Chapter - 2 FINANCIAL MANAGEMENT, Dr. RATNESH CHATURVEDI 2 Chapter FINANCIAL PLANNING

Chapter - 2Chapter - 2FINANCIAL MANAGEMENT, Dr. RATNESH CHATURVEDI

2Chapter

FINANCIAL PLANNING

FINANCIAL PLANNING


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


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


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


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


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


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


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


Principles Governing a Sound Financial Plan :

Simplicity

Long-term view

Flexibility

Foresight

Optimum use

Contingencies

Liquidity

Economy

Investor’s Temperament :

FINANCIAL PLANNING


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


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


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


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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Chapter - 2 FINANCIAL MANAGEMENT, Dr. RATNESH CHATURVEDI 2 Chapter FINANCIAL PLANNING