Factors Affecting Financial Plan
Nature of the industry
Here, we must consider whether it is a capital intensiveor labour intensive industry. This will have a major impact on the total assets that the firmowns.2.
Size of the Company
The size of the company greatly influences theavailability of funds from different sources. A small company normally finds itdifficult to raise funds from long X Ds X 1000 , term sources at competitive terms.On the other hand, large companies like Reliance enjoy the privilege of obtaining funds bothshort term and long term at attractive rates.3.
Status of the company in the industry
A well established companyenjoying a good market share, for its products normally commands investors’confidence. Such a company can tap the capital market for raising funds in competitive termsfor implementing new projects to exploit the new opportunities emerging from changing business environment.4.
Sources of finance available
Sources of finance could be grouped intodebt and equity. Debt is cheap but risky whereas equity is costly. A firm should aimat 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. Selectionof sources of finance is closely linked to the firm’s capacity to manage the risk exposure.5. The Capital structure of a company is influenced by the desire of the existingmanagement (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.6.
Matching the sources with utilization
The prudent policy of any goodfinancial plan is to match the term of the source with the term of investment. Tofinance fluctuating working capital needs the firm resorts to short terms finance. All fixedassets financed investments are to be financial by long term sources. It is a cardinal principle of financial planning.7.
The financial plan of a company should possess flexibility so as toeffect changes in the composition of capital structure when ever need arises. If thecapital structure of a company is flexible, it will not face any difficulty in changing thesources of funds. This factor has become a significant one today because of theglobalization of capital market.-3-