Contents

Financial Planning

Capital Structure

Working capital

Fixed capital

Financial planning

Financial PlanningFinancial Management

Financial planning is essentially preparation of a financial blueprint of an organisation’s future operations. The objective of financial planning is to ensure that enough funds are available at right time.

Objectives of Financial Planning

Financial Management

Financial planning aims to achieve twin objectives of ensuring the proper availability of finance and at the same time it also tries to ensure that the firm does not raise resources unnecessarily.

Importance of Financial Planning

Financial Management

It aims at enabling the company to tackle the uncertainty in respect of the availability and timing of the funds and helps in smooth functioning of an organisation.

Forecasting the futureImportance of

Financial Planning

It tries to forecast what may happen in future under different business situations. By doing so, it helps the firms to face the eventual situation in a better way.

Evaluation of PerformanceImportance of

Financial Planning

By spelling out detailed objectives for various business segments, it makes the evaluation of actual performance easier.

It helps in avoiding business shocks and surprises and helps the company in preparing for the future.

Preparing for the futureImportance of

Financial Planning

Coordinating Business Functions

Importance of Financial Planning

If helps in co-ordinating various business functions e.g., sales and production functions, by providing clear policies and procedures.

Detailed plans of action prepared under financial planning reduce waste, duplication of efforts, and gaps in planning.

Reduction of waste and duplication

Importance of Financial Planning

It provides a link between investment and financing decisions on a continuous basis. It also links the past with future.

Facilitate Linking process Importance of

Financial Planning

Financial Planning

future

Past

Investment

Decisions

Financing Decisions

Capital StructureFinancial Management

On the basis of ownership, the sources of business finance can be broadly classified into two categories viz., ‘owners funds’ and ‘borrowed funds’. Capital structure refers to the mix between owners and borrowed funds. These shall be referred as equity and debt in the subsequent text.

Owned Cap-ital67%

Borrowed Capital

33%

Capital Structure

Capital StructureFinancial Management

While deciding the ratio between debt and equity in the capital structure, the management has to consider various factors influencing it. They are discussed below.

Size of projected cash flows must be considered before borrowing. Cash flows must not only cover fixed cash payment obligations but there must be sufficient buffer also.

Cash flow positionFactors Influencing Capital Structure

If the stock markets are bullish, equity shares are more easily sold even at a higher price. Use of equity is often preferred by companies in such a situation.

Stock market conditionsFactors Influencing Capital Structure

Return on Investment(RoI)Factors Influencing Capital Structure

If the R O I of the company is higher, it can choose to use trading on equity to increase its EPS, i.e., its ability to use debt is greater.

Cost Benefits

Beneficial Return

Financial Non-Financial

Cost of DebtFactors Influencing Capital Structure

A firm’s ability to borrow at a lower rate increases its capacity to employ higher debt. Thus, more debt can be used if debt can be raised at a lower rate.

Floatation costFactors Influencing Capital Structure

Process of raising resources also involves some cost. Where the floatation cost involved is high, debt capital may be desirable.

Since interest is a deductible expense, cost of debt is affected by the tax rate. If the tax rate is high, debt will be more attractive.

Tax RateFactors Influencing Capital Structure