Notes on Concepts, Objectives And Steps Involved In Financial Planning:

      Financial Planning refers to the mechanism of deciding in advance the financial activities necessary for the achievements of the organisational goals and objectives.

      Different scholars have advocated different views regarding the concept of financial planning. These view points may be categorised into two:

1. Narrow Concept:

      The Narrow Concept pines that financial planning refers to the estimation of the quantum of funds needed for the proposed venture. This concept, because of its narrow approach is not useful to examine the financial problems of the firm. It emphasises the quantity aspects of finance and ignores the quality aspect.

2. Broader Concept:

      According to this concept, financial planning is the system of deciding in advance the quantum of funds requirement of a firm and its form. It covers the following three aspects:

  1. What type of assets will required by the firm and how much capital would be required for the acquisition of these assets?
  2. When and how would this capital be required?
  3. From which sources would the required capital be procured?

      In the words of Walker and Baugham, “Financial planning pertains only to the function of finance and includes determination of the firm’s financial objectives, financial policies and financial procedures.”

Classification of Financial Plan:

      On the basis of duration, financial plans can be classified into three:

1. Short Term Plan:

      It is prepared for a maximum period of one year. It is generally prepared to estimate the working capital requirements of the firm.

2. Medium Term Plan:

      It is prepared for a period of more than one year but less than five years. It incorporates plans for replacements and maintenance of assets, research, and developmental activities and so on.

3. Long Term Plan:

      It is prepared for a period of five years or more. It incorporates policies concerning capitalisation, capital structures, replacements of permanent assets etc.

Objectives of Financial Planning:
  1. To make sure of uninterrupted supply of required funds for the optimum utilisation of the scarce resources.
  2. To minimise the cost of acquiring funds by procuring funds under the most favourable conditions.
  3. To match the cost factors with the risk involved so as to safeguard the owners from the liquidation of the business.
  4. To provide for flexibility in the plan so that the financial structure of the company may be adjusted with the changed situation.
  5. To keep the financial structure simple to the extent possible and also consistent with the other organisational objectives.
Steps Involved in Financial Planning:

      The following steps are involved in the financial planning of an entity.

1. Determination of Business Objectives:

      In the present day scenario, it is advisable for the entrepreneurs to establish both long term and short term objectives of the firm:

a. Long Term Objectives:

      The long term financial objectives of the firm is to maximize the wealth of the concern by utilising the resources of the firm in such a way as to increase the productivity of the remaining factors of production over a long period of time. Effective utilisation of the productive factors is possible only if the required funds are made available at minimum cost and at regular basis.

b. Short Term Objectives:

      The short term financial objectives of the firm is to make arrangement for the required funds as and when required by the concern for the smooth running of the operational activities and for its survival and growth. It is also necessary to maintain the liquidity of the business.

2. Formulation of Financial Policies:

      The following financial policies are formulated which is to be followed by the financial authorities:

  1. Policies regarding estimation of capital requirement
  2. Policies regarding the form and the proportionate amount of securities to be issued
  3. Policies regarding the relationship between the company and the creditors.
  4. Policies and guidelines regarding the sources of raising funds
  5. Policies regarding distribution of earnings.
3. Developing Financial Procedures:

      Financial planning develops the procedure of performing financial activities. The financial activities are sub-divided into smaller activities, powers, duties and responsibilities and are delegated to the subordinates.

      The performance of the delegated duties and responsibilities needs to be evaluated by comparing the actual performance with the standard established and this can be possible by establishing standard of performance for evaluation and deviation (if any) can be figured out and necessary action can be initiated in time.

      The methods of budgetary control, cost control, ratio analyses etc are some methods used for the purpose.

4. Reviewing Financial Plan:

      From time to time, management reviews the firm’s short term financial objectives, policies and procedures in the light of the changed business and economical environment. This is required to be done to keep the business updated with the changed situation.