Financial planning enables the firm to attain the already set objectives as well as allowing a smooth flow of operations within the firm. For a firm to effectively strategize itself in the market, a well-coordinated and controlled financial plan should be put in place. The plan comprises various processes which include the preparation of financial statements, debt strategy, investments and budgeting. For a firm to effectively utilize the tool in ensuring competitiveness, qualified and competent personnel should coordinate the various processes. This paper seeks to analyze the role of financial planning and leverage use in enhancing competitiveness in the market.
The role of financial planning is to ensure efficient utilization of the available resources towards the attainment of the firm’s objectives. The financial planning, therefore, assists the firm to have a predetermined plan on how to utilize the available resources and gives directions on how the operations of the investment should be undertaken. In addition, it establishes control measures that are aimed at checking the viability of the undertakings (Warren & Reeve, 2007, p.933). For instance, the preparation of financial statements calls for accountability within the firms. This is more so since the accounting records require supportive documents such as receipts. The financial statements evaluation assists the firm to determine the most profitable area which further leads to specialization. Through specialization, the firm directs more of its resources in the area in which it has a comparative advantage over the others. The move, therefore, enhances competitiveness in the market.
Financial leverage is the use of external resources by the firm in its expansion process. The leveraging process thus increases the financial capacity of a firm enhancing it to maintain its productions and competitiveness in the market (Helfert, 2001, p.203). A firm can effectively use external borrowings in purchasing capital items which it could not afford otherwise. The capital investments, therefore, enhance quality and mass production within a firm which lowers the overall production costs of the firm. Due to the reduced production cost, the firm can opt to lower the prices of its products slightly below other firms in the same industry. The low price offered in the market will trigger a similar reaction to the other firms as each try to win a bigger share in the market.
A firm should target both internal and external resources when establishing its financial plan. The internal resources, if adequate, are the best to use since they have fewer conditions attached to them. In an actual sense, the internally generated amount attracts very little interest and its repayment period is usually longer. On the other hand, the external resources charge higher interest rates on the advanced principal amount. The amount is also bound to be repaid within a shorter time. However, the firm can expand and increase its market share using the two resources. If properly planned, the firm can advance its productions from a small scale to a large scale and thus enhance its competitiveness in the market.
Financial planning not only coordinates the firm’s financial operations but also enhances competitiveness in the market. This is because an excellent financial plan can enhance continuous growth in a firm. Financial leverage can also be used by the firm to ensure that it gains a comparative advantage in the market. The use of leverage finances to purchase mass production machines can be used to lower the production costs and also increase the production volume in a given firm. The low production cost can translate to better products marketing in the firm.
References
Helfert, E.A. (2001). Financial analysis: tools and techniques: a guide for managers. New York, McGraw-Hill Companies. Web.
Warren, C.S. & Reeve, J. M. (2007). Financial & Managerial Accounting. Boulevard, Rob Dewey. Web.