Financial Planning Planning is the key to the financial manager's success. No business whether small or large, canPlanning is the key to the financial manager's success. No business whether small or large, can

be successful until and unless it has prepared sound financial plan. The planning process is anbe successful until and unless it has prepared sound financial plan. The planning process is an integral part of the financial manager's job. It is needed both in terms of long-term financing asintegral part of the financial manager's job. It is needed both in terms of long-term financing as well as in forecasting the short-term needs of funds. The Long-term aspect of financial plan iswell as in forecasting the short-term needs of funds. The Long-term aspect of financial plan is concerned with the arrangement of the financial pattern while short-term financial planning givesconcerned with the arrangement of the financial pattern while short-term financial planning gives emphasis on cash forecasting. emphasis on cash forecasting.

According to J. H. Bonneville, "The financial plan of a corporation has a two-fold aspect; it refersAccording to J. H. Bonneville, "The financial plan of a corporation has a two-fold aspect; it refers not only to the capital structure of the corporation but also to the financial policies which thenot only to the capital structure of the corporation but also to the financial policies which the corporation has adopted or intends to adopt." Thus, financial planning includes two things -corporation has adopted or intends to adopt." Thus, financial planning includes two things - capital structure and financial policies. capital structure and financial policies.

According to Solomon and Pringle, “Financial planning may refer to the process of determiningAccording to Solomon and Pringle, “Financial planning may refer to the process of determining the financial requirements and financial structure necessary to support a given set of plans inthe financial requirements and financial structure necessary to support a given set of plans in other areas". It states – other areas". It states –

(i) the quantum of finance needed, (i) the quantum of finance needed, (ii) the pattern of financing, i.e. the form and proportion of various securities and(ii) the pattern of financing, i.e. the form and proportion of various securities and (iii) the policies to be pursued for the floatation of various securities, particularly the time of (iii) the policies to be pursued for the floatation of various securities, particularly the time of flotation.flotation.

Objectives of Financial Planning Determination of Financial ObjectivesDetermination of Financial Objectives - The financial objective of a firm may be divided into - The financial objective of a firm may be divided into

short-term objectives as well as long-term objectives. The short-term objectives may be marketshort-term objectives as well as long-term objectives. The short-term objectives may be market standing, innovation or expansion, maintaining the liquidity of funds, proper maintenance ofstanding, innovation or expansion, maintaining the liquidity of funds, proper maintenance of sales etc. On the other hand, the long-term objective of financial planning is to secure andsales etc. On the other hand, the long-term objective of financial planning is to secure and employ resources in the amount and proportion necessary to increase the efficiency of theemploy resources in the amount and proportion necessary to increase the efficiency of the remaining factors of production.remaining factors of production.

Determination of Financial Policies -Determination of Financial Policies - It involves the evolution of such policies that act as guide It involves the evolution of such policies that act as guide to the firm in achieving its primary objectives. Some important policies may be regardingto the firm in achieving its primary objectives. Some important policies may be regarding capitalization, capital structure, the policy of trading on equity, the policy of fixed assetscapitalization, capital structure, the policy of trading on equity, the policy of fixed assets management, the policy of dividend distribution and the policy of working capital management,management, the policy of dividend distribution and the policy of working capital management, etc.etc.

Determination of Financial ProceduresDetermination of Financial Procedures - The next step in the process of financial planning is - The next step in the process of financial planning is to develop procedures that aid in the achievement of the firm's goals and objectives. Theto develop procedures that aid in the achievement of the firm's goals and objectives. The financial executives decide about the control system. He should develop standards offinancial executives decide about the control system. He should develop standards of performance & evaluate the performance and then compare the activities with the standards.performance & evaluate the performance and then compare the activities with the standards. Manager will have to employ the technique of capital budgeting, budgetary control, standardManager will have to employ the technique of capital budgeting, budgetary control, standard costing, financial forecasting in the process of financial planning.costing, financial forecasting in the process of financial planning.

Provision of Flexibility Provision of Flexibility : Financial planning should ensure proper flexibility in objective, : Financial planning should ensure proper flexibility in objective, policies and procedures so as to adjust it according to changing economic conditions. Thepolicies and procedures so as to adjust it according to changing economic conditions. The objective is to make use of new opportunities for the benefit of the concern that may arise inobjective is to make use of new opportunities for the benefit of the concern that may arise in future.future.

Characteristics of a Sound Financial Plan Simplicity :Simplicity : In a financing management, the simplicity should always be observed. The financial In a financing management, the simplicity should always be observed. The financial

plan should be simple as well as practical. A simple capital structure is always easy to manage.plan should be simple as well as practical. A simple capital structure is always easy to manage. But for simplicity the efficiency should not be given up. But for simplicity the efficiency should not be given up.

Foresight :Foresight : Vision and foresight are also required in planning. The scope and scale of Vision and foresight are also required in planning. The scope and scale of operations should also be accurately determined as the efficiency of financial plan is to a greatoperations should also be accurately determined as the efficiency of financial plan is to a great extent based upon their accurate determination.extent based upon their accurate determination.

Balancing of costs and risks :Balancing of costs and risks : Costs must be balanced with risks so as to protect the owners Costs must be balanced with risks so as to protect the owners against the probable loss of control or loss of business.against the probable loss of control or loss of business.

Minimizing Costs :Minimizing Costs : Cost of raising funds should be minimum. When funds are in surplus, Cost of raising funds should be minimum. When funds are in surplus, interest bearing securities should be returned to reduce fixed burden.interest bearing securities should be returned to reduce fixed burden.

Flexibility :Flexibility : In a financing programme, flexibility for future should also be allowed. A rigid In a financing programme, flexibility for future should also be allowed. A rigid financial structure can never be helpful in realizing the goals of a business. Under suchfinancial structure can never be helpful in realizing the goals of a business. Under such circumstances, the financial plan becomes a burden rather than a tool. So the element ofcircumstances, the financial plan becomes a burden rather than a tool. So the element of elasticity is indispensable in a dynamic financial plan to cope with the expansion and alteration.elasticity is indispensable in a dynamic financial plan to cope with the expansion and alteration.

Liquidity :Liquidity : A sound financial plan should also ensure liquidity in funds. Financial needs and A sound financial plan should also ensure liquidity in funds. Financial needs and repayment schedules should be budgeted. A proper cash ratio should also be maintained. Thisrepayment schedules should be budgeted. A proper cash ratio should also be maintained. This cash ratio is determined by the size of corporation, its age, credits standing, stage of businesscash ratio is determined by the size of corporation, its age, credits standing, stage of business cycle and the nature of its business.cycle and the nature of its business.

Utility :Utility : A sound financial plan should always aim at the best possible and working capital A sound financial plan should always aim at the best possible and working capital should be maintained for using the capital effectively. Cyclical increases in the need for fundsshould be maintained for using the capital effectively. Cyclical increases in the need for funds should be financed from intermediate term sources. In the same way, seasonal peak needs forshould be financed from intermediate term sources. In the same way, seasonal peak needs for funds may properly be met by increasing current liabilities.funds may properly be met by increasing current liabilities.

Completeness:Completeness: A financial plan will be useless if it is not able to meet the future A financial plan will be useless if it is not able to meet the future contingencies. Promoters must make some provision for unseen events so that they may be contingencies. Promoters must make some provision for unseen events so that they may be provided for either from internal resources or by raising further capital. A financial plan provided for either from internal resources or by raising further capital. A financial plan possessing the above said characteristics helps the management in a number of ways possessing the above said characteristics helps the management in a number of ways :: Successful promotion of a new enterprise ;Successful promotion of a new enterprise ; Successful operation of an enterprise;Successful operation of an enterprise; Successful expansion of the business;Successful expansion of the business; Proper administration of capital; andProper administration of capital; and Efficient control and management of cash flows.Efficient control and management of cash flows.

Need and Importance of Financial Planning The need for financial planning in a concern can not be avoided. As a short-term aspect ofThe need for financial planning in a concern can not be avoided. As a short-term aspect of

financial planning, it ensures the balanced flow of funds so that the firm may be able to meet itsfinancial planning, it ensures the balanced flow of funds so that the firm may be able to meet its commitments. As a long-term aspect of planning, it becomes a tool of efficient use of financialcommitments. As a long-term aspect of planning, it becomes a tool of efficient use of financial resources. The need for financial planning arises to ensure the following:resources. The need for financial planning arises to ensure the following:

Availability of sufficient cash for meeting expenses, emergencies andAvailability of sufficient cash for meeting expenses, emergencies and contingencies.contingencies.

To maintain the necessary liquidity throughout the year, To maintain the necessary liquidity throughout the year, To indicate the points of time where funds will be required and how much.To indicate the points of time where funds will be required and how much. To indicate the surplus resources available for expansion or externalTo indicate the surplus resources available for expansion or external

investments.investments. To provide ahead for any more funds, if required, To provide ahead for any more funds, if required,

To increase the confidence in the minds of the suppliers of funds by adopting suitableTo increase the confidence in the minds of the suppliers of funds by adopting suitable financial policies.financial policies.

Factors to be Considered in Formulating a Financial Plan Nature of Business:Nature of Business: The nature of business plays a decisive role in drafting of a financial plan. The nature of business plays a decisive role in drafting of a financial plan.

A capital intensive industry like cement, paper or fertilizer requires more capital. In addition to it,A capital intensive industry like cement, paper or fertilizer requires more capital. In addition to it, the stability and regularity of income, future prospects of growth, the fluctuation in the demand ofthe stability and regularity of income, future prospects of growth, the fluctuation in the demand of the product being manufactured by the firm, the extern of automation, etc. play dominant role inthe product being manufactured by the firm, the extern of automation, etc. play dominant role in determining the capital needs as well as its capital structure.determining the capital needs as well as its capital structure.

Degree of Risk:Degree of Risk: The risk involved in the business should also be discussed while planning the The risk involved in the business should also be discussed while planning the sources of funds. The business having more risks should issue ownership securities only whilesources of funds. The business having more risks should issue ownership securities only while enterprises with stable earnings expectation can take advantage of trading on equity.enterprises with stable earnings expectation can take advantage of trading on equity.

Status of Unit:Status of Unit: This step includes age, size, market area, scope and nature of the field, the This step includes age, size, market area, scope and nature of the field, the reputation of management and credit rating in the market etc.reputation of management and credit rating in the market etc.

Appraisal of alternative Source of Finance:Appraisal of alternative Source of Finance: A study of the potential suppliers of funds has to A study of the potential suppliers of funds has to be made and only then a firm can expect to obtain funds suited to its advantage.be made and only then a firm can expect to obtain funds suited to its advantage.

Attitude of Management:Attitude of Management: The attitude of management and management policies regarding The attitude of management and management policies regarding trading on equity, capital gearing ratio, the desire and extent to conserve the control oftrading on equity, capital gearing ratio, the desire and extent to conserve the control of enterprise, etc., affect in no small amount the pattern of financing.enterprise, etc., affect in no small amount the pattern of financing.