Financial Planning Bcom Notes
Financial Planning Bcom Notes:- In this post, you will get the notes of B.com 3rd year Financial Management, by reading this post you can score well in the exam, hope that this post has helped you with this post to all your friends and all groups right now I must share it so that every student can read this post and it can also be helped in this post.
MEANING AND DEFINITION OF FINANCIAL PLANNING
Different authors have different opinions about financial planning. These views can be classified into two parts:
(1) Narrow Concept of Financial Planning: According to this view, in financial planning, it is estimated how much capital is required for business. According to some other authors, financial planning means capital structure. Thus, according to the supporters of this view, financial planning signifies, the forecasting of required capital of the enterprise and the determination of its capital structure.
“Financial Plan is the act of deciding in advance the quantum of capital requirements and its forms.”
– R.M. Shrivastava
(2) Broader Concept of Financial Planning: In a broad-sense, financial planning includes determination of financial goals, formulation of financial policies and development of financial procedures.
According to Arthur S. Dewing, the following activities are included in financial planning:
(i) Capitalisation i.e., determining the required amount of Capital;
(ii) Capital structure, i.e., deciding the various sources of capital and determining the mutual proportion of various securities;
(iii) Proper management of capital, i.e., managing the various types of assets.
Although the above concept of financial planning propounded by Dewing is quite comprehensive and reasonable, yet it fails to highlight upon its nature and functional areas more clearly. The definition given by Walker, E.W. and Baughn, W.H. seems to be more proper and appealing. According to them, “Financial Planning pertains only to the function of finance and includes the determination of the firm’s financial objectives, financial policies and financial procedures.”
TYPES OF FINANCIAL PLANNING
On the basis of time, the process of financial planning may be of three types:
- Short-term Financial Planning: The financial plans drafted for a year or less in any business is called short-term financial planning. Such plans are prepared for the efficient use of working capital. The main objective of such planning is to maintain liquidity of business. Various types of short-term budget particularly cash budget, sales budget, production budget etc. and projected balance sheet, cash flow statement etc. are considered as the important tools of short-term planning.
- Medium-term Financial Planning: The plans prepared for more than one year but less than five years are called medium-term financial plans. Such planning is needed for meeting the needs for the maintenance of assets, assets replacement, Conducting Research and Development activities and arrangement of special working capital.
- Long-term Financial Planning: The planning which is done for more than 5 years is known as the long-term financial planning. This is done to get rid of the long-term financial problems of the organisation.
Importance of Financial Planning: (1) Optimum utilisation of Resources, (2) Helpful in determination of Optimum Capital Structure, (3) Efficient Operation of Business, (4) Avoids financial difficulties in the future expansion and development of the business, (5) Helpful in replacement of Obsolete assets, (6) Adequate Liquidity, (7) Adequate return on the capital employed.
Steps in Financial Planning: 1. Determination of Financial Objectives, 2. Formulating Financial Policies, 3. Formulating Financial Procedures, 4. Providing for Flexibility.
CHARACTERISTICS OR PRINCIPLES OF A SOUND FINANCIAL PLAN
The financial plan should be prepared keeping in view the following principles: 1. Simplicity, 2. Objectivity, 3. Foresightedness, 4. Flexibility, 5. Liquidity, 6. Profitability, 7. Economical, 8. Intensive use of funds and (9) Reasonable Provision for future contingencies.
Factors Affecting Financial Planning or Factors to be considered in drafting a Financial Plan: 1. Nature of Industry, 2. Amount of Risk, 3. Appraisal of Alternative Sources of Finance, 4. Plans for the Future Expansion, S. Attitude of Management, 6. General Economic Conditions, 7. Government Control.
Limitations of Financial Planning: (1) Errors of Forecasting, (2) Rigid Attitude of Management, (3) Lack of managerial co-ordination.
Financial Planning Bcom Notes