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The importance of financial planning should be understood by individuals and companies alike since it can assist them in using and preserving money. For governments, financial planning is vital because these entities are responsible for guiding the national and the international economy. Therefore, their choices and decisions matter on a global, as well as local, scale. For government institutions, both long- and short-term strategies are connected to managing money production, determining the money supply, and regulating inflation (Nickels et al. 569). Federal reserve banks regulate the activity of local banks and manage transactions that happen between different regions (Nickels et al. 573). They also can slow down or speed up the economy by selling or buying bonds.
Business owners and their employees should understand how to operate with money as well. This knowledge is what often determines the firm’s survival and prosperity. Here, the main operations involve cash flow management, acquisition of needed resources, and budgeting for short- and long-term goals. For instance, many businesses use the concept of debt to perform day-to-day operations – debt financing lies on the basis of many purchases or companies (Nickels et al. 520). In order to acquire funds, most businesses have to sell goods or services which have to be acquired at a price.
Finally, individuals can pay attention to financial planning in order to maintain control over their money. For people, investment strategies, budgeting, and diversification of funds can be as useful as they are to businesses. Diversification of investments lowers risks and allows one to collect money from different sources (Nickels et al. 544). Budgeting provides a person with an outlook for their expenses and needs.
However, individual investment differs from that of a business because it is closely related to one’s personality and behavior (Baker and Ricciardi 23). Therefore, individuals should remember that they should understand themselves and their goals prior to making any decisions – similarly to how companies create their long- and short-term goals before designing their budgets.
Baker, H. Kent, and Victor Ricciardi. “Understanding Behavioral Aspects of Financial Planning and Investing.” Journal of Financial Planning, vol. 28, no. 3, 2015, pp. 22-26.
Nickels, William G., et al. Understanding Business.11th ed., McGraw-Hill, 2016.