Financial Planning Tools and Techniques

Financial planning requires planning for your financial future. The general idea behind financial planning includes managing debt, saving for retirement, charitable giving, taxes, the cost of college education, and other frequently encountered financial situations. However, one can get overwhelmed if one are not prepared with the tools to get started. The Financial Planning Tools and Techniques post is also helpful in understanding the complexity of financial planning. It provides you with tools to understand what each technique involves so that it can help you establish a plan.

Financial Planning Tools are the instruments used to meet current and future financial goals through a sound financial plan.  

Financial Planning Tools generally fall into two categories:
(a.) Wealth-Growing Tools
(b.) Protection Tools

Wealth-Growing Tools 

The wealth-growing financial planning tools are those that help you grow and compound the value of your money over time.  As such, these tools are best suited to meet financial goals that require big cash outlays such as buying a car, buying a house, preparing for your wedding, or preparing for retirement.

Protection Tools

The Protection tools of financial planning are those whose main objectives are to serve as a robust cushion of support to you and your family’s financial state should death, devastation, accident, illness, or disability happen to the person who brings in the money and income for the family.  These protection tools provide either a lump sum or partial cash infusion to you or your family in the event of the occurrence of one or all of those circumstances.

Since major disruptive events are largely unpredictable, it is wise to use these protection tools in conjunction with the wealth-growing tools mentioned above for a truly comprehensive financial plan to work well for you.


Business Plan

A solid business plan is the first tool that should be used in financial planning: It is the quintessential financial planning tool example. Business plans list every critical aspect of a company. The plan begins with a short overview of the entire plan and a history of the company. The second part of the plan analyzes the market. It provides an industry description, identifies the target market and all strengths, weaknesses, threats and opportunities.

The remaining areas of the business plan describe the company and how it will be managed. They include information regarding marketing strategies, what products or services are offered, and how the company’s expenses will be financed.

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Budget and Cost Projection

One key tool for financial planning is to prepare a budget and project costs. To prepare a budget, you need to formulate a reasonable sales projection, factoring in peak and off-seasons. The budget will determine how much cash is available to the business. New businesses will include funding obtained through personal financing, bank loans, investments and other sources. Once money forecast is available, business owners can look at the different categories of expenses and determine how much to spend in each category, according to Indeed. Most budgets are works in progress and are continually revised.

Break-Even Analysis

A break-even analysis is an essential tool for financial planning. It predicts what gross sales volume the business must achieve to cover its expenses, says Corporate Finance Institute. All sales beyond this point are profits. For new businesses, owners should assess their early predictions and determine how accurate they were. Adjustments might be needed for the next financial period. Mature businesses benefit from this tool as well because they can check their current break-even point and look for ways to lower it and increase profits.

Financial Statements

Financial statements contain information about the company’s assets, liabilities, profits and losses, making them conventional financial tools for business. Understanding and preparing accurate financial statements is important to the success of a small business. The two most important types of financial statements are the balance sheet and the income statement.

The balance sheet lists assets, liabilities and equity. The income statement lists revenues and expenses. Revenues minus expenses equals net income. Analyzing the relationship between the balance sheet and the income statement can pinpoint strengths, weaknesses and opportunities. Financial statements also help business owners prepare tax returns and loan applications.


1. Common-Size Statements:

The common-size financial statements are those in which figures reported are converted into percentage to some common base. Common-size balance sheet and income statement are prepared for vertical analysis and interpretation is done for identification of causes for changes taken place over a period of time.

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The items in the financial statements are presented as percentages or ratios to total of items and a common base for comparison is provided. Each percentage shows the relation of the individual item to its respective total.

2. Trend Ratios:

Trend ratios are the index numbers of the movements of financial figures reported in the financial statements for more than one accounting period.

It is a statistical technique adopted to reveal the trend of financial items which are used in analysis of behaviour of financial items and for preparation of projected financial statements. In preparation of trend ratios, the base accounting period should be selected and the financial figures of that base period should be given the index number of 100.

The trend ratios are calculated for the subsequent accounting periods taking the base period trend ratio as 100. The trend percentages are calculated for select major financial items in the financial statements to arrive at the conclusions for important changes.

3. Funds Flow Analysis:

The funds flow analysis gives the details of changes in financial position of a concern between two balance sheet dates. It is based on net working capital concept which is termed as ‘fund’. The funds flow statement contains the details of financial resources which have become available during the accounting period and the ways in which those resources have been used up.

The flow of funds refers to movement of funds which cause a change in working capital of the organization. The net increase or decrease in working capital will be further analyzed through preparation of Statement of changes in working capital position. Funds flow statement is a parameter for testing of the effective use of working capital. The analysis is particularly useful for long range planning where projections of liquid resources are vital.

4. Cash-Flow Analysis:

The preparation of cash-flow statements has been made mandatory. A statement of cash-flow reports the cash receipts and cash payments and net changes in cash resulting from operating, investing and financing activities of an enterprise during the period.

The cash-flow statement reconciles the opening and closing balances of cash and cash equivalents for the reported accounting period. It reports a net cash inflow or outflow for each activity and for the overall business.

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5. Ratio Analysis:

Ratio analysis is used as an important tool in analysis of financial statements. Ratios are used as an index or yardstick for evaluating the financial position and performance of a firm. Ratio is the expression of one figure in terms of another. It is the expression of the relationship between mutually independent figures. Ratio analysis used financial report and data and summarizes the key relationship in order to appraise financial performance.

Components of Financial Planning

1. Cash flow analysis

One of the most critical aspects of financial planning is understanding your cash flow and the connection between your current assets and debts. If you spend more than you make, it will be impossible to reach the goals you’ve set.

2. Risk management

Another essential part of financial planning is risk management. How you deal with life situations, for example, what are you going to do if you become medically unable to perform your work or physically disabled to deal with work obligations should also be included in your plan.

3. Taxation planning

To protect your investment returns, tax management is essential. There are numerous tax-reduction methods and strategies for wealth creation options and tax-free income, which can be achieved thanks to tax planning.

4. Retirement planning

Retirement planning helps you understand when you want to retire. The plan should include your lifestyle and income objectives after your retirement.

It is also important to understand how Government Entitlements can fit in to your retirement strategy and if there are any ways of boosting these further.

5. Investment management

There are many different vehicles or strategies to use to invest any surplus income or funds you may have and each have different taxation implications or risk and return characteristics which is why it is important to receive advice.


We are promoting Financial Planning software which is applicable for practicing brokers, financial analysts, stock advisors, stock brokers, financial controllers and all professionals who are involved in investment or money management. With the right financial tools and techniques, you’ll be able to work toward short and long-term financial goals.

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