Why Financial Planning Is Necessary | Investment Planning | Importance Of Personal Financial Planning
Most times you get a situation where individuals as well as organisations invest hard earned fund without proper planning, this is why financial planning is necessary before any kind of investment is made.
Organisations, firms and corporate as well as non corporate bodies go to the length while conducting their business operations, they apply all the necessary measures in obtaining their resources.
At the end proper planning has to be put in place for investments. Most times these funds are gotten in stringent ways, in the case of Deposit Money Banks (DMBs), this funds comes from depositors hence why financial planning is necessary, because profit has to be made on these funds.
Business firms usually carry out their day to day activities with idle funds, funds that are not immediately needed, while a larger part of this fund is invested either in financial assets like equity securities, debt securities or even in real assets like lands and buildings.
Some firms prefer to invest in multiple portfolios, most times it is a primary objective to invest, in a situation investment where return is tax free, firms want to capitalise on the tax free opportunity, situations like this are not always available.
What Is Investment Planning
Experts have defined investment as assets acquisition by an enterprise for the purpose of capital appreciation and income generation.
Classification Of Investment
In the school of investment, investments has been classified into two categories, namely
- Short term investments and
- Long term investment
Short term investment – short term investments refers those type of investment that are held temporarily in the place of cash, which can easily be converted into cash when there is a need for it. Short term investments are usually for the period of one year. Short term investment are usually held in ordinary share, treasury bills, commercial papers, bankers acceptance, bonds, preference share etc. Investing in these securities could be referred to investment where principal is protected and returns are somewhat guaranteed.
Long term investment – Long term investment refers to a situation where an investor invests his fund over a long period of time in order to earn income. This type of investment can also include debts and then equity securities as well as investment properties. There are possibilities that long term investment is not an investment where interest is tax free.
Why Financial Planning Is Necessary To Development
That is one question that should be in the mind of any investor, questions like why financial planning is necessary? Investment remains an essential part of development especially in the corporate world. Take for example, investment properties, this talks about an enterprise interest in lands as well as building for the purpose of investment potential, that brings about income and capital appreciation.
In most countries, properties are referred to as investment in property, this is believed to cover more that 15 percent of the lettable space is occupied by the owner or another enterprise in the group. A property is deemed to be substantially occupied if the owner or another enterprise in the same group occupies more than 15% of the lettable space.
Investments can as well be classified as an expansion which can take place in a business, starting up a new business, replacing machines or modernisation of business, either through mutually exclusive investment, contingent investment or independent investment.
How Can Investment Stimulate Expansion?
Investment as has been defined in this articles means assets acquisition by an enterprise for the purpose of capital appreciation and income generation, the truth remains that when an investment yield returns, it could lead the management to expand in order to accommodate new customers. Some investors encourage firms to make expansion investment, by this the firm will only be making investments that is geared towards the expansion of the organisation.
What Is Expansion Investment – In the expansion of an existing business, this may either be for an increase in the production level of the firm, or in the increase or adding to the capacity of the manufacturing of the company which is entirely aimed at the increase to be recorded in the earnings if the organisation, the question of either or not to expand, that is where the question of why investment decisions are important in established firm.
In the case of deposit money banks and discount houses or other financial institution, investors prefers to know which investment has the least liquidity ratio, it has been established that liquidity ratio is used to measure a financial firm’s capacity to pay off its outstanding debts.
Investment expansion can also occur when an individual or firm wants to diversify their portfolio, most times firm wants to understand what investment portfolio is most diversified, so as to consider how to go about it.
When ever, a firm wants to replace or modernize its investments, they are required to update or change outdated as well as obsolete equipments for a more economical operation. In situations like this, mutually exclusive investment comes to play, while one project is accepted other will be excluded. Independent investments serves the same purpose but it depends on their profitability as well as the availability of fund. When the choice of one investment necessitate undertaking of one or more other investment the investment are call contingent investment. Deciding on what and where to invest require proper planning.
Investment planning requires management from a capable investment manager, wrong investment may bring the business crashing down, that is why financial planning is necessary and can never be over looked.
Investment planning entails project management, this on the long run entails planning, directing as well as controlling of a project so that the project can meet up within the time frame and also cost effective.
Why Financial Planning Is Necessary
The bottom line of all that has been written here is that investment planning is the life of investment activities, here are the investment project life cycle as it applies;
Project definition, investment Planning, implementation of the proposed plan and finally completion as well as evaluation of the project.
In essence, investment planning is the life wire of investment business.