FINANCIAL PLANNING

Definition of Financial Planning

Financial Planning is the process of estimating the capital required and determining it’s competition. It is
the process of framing financial policies in relation to procurement, investment and administration of
funds of an enterprise.

Objectives of Financial Planning

Financial Planning has got many objectives to look forward to:

 Determining capital requirements- This will depend upon factors like cost of current and fixed
assets, promotional expenses and long- range planning. Capital requirements have to be looked
with both aspects: short- term and long- term requirements.
 Determining capital structure- The capital structure is the composition of capital, i.e., the
relative kind and proportion of capital required in the business. This includes decisions of debt-
equity ratio- both short-term and long- term.
 Framing financial policies with regards to cash control, lending, borrowings, etc.
 A finance manager ensures that the scarce financial resources are maximally utilized in the
best possible manner at least cost in order to get maximum returns on investment.
Importance of Financial Planning

Financial Planning is process of framing objectives, policies, procedures, programmes and budgets
regarding the financial activities of a concern. This ensures effective and adequate financial and
investment policies. The importance can be outlined as-

1. Adequate funds have to be ensured.

2. Financial Planning helps in ensuring a reasonable balance between outflow and inflow of funds so
that stability is maintained.
3. Financial Planning ensures that the suppliers of funds are easily investing in companies which
exercise financial planning.
4. Financial Planning helps in making growth and expansion programmes which helps in long-run
survival of the company.
5. Financial Planning reduces uncertainties with regards to changing market trends which can be
faced easily through enough funds.
6. Financial Planning helps in reducing the uncertainties which can be a hindrance to growth of the
company. This helps in ensuring stability and profitability in concern.

Factors Affecting a Financial Plan

Financial planning is a process by which funds required for each course of action is decided. A financial
plan has to consider capital structure, capital expenditure and cash flow. Decisions on the composition of
debt and equity must be taken.
The various other factors affecting financial plan are listed down:

Nature of the industry

The very first factor affecting the financial plan is the nature of the industry. Here, we must check
whether the industry is a capital intensive or labour intensive industry. This will have a major impact on
the total assets that a firm owns.

Size of the company

A small company normally finds it difficult to raise funds from long term sources at competitive terms.
On the other hand, large companies like Reliance enjoy the privilege of obtaining funds both short term
and long term at attractive rates.

Status of the company in the industry

A well established company enjoys a good market share, for its products normally command investors’
confidence. Such a company can tap the capital market for raising funds in competitive terms for
implementing new projects to exploit the new opportunities emerging from changing business
environment.

Sources of finance available

Sources of finance could be grouped into debt and equity. Debt is cheap but risky whereas equity is
costly. A firm should aim at optimum capital structure that would achieve the least cost capital structure.
A large firm with a diversified product mix may manage higher quantum of debt because the firm may
manage higher financial risk with a lower business risk.

The capital structure of a company

The capital structure of a company is influenced by the desire of the existing management (promoters) of
the company to retain control over the affairs of the company. The promoters who do not like to lose their
grip over the affairs of the company normally obtain extra funds for growth by issuing preference shares
and debentures to outsiders.

Matching the sources with utilization

The prudent policy of any good financial plan is to match the term of the source with the term of the
investment. To finance fluctuating working capital needs, the firm resorts to short term finance. All fixed
asset – investments are to be financed by long term sources, which is a cardinal principle of financial
planning.

Flexibility
The financial plan of a company should possess flexibility so as to effect changes in the composition of
capital structure whenever need arises. If the capital structure of a company is flexible, there will not be
any difficulty in changing the sources of funds. This factor has become a significant one today because of
the globalization of capital market.

Government policy
SEBI guidelines, finance ministry circulars, various clauses of Standard Listing Agreement and
regulatory mechanism imposed by FEMA and Department of corporate affairs (Govt. of India) influence
the financial plans of corporates today. Management of public issues of shares demands the compliances
with many statues in India. They are to be complied with a time constraint.

ANGELINA GUPTA

ROLL NO. 145