Financial Planning

A financial plan may be defined as predetermining the amount and type of capital required to commence and manage the beginning and functioning effectively of the financial activities of an enterprise.Thus ,it is a process that decides the capital structure of the enterprise.It is formulated so that any obstacles on the way to entrepreneurship may be overcome;thereby leading to success in ventures and financial growth and progress of an enterprise.It mainly consists of following important features-

Estimate of the amount of capital-the financial manager has to make an estimate of capital needed to carry on the business.In doing so,future needs of funds for growth and expansion are taken into account.

Determining the type of securities to be issued-here,sources of funds and amount that will be raised from theses sources are determined,it should be clear as to what part of capital will be borrowed.Proper balance between owned and borrowed capital is required.The sources may be-

1. Issue of equity and preference shares.

2. Issue of debenture.

3. Ploughing back of profir.

4. Public deposits.

5. Bank loans.

6. Institutional finance.

Framing policies for the administration of capital-here,policies are formulated for utilization and administration of capital for instance credit to be granted to customers,using profits for payments of dividends,reinvestment of earnings.

Capital of the enterprise is classified as

Fixed Capital:- It is the amount invested in and blocked in fixed assets such as land and building,plant and machinery,vehicles,furniture and fixtures,tools and equipment,etc.

Working Capital:- It is invested to meet the cost of raw material,manufacturing,selling,distribution and other operational expenses.working capital is the excess of the current assets over current liabilities;and is the result of the operating cycle of the business.

 

Provisions in Financial Planning are as follows:-

Cost of goodwill for acquiring the business.

Promotional costs.

Cost of raw material.

Cost of acquiring raw material.

Cost of manufacturing goods.

Cost of selling and distribution of goods.

Other operating and non-operating costs.

Provision of contingencies.

Factors that influrence Financial Planning are as follows:-

Objectives:- All financial plans are designed so as to achieve the financial aims and objectives of an enterprise;one of which is procurement of funds at the lowest cost and its best utilization.

Nature of the Industry:- Large scale industries will require huge amount of capital,while small scale industries will need lesser amount of capital.Other factors affecting the capital are stability of the industry,value of assets required,growth rate,competition etc.

Present and Future Requirements:- Consideration has to taken of both the present and future needs of an enterprise.Provision should be also made for the various contingencies that may come up in future.

Risk involved in the Investment:- More risk can be undertaken by enterprises financed by equity capital than by those that are financed by loan.

Flexibility:- Fianacial adjustments may be needed due to changing business conditions;thus,the financial plan should be easily adjustable to any change.Diversion of funds into more profitable channels should be allowed;also should allow the raising of more funds at a short notice.

Sources of Available Funds:- New projects should be financed by internal sources and larger ones by external financing .

Independence:- To reduce dependence on outside sources for funds and to avoid outside interference,it is required to reinvest a part of earnings into the business every year.

Government Regulation:- Monetary policies of the government affect the sources and cost of finance.Change in bank rates and credit control too will affect the finance cost.

Future Growth Plan:- Financial plans are made taking into account the future plans and depend upon the size and structure of the growth plan.

Importance of Financial Planning:

Finance is the lifeblood of an enterprise and required for any business to survive, grow and prosper.ignoring this important aspect of a business would tantamount to venturing in the unknown without a lamp or a guide.To make a financial plan-is like preparing for the activities of a business with pre planning, knowing the way where one treads, leading to future prosperity and also preparing for future contingencies.Aspects of importance of financial planning are as follows:

Ensuring sufficient funds:- A financial plan estimates the amount of current and future funds required in different stages and situations and maintains adequate flow of funds.This helps to avoid both the surplus and shortage of funds.In case of inaccuracy of financial plan,shortage of funds may be faced and growth of the business might be restricted.

Effective utilisation of funds:- A good plan allocates funds for various projects in accordance to their significance;due to which wastage is eliminated.It anticipates the period of surplus funds that can be utilized for the expansion of the business.

Ensuring Liquidity:- Financial planning maintains the balance between inflow and outflow of funds and makes it liquid funds available throughout the year.It ensures availability of requisite funds and their optimum utilization.

Ensuring incresed Profitability:- Financial planning is based upon cost-analysis,so profit at higher rates are earned on the basis of a financial plan that is based upon procurement of funds at cheaper rates and makes the best utilization of funds which increases the amount of profit.

Better Financial control:- A financial plan enables the management to exercise effective control over the finances related activities;due to which utilization of funds can be kept in accordance with the planned utilization.If desired results are not achieved,causes of deviation are identified and remedial measures are applied to prevent and remove the causes of failure.

A Financial Plan Would Consist of Following Parameters:

Proforma income statement.

Cash flow projection.

Proforma balance sheet.

Break-even analysis.

Sources and application of funds.

Important paperwork involved while preparing a financial plan-are as follows-

A Profit and Loss Account:- This will go a long way in shaping financial future of the enterprise.

Budgeting:- Budgeting is the process of estimating your income as it is earned and expenditure as it is incurred. it is advisable to always allow a margin for inflation in the forthcoming year.

Cash Flow:-

The cash flow statement sets out what is happening in cash terms.

The Balance Sheet:

The final accounting item is the balance sheet. .

Make sure your documentation is complete and uptodate.

Keeping Accounts:

You must keep a careful record of all the financial transactions concerned.This is important, not only to check whether you are making a profit or loss, but also for the legal requirements involved in paying income tax.