Financial Planning
Financial Planning
This is primarily a decision making function. In the case of majority to the firms, financial managers participate in setting the long run plans. While participating in long-run planning a financial manager. Is expected to take into account an overall broad view of the operations of his firm. The major parts of the long-range plans of a firm with which the financial manager may be concerned are :
(i) Expansions programmes (particularly plant expansion).
(ii) Major expenditures involving large cash outflows.
(iii) Renewals and replacements of machinery and equipments.
The financial planning functions involves three basic steps viz. (a) determining financial objectives. both short-term and long term. And (b) formulating financial policies (e)making adjustments and readjustments.
The basic financial objective of a firm should be to obtain and use capital resources in the amount proportion which facilitate increase in the efficiency of other factors of production.
It may be said that the ideological financial objectives is the perfect synchronization of inflows of funds with the outflows of funds (i.e. full employment of funds at all times). But this is not a practical objective; it is not possible to achieve this objective. At the best, a financial manager may be able to strike a balance between inflows and outflows of funds for a short time. Further, is setting out. The financial objective, a financial manager has to strike out an acceptable and bearable balance between profitability and risk. For protection solvency (a financial risk) the financial manager would like to keep some cash which goes against the objective of full employment of resources.
Various financial objectives may be thought of Two of them are notable because of their wide support. These are :
(i) Profit Maximization, and
(ii) Wealth Maximization (maximization of the firms market value)
Profit maximization is non-regarded as traditional goal and has been strongly attached for not having logical, management justifications. The second one is regarded as operationally and managerially better objective. It is recognized as an objective goal. This goal considers (i) the time value of money. (ii) the risk or uncertainty of future earnings, (iii) effect of dividend policy on the market price of shares.
Maximization of the firms market value means maximizing the market price of shares in the stock exchanges, The market price of shares (excluding impact of speculation) serves as the standard to judge whether financial decisions have been taken and implemented efficiently or not. Therefore, maximization of the firms market value is considered to be proper objective.
After setting objective, the financial manager formulates financial
(i) Policies determining the total amount of capital required.
(ii) Policies determining are control of the supplies of capital (both shareholders and creditors).
(iii) Policies determining the debt : equity ratio;
(iv) Policies guiding the selection of sources of capital.
(v) Policies guiding the retention of earnings and distribution of dividend, i.e. appropriation of profit and management of income.
(vi) Policies with regard to credit terms, selection of customers for: credit extension and collection of credit.
(vii) Polices determining the investment of funds in fixed assets and current assets.
Good financial planning presupposes coordination. The major tool of financial planning is ‘budgeting’ Budgeting practices and procedures involving all persons working at the top through bottom is a powerful instrument for securing coordination. Coordination is attained when each function and sub –function is performed at the proper time. For this various functions should be organized. Organizing these functions requires :
(a) grouping of financial functions according to segments of department of sections; and
(b) determination and delegation authority should be delegated to individuals who are responsible for performing or and getting performed functions:
Coordinations becomes all the more important when finance becomes all the more important when finance functions are decentralized.
Some of the major financial planning devices are :-
(i) Master plan (Forecast Trading Profit and Loss Account and Balance sheet).
(ii) Funds, Flow statement.
(iii) Forecast Statements of working capital.
(iv) Cash Budget.
(v) Capital Budget.
Making adjustment and readjustment in financial plan is an important function of financial manager. It may be termed as replanning. Analysis and evolution of performance may reveal that results are not in accordance with the predetermined objective or goal. One of the reasons, and an important one, may be defective or ineffective financial policies and procedures. For removing defects and effectiveness, certain adjustment may be desirable, Therefore, a financial manager’s function is to make such adjustments. The following chart shows the broad.
