What are two key elements of the financial planning process? Why is cash planning as vital as profit planning?

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Profit planning and cash planning are the two most critical elements of financial planning. Cash planning is essential in understanding the company’s current liquidity position and anticipating future cash flow needs. It helps to ensure there are enough funds available for operational expenses, debt repayments and financing investments. Profit planning is the opposite. It focuses on maximising profit by setting realistic targets that are based upon expected sales and expenditures, while also minimizing risk associated with each activity.

Cash and profit planning are both important because they both provide different types of insights into an organization’s financial health. A company that has high profits, but low cash may not be able to cover unanticipated expenses or take advantage of growth opportunities. This could threaten their long-term viability. If a company’s cash balance is healthy but profits are low, it could signal problems in pricing strategy or cost management that may be needed to stay competitive.

For long-term success, an organization must maintain a balance between the two. Therefore, organizations should incorporate both elements into their financial strategies so that they create an environment for sustained profitability without compromising liquidity.

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