Here you will study all these in detail:
- Meaning and Definition
- Nature of Financial Planning
- Need of Financial Planning
- Objects of Financial Planning
- Type of Financial Planning
- Factors Determining Financial Planning
- Characteristics of Sound Financial Plan
- Importance of Financial Planning
- Limitation of Financial Planning
- Some Guidelines Regarding Financial Planning.
The success and failure of any business organization depends on the availability of financial resources, hence finance is called the blood of modern business. Finance works in business in the same way as blood in human body Finance is such a powerful tool that maintains the dynamics of business, develops products with the help of means of production and maintains the efficiency of human machine. Is . Finance is required in all circumstances from the commencement of any business or industry to its commissioning, expansion of operations and its closure. Therefore, it is the duty and responsibility of the financial manager to plan the inflow and outflow of funds and ensure that funds are available at all times, so that the established objectives of the organization can be achieved and the interests of the parties concerned can be protected. . The future success or failure of the organization or company also depends on financial planning. Similarly, forecasting the results obtained from the financial statements is also a part of financial planning, whereby the manager reveals the planning of all the activities for a certain period in the finance keeping in mind the economic competition, technological and social global environment, which plays an important role in financial planning.
Financial planning refers to the process of determining the total amount and nature of capital for the organization and formulating related policies for its proper management and control. Financial planning is made up of two words, finance + planning. Finance refers to the means of finance and planning means to make forecasts, to decide the ways to spend the available resources and to make a roadmap to control the expenditure.
In this way, the following points are included under financial planning: –
- To determine the amount of capital in the business.
- Determination of sources of capital receipt.
- To make optimum use of available resources.
- To assess the current financial position of the firm.
- To determine the future profitability and rate of growth.
Not all scholars are unanimous about the meaning of financial planning. In this regard, the views of scholars regarding financial planning can be classified into two categories:-
(1) Financial planning in the narrow sense:- According to the proponents of the above ideology, financial planning means to determine the capital structure of the institution, that is, how much part of the institution should be collected from shares and how much from debentures. Through this it is not possible to study and analyze all the problems related to finance.
(2) Financial planning in the broad sense:- Financial planning in the broad sense includes estimating the resources needed for the firm, selecting various means to achieve them and formulating and implementing financial policies. Arthur S. According to Deweing: – “The following three things are included in financial planning.
- Capitalization :- Estimating the required amount of capital.
- Capital Structure :- Various types of capital To determine the source and to determine the mutual ratio of different securities.
- Management of Capital :- To see whether the optimum use of capital is being done for profit or for some other purpose.
Note: – Dewing’s definition of financial planning is quite reasonable but it does not explain the nature and scope of financial planning. In this context, the definitions of Walker and Vaughan are more appropriate, which are as follows – “Financial planning is related to the work of finance, which includes the determination of financial goals of the firm, the formulation and estimation of financial policies and the development of financial methods”.
Financial planning in the sense includes the following things:-
1. Determining Financial Objectives :- Long term and short term goals of the firm should be determined. The long-term financial goal of the firm is to manage maximum assets so that maximum and economical use of the means of production can be made and the objective of short-term finance should be to provide the necessary liquidity for each and every activity of the firm.
2. Formulating Financial Policies :- Financial policies should be made in such a way that financial needs (according to the goals) can be met. The following financial policies are important in this regard:-
- Policy to determine the required amount of capital
- Policy to determine the relationship between the firm and the parties providing capital
- Policy determining the ratio of owner-capital and debt-capital (EI . & Dela Cop Ratio)
- Policies helpful in decision making regarding obtaining capital from various sources
- Policies that help in distribution of income and
- Policies that help in efficient management of fixed and current assets.
3. Developing Financial Procedures :- For this work it is necessary to divide the finance work into small pieces, assign those tasks and responsibilities to subordinate employees and arrange for financial execution. Standards for financial performance Deviations are determined by checking progress with respect to standards. Financial controls are necessary to prevent deviations and discrepancies. Methods like budgetary control, cost control, analysis and interpretation of financial statements, etc. are used for financial control.
According to Walker and Wadhan – “Financial planning is concerned with the work of finance which includes the determination of financial goals of the firm, formulation of financial policies, development of techniques”.
J. H. According to Vanville- “The financial plan of a state corporation has two aspects (i) the capital structure of the corporation and
(ii) the financial policies to be followed by the corporation.”
According to Gastenberg, “financial planning” means the beginning of any newly formed business. Property, organization, statutory establishment expenditure, arrangement of fixed and working capital, proper estimation of capital required at present and its arrangement and possible sources of receipt are correct analysis.
Financial planning is a process of determining the objectives of an organization’s financial activities, formulation of business policies and development of techniques, as defined by various managers. Under this, the funds received are included in the appropriation of funds and making future plans for administration etc. The following activities are included in financial planning
1. Determination of financial goals:- The main function of financial planning is to determine the short-term, medium-term and long-term objectives of any organization. The short term financial objective of an institution is to make adequate provision of working capital to meet the short term financial needs of the institution, so that the institution according to its capacity, the long term financial objective is to increase the profit potential by effective and frugal use of the resources of production available with the institution. . Optimum utilization of the resources of production is possible only when there is minimum cost of funds, determination of capital structure according to the quantum of capital receipt, nature of shares and steps, relationship and ratio etc.
2. Formulation of Financial Policies:- The secondary objective of financial planning is the formulation of policies so that the organization can fulfill its pre-determined financial goals. Financial policies include determining the required amount of capital, determining the mutual ratio of debt and equity capital, choosing various options for capital, distributing income, and policies related to efficient management of fixed and current assets, etc.
3. Development of Financial Techniques:- Financial planning Various financial functions are divided into small departments. After this, arrangements are made for their regulation, execution and control by dividing all the financial functions among the financial officers. For this work, techniques like budgetary control, cost control, capital budgeting, capital costing, management of working capital, interpretation and analysis of financial accounts etc. are used.
Arthur S. Dewing has described the following things in financial planning:-
- Determining capitalization,
- Determining capital structure and
- Determining policies related to management and administration of capital.
J. In the words of Betty, “Adequate balance and flow of cash is essential. The business should always be able to deliver on its promises. Further, the business cannot be stagnant. In any competitive sector, there is a need to introduce new products to the market and To expand, it is necessary to improve the business. Experience shows that business cannot remain stagnant, the tendency of business is to move forward or backward, not to remain stagnant. If so, adequate financial resources will be required.”
The need for financial planning arises due to the following reasons:-
- To provide sufficient cash to meet expenses, contingencies and fluctuations in the level of working capital.
- To maintain liquidity throughout the year.
- To indicate when and where the funds will be required.
- To state the surplus funds available for expansion or for external appropriation.
- To further estimate the need for more funds.
- To increase the confidence of those providing finance to the institution by adopting appropriate financial policies.
In addition to the above reasons, Walker and Vaughan have also given the following reasons for making financial plans:-
- Modern business organization has to run in the era of fierce competition, due to which the profit margin of the organization has to be kept low. Therefore, predictions have to be made about the future trend. Therefore, the managers have to take clear decisions in the profitability area of the business.
- The task of keeping capital safe is very difficult, especially when we are standing at the door of the space age. A large part of the assets which are new today may become obsolete in the near future. Therefore, in relation to the assets to be restored in the future and the establishment of new properties for the increasing need of the future, planning should be done in the present.
- As the price level continues to rise due to inflationary conditions, the cost of restoration of the original investment will generally be high. Therefore, there will be a need for such a financial plan which can maintain the assets as well as restore them in future.
- Finance – Affects the success or failure of the entire production and distribution function. Therefore it is very important that every financial action is carefully planned.
- The government is also competing day by day in getting funds from the private sector from the same sources from which the private sector receives, so it has become necessary to make suitable financial planning for the private sector institutions so that adequate funds are available on time. can be obtained.
The primary objective of running a business is to maximize profit and this is also the purpose of financial planning. The primary objective of financial planning is to arrange sufficient capital in such a way that all the necessary means of running the business are available in such a way that the net profit left after deducting all expenses from the income earned is a proper return of capital employed to the shareholders and be considered sufficient to meet the risk taken by them. Along with this primary objective of financial planning, it also has some other auxiliary objectives, such as provision of capital resources at minimum price, flexible convertibility in quantity and proportion of capital as required: – Proper coordination of capital resources, protection of shareholders’ interests, capital Convenience in control etc.
Financial planning may vary from time to time. Financial planning can be divided into the following parts on the basis of time:
1. Short-term financial planning :- Under this, planning is generally taken for one year. In this financial planning, an effort is made to meet the short term financial needs of the organization and an effort is made to keep the cash flow balanced so that the organization does not face any difficulty. different types of this work This is done by preparing budgets and preparing Projected Profit & Loss a/c and Balance Sheet.
2. Medium-term Financial Planning :- Under this, plans made for a period of more than one year and less than five years are included. The purpose of such plans is to find such means of capital, which will reduce the cost of capital and maintain elasticity in the capital structure. Medium-term financial planning includes things related to replacement, maintenance of assets, running short-term production programs, carrying out research and development activities and meeting the needs of a particular worker.
3 Long-term financial planning: – Generally, the planning done for a period of more than five years is called long-term financial planning. This is done to solve the long term financial problems of the organization. Under this, the long-term financial goals of the organization, the amount of capitalization, capital structure, planning for additional capital arrangement for future expansion and finance for replacement of fixed assets etc. are included.
It is very difficult for every organization to prepare such a financial plan which is good for it and can be accepted immediately. Each organization is working in different circumstances, so such a financial plan should be prepared for that which is suitable for the organization in those circumstances. Therefore, while preparing a suitable financial plan for any organization, the following factors must be kept in mind:-
- Nature of Business: – The nature of business has the greatest impact on the financial plan. If the business is more dependent on capital resources, then more capital will be required for it, on the contrary, businesses dependent on labor resources will not require that much capital. The business of regular and stable income can be run with less capital also. Whereas business with high income, business with high sales potential in future and business with potential for production process, mechanization, scientific improvement will require more capital.
- Status and Size of Business :- A business which has a large size requires more capital, on the contrary, a smaller size business requires relatively less capital. It is easy to raise financial resources for a business with good condition, large size, long life, good credit, good organization etc. whereas it is difficult to collect financial resources for a new business because the investor is looking for a business entity while appropriating his money. Only after analyzing the situation, do we invest money in it.
- Amount of Risk: – Generally, businesses with high risk are more dependent on ownership capital, whereas businesses with low risk can be more dependent on debt capital. Investors are often afraid to invest in high-risk businesses in the form of debentures. Liquidity is also relatively low in risky industries. Conversely, by getting more funds in the form of debentures in low-risk industries, the owners can be given the advantage of ‘Trading on Equity’ and liquidity is also maintained in them.
- Evaluation of Different Sources of Finance :- While preparing the financial plan it is necessary to evaluate the various financial instruments available in the market. For this work it is necessary to study the market, the prevailing price of various instruments, their popularity, face value and issue cost. Along with this, it is also necessary to see whether the timing of issuance of such securities is also appropriate or not. Considering all these things, while evaluating various options, the best option should be selected among them.
- Attitude of Management :- The nature of financial planning also depends a lot on the attitude of the management. If the managers want to keep the management and control of the business concentrated in their own hands, they will issue the common shares very rarely or even if they issue they will buy them in the market at a later stage. For finance, preference will be given to institutional investors over the general public or debt financing will be done. Such managers will also make arrangements for Ploughing back of profits by not issuing new shares for future expansion programes. Conversely, if the managers do not wish to keep the control in their own hands, they will keep a fair proportion of all types of securities. Apart from this, the policy of doing business on the equity of management and the policy of capital gearing will also affect the financial planning.
- Possibility of Expansion: – As the organizations get older, they also get bigger in size, their possibilities of expansion and development also increase. If there are possibilities of development, expansion, scientificization etc. in the business, then it is very important to keep in mind the diversity and flexibility in the capital plan. If this is not taken into account at the time of preparation of the financial plan, it may become difficult to make adjustments in future.
- Government Policies :- Financial planning is also influenced by various government policies, controls and rules. For example, before the issuance of industrial securities, the permission of the Controller of Capital Issues has to be obtained. This permission is granted only if proper balance is maintained in all the securities. Similarly, for listing of securities in the stock market, it is necessary to have a certain percentage of common shares in the total capital. Therefore, it is necessary to keep these rules in mind while preparing the financial plan.
- Income of the business :- At the time of financial planning, forecasting of business income is also necessary. If the business is successful in earning income as per the estimates, then the business will move towards success and in the opposite case, the business will move towards failure.
- Status and the Size of the Business :- Before determining the financial sources of the business, it is necessary to determine the reputation and size of the business. Financial resources are planned according to the need so that the available resources can be optimally utilized.
- Alternative Sources of Finance :- Before starting a business, it is necessary to find out alternative financial resources by the managers. In the event of the failure of any of the available financial sources, and in the event of providing less capital than required, the need for finance can be met through alternative financial means, which does not adversely affect the efficiency and profitability of the business.
As it has been clarified earlier that the success of any business organization depends on its financial plan. Only then can a business be successful. While his financial plan is good. Financial planning will be called good only then. While it should include the following qualities :-
- Simplicity :- Financial plan should be such that it can be easily managed and controlled as well as it should be in accordance with the objectives of the organization. The capital structure should be so simple. So that the investor can be easily attracted towards him. One should not try to raise capital through issue of different types of securities and diversified means. Due to different types of securities, the capital structure becomes so complex that people start doubting them unnecessarily. Hogland has written about this that no corporation, no matter how liberal its charter, should not differentiate between horizon and goal. “It should have definite goals in the mind of its managers and the means to achieve them. Financial planning should not be such in which capital is considered for the fulfillment of many types of objectives.
- Planning Foresight: – In the financial plan, the short term needs of the business as well as the future needs should be taken care of. The capitalization should be such that all types of permanent and current expenditure can be met from that amount. In the rise and fall, balance should be maintained in the financial position and the organization can easily cope with any problem.
- Intensive Utilization of Capital :- Capitalization should be such that the available resources can be used as much as possible. For this it is necessary that the capital should neither be more nor less, but there should be proper capitalization. There should be proper balance between fixed and working capital. Apart from this, fixed capital should not be used for working capital and working capital should not be used for fixed capital, otherwise the organization may get into financial crisis.
- Liquidity: – In order to conduct the day-to-day operations of the business, it is necessary that the working capital of the business should be sufficient and in the form of cash. This cash ratio depends on the size of the organization, its credit standing, the state of the business cycle and the nature of the business. With the required amount of liquidity in the organization at all times, there is no hindrance in the execution of daily operations. Therefore, it is necessary to have adequate liquidity arrangement in the financial plan.
- Flexibility: – In order to run the business well, it is necessary that the capital structure of the organization should be flexible so that it can be increased or decreased according to the needs of the business.In the era of recession, profits to the business are less, so at that time less space should be given to the debentures in the capital structure, on the contrary, in the era of boom, more space should be given to the debt capital to bring more profit to the owners. This can be possible only when the capital structure of the organization is flexible.
- Economy: – There are many types of expenditure at the time of issue of capital; For example, printing, advertising, underwriting commission, brokerage etc. Therefore, the financial plan should be slave according to which the expenditure on obtaining capital and issue of securities should be less than tax. Along with this, it should also be kept in mind that the dividend paid on the capital of the owners and the interest paid to the debenture holders and creditors should not in any case become an unbearable burden on the institution.
- Contingencies Anticipated:- Some sudden events may also be possible in the life of the business, which is very difficult to predict in advance. Therefore, it should be decided in the financial plan that how these contingencies will be dealt with and from what source the capital will be arranged for them, so that there is no problem in future.
The success of any business depends on the optimum utilization of the resources available with it. This is possible only when the present and future capital requirements of the organization are correctly estimated in the financial plan. Many businesses fail due to conducting business without making a good financial plan. Therefore, it is very important to have financial planning for efficient operation of business and to get the best results from it. The importance of financial planning for such an organization is as follows:-
- Success of Promotion :- At the time of establishment of new business, the most important task of promoter is to create proper capitalization and good capital structure, hence financial planning. An important part of enforcement. If financial planning is not taken care of, then a situation of over-capitalization or under-capitalization may arise in the institution which can be a threat to the future of the institution. Similarly, the wrong choice of the resources of capital can also become a hindrance in the profitability of the business. Therefore, it can be said that financial planning is the cornerstone of enforcement.
- Successful Operation of Business :- Finance is the life blood of any business organization. Without adequate and proper capital the success of business, far from its existence, cannot be imagined. For the operation of business, there is a need of material, labor and plant etc. and for all this finance is required. Therefore, career planning has an important role in business operation.
- Proper Co-ordination in Sources of Capital :- The total capital of the organization is obtained from many sources. The cost of capital acquisition from these different sources is different. Raising capital from any one particular resource can be costly and risky for the organization. Therefore, to get the required amount of capital, the ratio of various cheap and risky means has to be fixed. This is possible only through financial planning in which the optimum ratio of various sources of capital is determined in advance.
- Growth and Expansion of Business: – After the start of the business, gradually the size of the organization increases and there is a need for its development and expansion, for this more financial resources are required. Therefore, by planning the financial plan very carefully in the beginning itself, after planning in advance to meet the financial resources for the development and expansion of the business in future, the business does not have to face difficulties for this work in future.
- Replacement of Assets: – In the economic environment in which the institutions are working today, the price level is increasing at a rapid pace, in such a situation, it is natural for the replacement cost of assets to be much higher than their cost cost. Therefore, along with the security of the money invested in these assets, it is also necessary to replace them at the increased value. The arrangement for the additional money that will be required for this work can be possible only through proper financial planning.
Financial planning is done with foresight keeping in mind many types of facts, but still it may have some limitations which are as follows :-
- Lack of mutual cooperation and coordination :- For successful implementation of financial plan all officers and departments It requires mutual cooperation and coordination. In the absence of mutual cooperation and coordination, even the best financial planning can fail.
- Future uncertain:- Financial planning is mostly based on future forecasts. Since the future is uncertain and nothing can be said about it, therefore, if any forecast in the future turns out to be wrong, then financial planning also fails.
- Ineffective:- Generally, once the financial plan is prepared, it is strictly followed and the management adopts a rigid approach towards the plan. She slowly starts to become ineffective. Unwilling to make timely changes to the plan. consequent financial plan.
- Fulfillment of fixed capital requirement means – Management should be done by permanent means and not by current means like for purchase of fixed assets, capital should be obtained from shares and debentures and not from short term loans.
- The major part of current assets should be managed from long term or permanent sources because some part of them remains permanently in the business as working capital.
- One should also anticipate the future financial needs and see how they will be met.
- Financial programs should be kept sufficiently flexible.
- Debt and equity capital should be used judiciously. If the use of debt capital gives more return than the cost of obtaining it and common capital provides adequate security to him, then it should be used in business.
- Funds should be received in large quantities rather than in small installments.
- A new entity should take on rent or lease if it is profitable than buying fixed assets in the initial years.