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Chapter - 2Chapter - 2FINANCIAL MANAGEMENT, Dr. RATNESH CHATURVEDI
2Chapter
FINANCIAL PLANNING
FINANCIAL PLANNING
Chapter - 2Chapter - 2FINANCIAL MANAGEMENT, Dr. RATNESH CHATURVEDI
What you mean by Financial plan?Financial plan may be defined as the plan, which properly estimates
the amount of funds required, proportion of debt-equity, and the
policies for administration of financial plan.
Financial plan is a statement estimating the amount of capital
required, determination of finance mix and formulation of policies for
effective administration of financial plan. Financial plan states:
1. The amount of capital required to be raised,
2. The proportion of debt in total capital and its form, and
3. Policies bearing on the administration of capital.
FINANCIAL PLANNING
Chapter - 2Chapter - 2FINANCIAL MANAGEMENT, Dr. RATNESH CHATURVEDI
NEED FOR FINANCIAL PLANNING: Many technically sound and economically viable industrial projects have failed
simply because of poor financial planning. Thus, it is essential tool for any
business undertaking.
1. Financial Planning is needed not only in the case of enterprises proposed to be
setup, but is equally needed for on-going enterprises as well.
2. The need for financial planning arises from the following reasons :
3. Goode financial planning :
4. would ensure liquidity throughout the year.
5. Would bring to light the surplus of funds available for expansion
6. Would contribute to rational utilisation of the available resources to get the
maximum benefit.
7. Would make things easy for the management team to function smoothly.
FINANCIAL PLANNING
Chapter - 2Chapter - 2FINANCIAL MANAGEMENT, Dr. RATNESH CHATURVEDI
Steps In Financial Planning
1. Estimating the Capital Requirements : It is the first step in financial planning. Requirement of the concern will be estimated on the basis of the following factors :The cost of fixed assets like hand, buildings, plant and machinery
furnitures and fittings, required to be acquiredThe cost of intangible assets like patents, goodwill etc., to be acquiredThe amount required to be invested in current assets like stock of
raw materials, stores, stock of finished goods, sundry debtors, cash etc.
The cost of promotion and the cost of financing i.e., the amount of expenses to be incurred on the promotion of the concern like registration fee, stamp duty, legal charges etc., and the amount of expenses to be incurred on the printing of prospectus, share application forms etc.
FINANCIAL PLANNING
Chapter - 2Chapter - 2FINANCIAL MANAGEMENT, Dr. RATNESH CHATURVEDI
Steps In Financial Planning
2. Determination of the Form and the Proportionate Amount of Securities to be issued: The second step in Financial Planning is the determination of the forms and the proportion of the various securities to be issued by the concern for raising capital.
3. Other StepsProjection of Financial StatementsDeterminations of Funds NeededForecast the Availability of FundsEstablish and Maintain Systems of ControlsDevelop ProceduresEstablish of Performance-Based Management Compensation System
FINANCIAL PLANNING
Chapter - 2Chapter - 2FINANCIAL MANAGEMENT, Dr. RATNESH CHATURVEDI
Financial Planning Process
Projection of Financial Statements
Determinations of Funds Needed
Forecast the Availability of Funds
Establish and Maintain Systems of Controls
Develop Procedures
Establish of Performance-Based Management Compensation System
FINANCIAL PLANNING
Chapter - 2Chapter - 2FINANCIAL MANAGEMENT, Dr. RATNESH CHATURVEDI
Factors Affecting Financial Plan
Nature of the Industry
Status of the Company in Industry
Evaluation of Alternative Sources of Finance
Attitude of Management Towards Control
Magnitude of External Capital Requirements
Capital Structure
Flexibility
Government Policy
FINANCIAL PLANNING
Chapter - 2Chapter - 2FINANCIAL MANAGEMENT, Dr. RATNESH CHATURVEDI
Limitations of Financial Planning
Difficult in Accurate Forecasting
Absence of Co-Ordination
Rigidity of Financial Plans
Rapid Technological Changes in Industry and Customer
Preferences
FINANCIAL PLANNING
Chapter - 2Chapter - 2FINANCIAL MANAGEMENT, Dr. RATNESH CHATURVEDI
Principles Governing a Sound Financial Plan :
Simplicity
Long-term view
Flexibility
Foresight
Optimum use
Contingencies
Liquidity
Economy
Investor’s Temperament :
FINANCIAL PLANNING
Chapter - 2Chapter - 2FINANCIAL MANAGEMENT, Dr. RATNESH CHATURVEDI
CAPITALISATION: In financial management the term ‘capitalisation’ is used in two
different senses, viz. (1) in a broad sense and (2) in a narrow sense.
In a broad sense, the term ‘capitalisation’ is considered synonymous
with financial planning. So, the term is taken to refer to the
determination of the amount of capital to be raised, the securities
through which the capital is to be raised and the relative proportions
of the various types of securities to be issued, and also the
administration of the capital .
In a narrow sense, the term ‘capitalisation’ is taken to mean the
determination of only the quantity of finance required by a company.
FINANCIAL PLANNING
Chapter - 2Chapter - 2FINANCIAL MANAGEMENT, Dr. RATNESH CHATURVEDI
Over - Capitalisation
A company is said to be over- capitalized, when its actual
earnings or profits are not sufficient to pay dividend at proper
rate to the shareholders.
In short, when the actual capitalization of a company (i.e., the
capitalization of a company arrived at by adding up the par
value or paid-up value of share capital, reserves and surplus,
debentures and other long-term borrowings) is more than the
proper capitalization (i.e. the capitalization determined on the
basis of either the cost approach or the earnings approach).
FINANCIAL PLANNING
Chapter - 2Chapter - 2FINANCIAL MANAGEMENT, Dr. RATNESH CHATURVEDI
Over – Capitalisation Vs. Excess Capital Over-capitalisation arises when the existing capital of a
company is not effectively or properly utilized, as indicated by
the fall in the earning of the company.
On the other hand, excess capital arises when the company
has raised capital in excess of its requirements.
It may be interesting to note that, sometimes, a company may
be over-capitalisation, but it may suffer from shortage of
capital.
FINANCIAL PLANNING
Chapter - 2Chapter - 2FINANCIAL MANAGEMENT, Dr. RATNESH CHATURVEDI
Under–Capitalisation Under-Capitalisation refers to a situation where the actual capitalization of
a company is much less than its proper capitalization (i.e., the
capitalization warranted by its earnings).
For instance, if the general rate of return or fair rate of return on the
ivestment or capital employed in the industry is 10%, the average annual
earnings or profits of a company are Rs. 60,000 and the actual
capitalization of the company is Rs. 5,00,000, the company is under-
capitalised. The company is under-capitalised.
FINANCIAL PLANNING
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