Financial & Profit Planning

Anamika S

FINANCIAL PLANNING

Financial planning indicates a firm’s growth, performance investments and requirements of funds during a given period of time, usually three to five years. It involves the preparation of projected or proforma profit and loss account, balance sheet and funds flow statement.

Objectives of Financial PlanningFinancial Planning has got many objectives to look forward to:

Determining capital requirements- This will depend upon factors like cost of current and fixed assets, promotional expenses and long- range planning. Capital requirements have to be looked with both aspects: short- term and long- term requirements.

Determining capital structure- The capital structure is the composition of capital, i.e., the relative kind and proportion of capital required in the business. This includes decisions of debt- equity ratio- both short-term and long- term.

Framing financial policies with regards to cash control, lending, borrowings, etc.

A finance manager ensures that the scarce financial resources are maximally utilized in the best possible manner at least cost in order to get maximum returns on investment.

Importance of Financial PlanningFinancial Planning is process of framing objectives, policies, procedures, programmes and budgets regarding the financial activities of a concern. The importance can be outlined as-

Adequate funds have to be ensured.

Financial Planning helps in ensuring a reasonable balance between outflow and inflow of funds so that stability is maintained.

Financial Planning ensures that the suppliers of funds are easily investing in companies which exercise financial planning.

Financial Planning helps in making growth and expansion programmes which helps in long-run survival of the company.

Financial Planning reduces uncertainties with regards to changing market trends which can be faced easily through enough funds.

Financial Planning helps in reducing the uncertainties which can be a hindrance to growth of the company. This helps in ensuring stability an d profitability in concern.

Basic financial planning

Need For Profit Planning

Changes In Company Financial Position

Financial Structure Planning For Profit

Profit Planning“…a series of prescribed steps to be taken to ensure that a profit will be

made.”Budgeting or profit planning is a detailed plan of action during a period of one year or less. Both financial planning and profit planning help a firm’s financial manager to regulate flows of funds which is his primary concern.

Profit planning is a disciplined method whereby the environment encroaching on an organization are analyzed, the available resources and internal competence identified, agreed objectives established and plans made to achieve them.Profit planning is largely routine and covers definite time span.Profit planning and strategy formulisation are complementary .Profit planning is often reasonable substitute for fair and imagination need of the entrepreneurs.

Need for Profit PlanningTo improve management performance.

To ensure that the organization as a whole pulls in right direction.

To ensure that the objectives should be set which will stretch but not overwhelm managers. To encourage strict evaluation of managers performance in monetary terms.

To run company in more demanding way.

Choosing budget period The annual operating budget may be

divided into quarterly or monthly budgetsFirst Quarter

Second

Quarter

Third

Quarter

Fourth

Quarter

Budgets provide a means of communicating management’s plans through the organization.

Budgets force managers to think about and plan for the future. In the absence of the necessity to prepare a budget, many mangers would spend all of their time dealing with daily emergencies.

The budgeting process provides a means of allocating resources to those parts of the organization where they can be used most effectively

The budgeting process can uncover many potential bottlenecks before they occur .

Budgets coordinates the activities of the entire organization by integrating the plans of the various parts of the organization. Budgeting helps to ensure that everyone in the organization is pulling in the same direction.

Budgets provide goals and objectives that can serve as benchmarks for evaluating subsequent performance.

Advantages of budgeting

 Limitations of Budgeting:Whilst budgets may be an essential part of any marketing activity they do have a number of disadvantages, particularly in perception terms.

Budgets can be seen as pressure devices imposed by management, thus resulting in:a) bad labor relations

b) b) inaccurate record-keeping. Departmental conflict arises due to:

a) disputes over resource allocation b) departments blaming each other if targets are not attained.

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CLASSIFICATION OF BUDGETS

ACCORDING TO ACCORDING TO ACCORDING TO TIME FUNCTION FLEXIBILITY

1. Long term budget 1. Sales budget 1. Fixed budget2. Short term budget 2. Production budget 2. Flexible budget3. Current budget 3. Cost of Production budget4. Rolling budget 4. Purchase budget 5. Personnel budget 6. R & D budget 7. Capital Expenditure budget 8. Cash budget 9. Master budget

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1. SALES BUDGET:Sales budget is the most important budget based on which all the other budgets are built up. This budget is a forecast of quantities and values of sales to be achieved in a budget period.

2. PRODUCTION BUDGET: Production budget involves planning the level of

production which in turn involves the answer to the following questions:a. What is to be produced?b. When is it to be produced?c. How is it to be produced?d. Where is it to be produced?

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3. COST OF PRODUCTION BUDGET: This budget is an estimate of cost of output planned for a budget period and may be classified into –

• Material Cost Budget• Labour Cost Budget• Overhead Cost Budget

4. PURCHASE BUDGET: This budget provides information about the materials to be acquired from the market during the budget period.

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5. PERSONNEL BUDGET: This budget gives an estimate of the requirements of direct labour essential to meet the production target. This budget may be classified into – a. Labour requirement budget b. Labour recruitment budget6. RESEARCH AND DEVELOPMENT BUDGET: This budget provides an estimate of expenditure to be incurred on R & D during the budget period. A R&D budget is prepared taking into consideration the research projects in hand and new R & D projects to be taken up.

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7. CAPITAL EXPENDITURE BUDGET: This is an important budget providing for acquisition of assets necessitated by the following factors: a. Replacement of existing assets. b. Purchase of additional assets to meet increased production c. Installation of improved type of machinery to reduce costs.8. CASH BUDGET: This budget gives an estimate of the anticipated receipts and payments of cash during the budget period. Cash budget makes the provision for minimum cash balance to be maintained at all times.

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9. MASTER BUDGET:CIMA defines this budget as “ The summary budget incorporating its component functional budget and which is finally approved, adopted and employed”.Thus master budget is a summary of all functional budgets in capsule form available in one report. 10. FIXED BUDGET:This is defined as a budget which is designed to remain unchanged irrespective of the volume of output or turnover attained.This budget will, therefore, be useful only when the actual level of activity corresponds to the budgeted level of activity.

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11. ZERO BASE BUDGETING:The zero base budgeting is not based on the incremental approach and previous figures are not adopted as the base.

Zero is taken as the base and a budget is developed on the basis of likely activities for the future period.

A unique feature of ZBB is that it tries to help management answer the question, “Suppose we are to start our business from scratch, on what activities would we spent out money and to what activities would we give the highest priority?”

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12. FLEXIBLE BUDGET:CIMA defines this budget as one “ which, by recognising the difference in behaviour between fixed and variable costs in relation to fluctuations in output, turnover or other variable factors such as number of employees, is designed to change appropriately with such fluctuations”.

13. PERFORMANCE BUDGETING:These days budgets are established in such a way so that each item of expenditure is related to specific responsibility centre and is closely linked with the performance of that standard.

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14. RESPONSIBILITY ACCOUNTING:Responsibility accounting fixes responsibility for cost control purposes by establishing responsibility centres namely – a. Cost centre b. Profit centre c. Investment centrePrinciples of responsibility accounting are as follows: 1. Fixation of targets for each responsibility centre 2. Actual performance is compared with the target 3. The variances therein are analyzed so as to fix the responsibility of centres. 4. Taking corrective action.

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