Question

Why is preparing a financial plan so important? How do financial ratios fit into the preparation of a financial plan?

Answer 1

Preparing a financial plan allows us to see the big picture and establish long-term and short-term goals. It helps one to maintain clear objectives and compare the achievements with the targets. It allows the planner to control the costs and monitor them. Ratio analysis is extremely important in financial planning since it allows the evaluators to evaluate the financial health. For instance the Liquidity ratios allows one to assess whether one would have sufficient liquidity if the plan is implemented. The savings ratio allows one to assess how much money is being saved over a period of time considering the financial plan. Moreover the financial plan can be made keeping in mind the different ratios required to be maintained.