Financial Planning

• Meaning • Objectives and Principles of sound financial

planning • Long term and short term financial plan • Factors affecting financial plan

Meaning Financial planning is deciding in advance the course or line of action for the future in respect of the financial management of the firm. Financial plan is statement estimating the amount of capital and determining its composition. The quantum of funds needed will depend upon the asset requirements of the business. It highlights on the pattern of financing. It spells out the policies and the time of floatation of various corporate securities.

Definition• According to Cohen and Robbins, Financial

planning should:1.Determine the financial resources required to meet

the company’s operating programme2.Forecast the extent to which these requirements

will be met from external sources;3.Develop the best plans to obtain the required

external funds4.Estblish and maintain a system of financial control

governing the allocation and use of funds.5.Formulate programmes to provide the most

effective CVP Relationship.

Contd..

• Analyse he financial results of the operation • Report facts to the top management and

make recommendations on future operations of the firm.

Principles of a sound financial plan• Adequate funds • Balancing the cost and risks • Flexibility • Simplicity• Long-Term view• Liquidity • Optimum use • Economy• Based on clear cut objectives • Less dependence on outside resources• Solvency • Profitability

Objectives of a financial plan• To determine the financial resources required to

meet the company’s operating programme• To forecast the extent to which these requirements

will be met by internal generation of funds and to what extent they will be met from external sources

• To establish and to maintain a system of financial controls governing the allocation and the use of funds

• To formulate programs to provide the most effective CVP relationship

• To analyse the financial results of operations.• To report the facts to the top management and to

make recommendations on future operations of the firm.

Factors affecting financial plan• Costs • Liquidity • Risk• Repayment date • Claim on assets • Control • Seasonality • Requirements • Need for additional funds • Fixed Assets needs

• Current asset needs • Gestation period • Margin of safety • Initial promotional cost • Distribution cost

Estimating long term and short term financial needs

• Fixed Capital requirements • Working capital requirements Assessment of fixed Capital requirements:• Estimating fixed assets requirement • Estimating intangible asset requirement

Factors affecting the estimations of fixed assets requirements

• Internal factors1. Nature of business 2. Size of business 3. Activities undertaken by the

enterprise or scope of business 4. Production techniques5. Mode of acquisition of fixed

assets 6. Acquisition of old equipment or

plants 7. Decision as regards ancilliary

units 8. Availability of fixed assets at

concessional rates

• External factors1. International conditions and

economical outlook 2. Population trends and its

composition 3. Shift in consumer preferences 4. Competitive factors 5. Shift in technology 6. Government regulations

Estimation of intangible assets requirements

• Promotion expenses • Incorporation and organisation expenses • Cost of financing • Initial operating losses• Cost of acquisition of patents, copyrights,

goodwill etc., Estimating Working capital( Discussed in next chapter in detail)

Limitations of Financial Planning

• Difficulty in forecasting • Difficulty in change • Problem of co-ordination • Rapid changes