Effects Of Financial Planning

Positive Effects

The purpose of financial planning is to manage the use of resources for the implementation of organizational strategies. In Addition, the financial plan also acts as controlling mechanism where actual results are compared to the plan so that responsibilities and accountabilities could be assumed by the relevant personnel for performance improvement. Secondly, financial planning also determines the creative use of resources to accomplish organizational aims and to remain competitive. The two aspects of financial planning include the liquidity planning and the profitability planning. The liquidity planning forces the management to look ahead for the cash requirements of the business, therefore, saving the business from survival issues before-hand. In this regards, where the company identifies problems in future cash flows, it plans to mitigate these at the planning stage only. This mitigation of risk on a timely manner helps the organization to safeguard themselves against emergency costs. On the other hand, the profitability planning helps the organization to plan for returns in the future so that appropriate strategies could be adopted on timely basis. Furthermore, planning helps to direct managers and gives them clarity over what targets to achieve. Also, where managers are able to perform well with regards to budgets, they are awarded and incentivized this way. Moreover, financial plan enhances coordination and leads towards goal congruence. Not only this, but where financial planning involves the participation of all levels of management this becomes a source of motivation for the management and leads toward the setting of realistic targets.

Negative Effects

Although, there are a lot of benefits relating to financial planning, this process consumes time and other resources of the company which may be used in other areas of the business. Also, the company may need the services of a specialist or a consultant in this regard again putting pressure on the resources of the company. Additionally, financial plans may not be realistic as these are merely the future expectations of the company and therefore, may fail to incorporate various factors. Furthermore, the process of financial planning may have adverse effects on the organization; for instance if the financial plan is set at an ideal level or a level that is way above the reach of the managers, this may become a source of de motivation for the employees as they are never likely to reach the target. Additionally, where financial planning is done by the upper management and imposed on the lower management this is not likely to be readily accepted and may become a source of conflict in the organization.