the availability of cash, both internally, (via working capital), and externally, (via banks and other sources).

With that being said; one may go on to state that whether cash is in hand or being used, a cost is incurred, as there is a financial cost to buying and an opportunity cost to not doing anything at all.

In-order to regulate an organisation’s cash, said cash is to be split up into four sections; those being:

• Cash with a Transactional motive (covering day to day expenses, cash in/out and running cash),

• Cash with a Precautionary motive (covering emergency cash),

• Cash with a Speculative motive (covering possible investment opportunities),

• Cash that is Compensating balance requirements (ensuring enough cash is left to pay debts, debentures, overdrafts, and other bills).

With these four sections being covered one must also point out that the planning of the aforementioned should be carried out on both a long term and short term basis, leaving room to alter the plan where possible/necessary so as to maintain appropriate levels of cash; however this is easier said than done.

In order to maintain appropriate levels of cash, an organisation must follow three guidelines, namely:

• Control inflows and outflows: By preventing leakages through more control over stock, accounting etc; through speeding up the rate at which the company collects due cash; via strengthening relationships with suppliers; by delaying payments to ensure the company doesn't overspend and freeze other transactions, and by planning your capital expenditures via purchasing any large assets at a financial high point, rather than at a financial low point.

• Control shortages: This may be achieved by preventing inadequate growth i.e. not expanding a particular department or sector when it is not necessary/beneficial towards the company; by preventing overtrading, as the more you buy, the more risk and expense you entail; by halting one off item expenditure purchases, as they tend to cripple finances in the long run; and by estimating inflations as much as possible.

• Control idle cash: It is never advisable to leave idle cash, instead it is suggested that it is split into two (2) sections, those being Temporary cash, i.e. cash to be used for day-to-day transactions and Permanent cash, i.e. to be used at a single point in time to make a bulk purchase such as that of new premises.

In retrospect to the aforementioned, the above points may and should be used by anyone who so wishes to control their finances. Given that we are at an age where a simple transaction can be performed in a blink of an eye, it has become relatively easy to lose money through the cracks, resulting in some scratching their heads, wondering where their money has gone.

Good day and happy trading!