Financial planning and investment planning are two important concepts in managing business finances, but they have distinct meanings and purposes. Proper financial planning evaluates short- and long-term cash flow needs and devises strategies to achieve financial goals. Investment planning focuses more narrowly on selecting assets to generate returns. While financial planning takes a big-picture view of budgeting, taxes, insurance, and retirement goals, investment planning deals with specific vehicles like stocks, bonds, real estate. Both require expertise and coordination for a business to improve profitability, meet obligations, and prepare for the future. This article will elaborate on the key differences between financial planning and investment planning for enterprises.
Financial Planning Encompasses Broader Financial Goals and Needs
As the name suggests, financial planning has a wide scope that assesses and plans to meet all the monetary needs of a business. It estimates short-term working capital requirements for day-to-day operations. Financial planning also evaluates longer-term capital expenditures for growth and contingencies. Some important aspects of business financial planning include:
– Budgeting based on projected revenues and expenses
– Managing cash flow and maintaining optimal liquidity
– Setting funding targets and choosing sources of financing
– Estimating tax liabilities and minimizing tax burden
– Procuring adequate insurance coverage
– Setting aside funds for future expansion and marketing plans
– Preparing contingencies for unforeseen events or downturns
In essence, financial planning takes a comprehensive approach to manage money in and money out. It coordinates different pieces like payables, receivables, debt, equity, taxes, and insurance within an overall framework. Good financial planning is vital for a business to meet its commitments and provide for future needs.
Investment Planning Focuses on Asset Allocation to Earn Returns
Investment planning has a more well-defined remit – it looks at avenues for parking spare funds of a business to earn investment income. It evaluates various asset classes like fixed deposits, debt instruments, equity, real estate, commodities, etc. and picks the optimal mix to generate returns at an acceptable risk. Core aspects of business investment planning include:
– Assessing capital required for operations and capital available for investing
– Setting investment goals and expected returns
– Researching investment options and associated risks
– Diversifying across assets with varying risk-return profiles
– Selecting the right securities within each asset class
– Monitoring investment performance and rebalancing periodically
While financial planning takes a comprehensive big-picture view across domains, investment planning zooms in specifically on asset allocation to earn returns from spare capital. Both require coordination for optimal results.
Financial Planning Precedes Investment Planning
Within a business, financial planning provides the foundation and parameters that guide investment planning. First, a company’s financial planning process will estimate the spare funds available for investment after meeting operational needs.
Second, the financial plan will set overall risk tolerance levels that investment planning must adhere to. Some strategic financial planning objectives shape investment planning, such as:
– Minimum required rate of return on invested capital
– Limits on exposure to high-risk assets
– Liquidity requirements of the investment portfolio
In brief, the broader financial plan must be formed first, which then defines the goals and constraints for investment planning. Financial planning asks ‘what funds are available to invest’ and ‘how much risk is acceptable.’ Investment planning works within the brackets set by financial planning outputs.
Financial Planning Involves Short-Term and Long-Term Horizons
Financial planning examines both short-term and long-term monetary needs and plans accordingly. It ensures sufficient funds for day-to-day working capital needs like inventory, payrolls, and taxes. At the same time, long-range planning is done for future capex, debt repayment, expansion, etc.
Investment planning generally works on medium to long-term horizons, aligned to investment goals. Specific investments may be short-term like T-bills. But the investment portfolio is structured with a multi-year outlook based on projected cash surplus and growth needs.
In summary, financial planning does not distinguish between short-term and long-term, but invests funds to meet both. Investment planning works mostly on medium to long-term investment goals.
In business, financial planning devises overall strategies for funding needs and financial management. Investment planning fits within this broader plan as a tool to deploy surplus capital into income generating assets at optimal risk levels. Financial plan sets the goals and parameters, investment plan works within these brackets.