Financial Planning According to Gitman

Lawrence J. Gitman, in his widely-used finance textbooks, presents financial planning as a crucial component of sound financial management, both for individuals and businesses. His approach emphasizes a structured, goal-oriented process designed to achieve financial security and optimize resource allocation.

Key Elements of Gitman’s Financial Planning Framework

Gitman’s framework encompasses several key stages, each building upon the previous one:

• Defining Financial Goals: This is the foundation. Goals should be specific, measurable, achievable, relevant, and time-bound (SMART). Examples include saving for retirement, purchasing a home, or funding a child’s education. Identifying short-term (less than a year), intermediate-term (1-5 years), and long-term (over 5 years) goals is vital. Prioritizing goals based on importance and urgency is also essential.
• Developing Financial Statements: Creating a personal or business balance sheet and income statement provides a snapshot of current financial health. The balance sheet outlines assets (what you own), liabilities (what you owe), and net worth (assets minus liabilities). The income statement tracks income and expenses over a specific period. These statements serve as benchmarks for tracking progress and identifying areas for improvement.
• Analyzing the Current Financial Situation: This involves thoroughly evaluating the financial statements to understand income, expenses, debt levels, and investment holdings. Ratio analysis, comparing financial ratios to industry averages or personal benchmarks, can pinpoint areas of strength and weakness. For example, a high debt-to-income ratio might indicate the need to reduce debt, while a low savings rate suggests increasing savings efforts.
• Developing a Financial Plan: The financial plan is a roadmap for achieving the defined goals. It includes strategies for budgeting, managing debt, saving, investing, and insurance. Gitman stresses the importance of considering different investment options and their associated risks and returns. Diversification, spreading investments across various asset classes, is a key risk management strategy. The plan should also address contingency planning for unexpected events, such as job loss or medical emergencies.
• Implementing the Plan: Putting the financial plan into action requires discipline and commitment. This involves consistently tracking income and expenses, making regular contributions to savings and investment accounts, and managing debt responsibly. Automating savings and bill payments can help ensure consistent implementation.
• Monitoring and Revising the Plan: Financial planning is not a one-time event. The plan should be reviewed and updated regularly, at least annually, or whenever significant life changes occur, such as a marriage, birth of a child, or change in employment. Economic conditions, market fluctuations, and personal circumstances can all necessitate adjustments to the plan. Flexibility is essential for long-term financial success.

The Importance of Ethical Considerations

Gitman emphasizes the importance of ethical considerations in financial planning. Financial professionals have a responsibility to act in the best interests of their clients, providing unbiased advice and avoiding conflicts of interest. Transparency and full disclosure are crucial for building trust and ensuring that clients are making informed decisions.

Conclusion

Following Gitman’s framework provides a solid foundation for effective financial planning. By systematically defining goals, analyzing the current situation, developing a comprehensive plan, implementing it diligently, and monitoring and revising it regularly, individuals and businesses can increase their chances of achieving their financial objectives and securing their financial future.