Financial Plans and Policies
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Transcript of Financial Plans and Policies
Presented by Jagannath Pati
FINANCIAL PLAN A financial plan is a statement estimating the amount of
capital requirements and determining its composition. It emphasizes on the following aspects-
How much fund is require ?
When the fund is require ?
How the fund should be raised ?
How to use the funds ?
DEFINITIONAccording to Cohen and Robbins Financial planning should :
1. Determine the financial resources require to meet the company’s operating programme.
2. Forecast the extent to which these requirements will be met by internal generation of funds and the extent to which they will be met from external sources.
3. Develop the best plans to obtain the required external funds.4. Establish and maintain a system of financial control governing the
allocation and use of funds.5. Formulate programmes to provide the most effective profit-volume-cost
relationship.6. Analyse the financial results of operations7. Report facts to the top management and make recommendations on future
operations of the firm
OBJECTIVES OF FINANCIAL PLANAdequate FundsFlexibilityLong-term ViewLiquidityOptimum useEconomy
CHARACTERISTICS/PRINCIPLES OF A SOUND FINANCIAL PLANSimplicityBased on clear-cut ObjectivesLess Dependence on Outside SourcesFlexibilitySolvency and LiquidityCostProfitability
CONSIDERATIONS IN FORMULATING FINANCIAL PLANNature of IndustryStanding of the concernFuture PlansAvailability of SourcesGeneral Economic conditionsGovernment Control
STEPS IN FINANCIAL PLANNINGEstablishing Financial ObjectivesFormulating Financial PoliciesFormulating ProceduresProviding for flexibility
ESTIMATING LONG-TERM AND SHORT-TERM FINANCIAL NEEDSThe finance required for a business can be broadly classified
into two main categories :
1.Fixed Capital Requirements, and
2.Working Capital Requirements
ASSESSMENT OF FIXED CAPITAL REQUIREMENTSEstimation of Fixed Assets Requirements Estimation of Intangible Assets
Requirements
FACTORS AFFECTING THE ESTIMATION OF FIXED ASSETS REQUIREMENTS
Internal Factorsa) Nature of Business
b)Size of Business
c) Activities Undertaken by the Enterprise or Scope of Business
d)Production Techniques
e) Mode of acquisition of Fixed assets(Extent of Lease or Hire)
f) Acquisition of old Equipment and Plant
g)Decision as Regards Ancilliary Units
h)Availability of Fixed Assets at Concessional Rates
External Factorsa) International conditions and Economic Outlook
b) Population Trends and its composition
c) Shift in consumer Preferences
d) Competitive factors
e) Shift in technology
f) Government Regulations
ESTIMATION OF INTANGIBLE ASSETS REQUIREMENTS
1. Promotion Expenses2. Incorporation and Organization Expenses3. Cost of Financing4. Initial Operating losses5. Cost of Acquisition of patents, Copyrights,
Goodwill etc.
ASSESSMENT OF WORKING CAPITAL REQUIREMENTS1. Nature or character of business2. Size of business/scale of operations3. Production Policy4. Manufacturing process/Length of Production cycle5. Seasonal variations6. Working capital cycle7. Rate of stock turnover8. Credit Policy9. Business cycles10. Rate of Growth of business11. Earning capacity and dividend policy12. Price level changes
DIFFERENCE BETWEEN PLAN AND POLICYA plan is a set out of actions that will be
undertaken to achieve a goal. Plans give direction to actions and ensure that all actions are moving towards stated goals.
A policy is a set of guiding principles or rules which is framed to influence decisions and actions in implementation of plan that reflects the ultimate behavior of the organization.
FINANCIAL POLICIES Definition :
Criteria describing a corporation's choices regarding its debt/equity mix, capital structure, method of financing investment projects, and hedging decisions with a goal of maximizing the value of the firm to some set of stockholders.
ISSUES RELATED TO FINANCIAL POLICIESThe Financial policies of a corporate mainly are related to the
following issues :
1. Sources of Finance
2. Capital Structure decision
3. Capital Budgeting
4. Dividend Decision
5. Working Capital Management
6. Financial Reporting
7. Financial Analysis
SOURCES OF FINANCE
1. Internal Source Past Accumulated Profit Provisions2. External Source i) Ownership Capital Equity Shares Preference Shares ii) Borrowed Capital Debentures/Bonds Loans and Credits
COST OF RAISING FUND/CAPITALThe cost of capital means cost of obtaining
funds.A decision to invest in a particular project
depend upon the cost of capital of the firm or the cut off rate which is minimum rate of return expected by the investors.
It affects the market price of the shares of the firm.
Higher the risk involved in a firm, higher the cost of capital.
METHODS OF RAISING FUNDSPublic IssueRight IssueOffer of SalePrivate PlacementAppointing UnderwriterBorrowings
CAPITAL STRUCTURE Refers to the kinds of securities and its composition and
proportion.The capital structure may be in following forms :
a) Equity shares only,
b) Equity shares and Preference Shares,
c) Equity shares and Debentures,
d)Equity shares and Preference Shares and Debentures
CAPITAL BUDGETINGCapital Budgeting is the process of making investment
decision in capital expenditures.Its objectives is to increase the profitability, that can be
achieved by the following : a) Increasing revenue b) Reducing costThere are various methods are used for capital budgeting : a) Pay Back Period Method b) Rate of Return Method c) Net Present Value Method d) Internal Rate of Return Method e) Profitability Index Method
FACTORS INFLUENCING CAPITAL BUDGETING DECISIONUrgencyDegree of certaintyIntangible factorsLegal factorsAvailability of fundsFuture earningsObsolescenceResearch & Development projectsCost considerations
DIVIDEND DECISION Dividend refers to that part of profits of the
company which is distributed by the company among its shareholders.
It is the consideration that is given by company for using the funds of investors.
DETERMINANTS OF DIVIDEND POLICY1. Legal Restrictions ( Transfer of profits to Reserve , as per
Companies Act,1956)2. Magnitude and Trend of Earning3. Desire and Type of Shareholders4. Nature of Industry5. Age of the company6. Future Financial Requirements7. Government’s Economic Policy8. Taxation Policy9. Inflation10. Control Objectives11. Requirements of Institutional Investors12. Stability of Dividends13. Liquid resourses
Types of dividend policyStable dividend policyRegular dividend policyIrregular dividend policyNo dividend policy
Working Capital ManagementWorking capital is the amount of funds necessary to cover
the cost of operating the enterprise. For Example -Purchase of raw materials, Payment of
wages and other day to day expenses etc. Types :
1.Permanent or Fixed Working Capital
2.Temporary or Variable Working Capital
Determinants of Working Capital
- Same as Slide 13 -
FINANCIAL REPORTINGFinancial Reporting is nothing but the
presentation of financial facts relating to the performances and activities of the enterprise.
Methods of Reporting: 1. Oral 2. Written 3. Graphic Reporting is made as per the level of
management.
LEVELS OF MANAGEMENT
Reporting
.
The Annual Financial Reporting is made as
per following guidelines Reporting of Banking Companies---RBI Reporting of Insurance Companies ---IRDA Reporting of other Corporate ----AS/IAS
FINANCIAL ANALYSISFinancial Analysis is evaluation and
interpretation of financial data and reports finding out the results thereof.
It says about the problems and its reasons, on the basis of which corrective actions are taken.
It includes Ratio analysis, Funds flow Statements, Cash Flow Statements, Comparative Statements, Standard Costing and Variances, Budgetary Control etc.
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