In the domain of personal finance and business management operations, people often encounter two terms: financial planning and financial management. Although, at a glimpse, they seem similar, however, they are aimed to serve dissimilar purposes and equally involve different procedures- according to Scott Tominaga. Having an overall idea about how these two concepts differ and how they serve the industry is essential for anybody planning to boost their financial well-being, regardless of whether on a personal level or within an enterprise.
Financial Planning
Primarily, financial planning is a proactive nature of planning. Its process encompasses the formation of financial goals and making a roadmap to accomplish such goals. This process takes a holistic approach and often integrates a variety of aspects of mainly an individual’s or business’s financial life, including income, expenses, investment, and savings, apart from risk management. Here is a breakup:
- Setting Goal: At its core, financial planning needs to be specific, measurable, achievable, relevant, and time-bound aka SMART goals. For common people, the goals might involve saving for retirement, creating an emergency fund, buying a dream home, or funding a child’s higher education. For businesses, the aims might be launching new products, reaching unrepresented areas, or reaching a certain target in the upcoming year.
- Evaluating Current Financial Condition: Before formulating a plan, individuals and businesses are required to assess their present financial situation. This process includes the assessment of assets, liabilities, income, and expenditures. Having a thorough idea of these basic elements is vital for effective planning.
- Developing Strategy: After recognizing goals and evaluating current scenarios, the next phase requires developing strategies to reach these goals, as per Scott Tominaga. This generally involves budgeting, planning for investment options, tax strategies, as well as retirement planning.
- Reviewing and Adjustment: Financial planning is a continuing process and not merely a one-time task. For its effectiveness, it requires regular assessment and adjustments to the changing situation. This ensures the relevancy and value of the plan in accomplishing the goals.
Financial Management
Conversely, financial management chiefly focuses on the day-to-day supervision and administration of financial activities. It encompasses the effective management of an organization’s finances to deal with its current operational necessities while ensuring the sustainability and profitability of the establishment.
- Budgeting: One of the basic activities of financial management involves forming and managing the budget. This involves the effective allocation of resources, observing expenses, and also ascertaining that the organization does not go beyond its financial limits.
- Financial Reporting: Financial management embraces activities like the preparation of financial statements as well as reports, – to provide insight into the financial health of the organization. These are vital documents required for audit, and exposure for internal stakeholders apart from outside entities including investors, regulatory bodies, and creditors.
- Cash Flow Management: having adequate and continual cash flow is vital for the effective operation of an organization regardless of its size. Therefore, ensuring that the establishment has adequate cash flow for meeting its obligations is an essential part of financial management. The process involves having a close track of incoming and outgoing cash and accordingly making necessary adjustments to sidestep shortfalls.
- Investment Decisions: Apart from the above, financial management also involves making strategy-based data-driven decisions pertaining to investments, regardless of capital assets like advanced machinery, securities, or other kinds of financial instruments. The overall objective should be the maximization of returns while managing risk.
Although financial planning and financial management are often co-related, they serve varied functions. Understanding the differences among them is important for effective financial management no matter whether individuals aim at having financial stability or businesses focused on development and sustainability.
