FINANCIAL PLANNING TOOLS AND CONCEPTS

PRIMARY OBJECTIVES:

~IDENTIFY

~ILLUSTRATE

~EXPLAIN

FINANCIAL PLANNING TOOLS AND CONCEPTS

In a much as most business decisions affect the financial resources of a company, Financial Planning is
part and parcel of corporate, strategic, operational, project planning in an enterprise. It requires
knowledge of economics and proficiency in the use of tools and techniques

FINANCIAL, CORPORATE, STRATEGIC, PROJECT, AND OPERATIONAL PLANNING DEFINED

Financial planning – refers to the process of the determining the best uses of the financial resources of
an organization.

Corporate planning – defined as formal and systematic managerial process, organized by responsibility,
time and information, to ensure that operational planning, project planning, and strategic planning are
carried out regularly to enable top management to direct and control the future of the enterprise

Strategic planning- is the process of making decisions which will tend to optimize the organization’s
future position despite changes in the environment. A strategy is a plan, an integration of an
organization’s important objectives, policies and programs into a cohesive whole.

Project planning or capital expenditure planning- refers to working out the detailed execution of an
action outside the scope of current operation such as acquisition of another company.

Operational planning – refers to forward planning of existing operations. It involves the determinations
of how to effectively use the current resources to attain both short-range goals and long-range
objectives.

THE FINANCIAL PLANNING PROCESS

In planning the best uses of firm’s resources, the different step followed are based on the following
question:

WHERE ARE WE NOW?

This requires analysis of the current financial statement of a company, namely, its balance sheet, income
statement and cash flow statement. This is done detect areas of strengths and weakness as indicated by
the measures of liquidity or short-term solvency, profitability, and stability.

HOW DID WE GET HERE?

This requires an interpretation of historical data which may reveal the causes of the current financial
stability of difficulty such as sufficiency or insufficiency of fund inflows from operation, inability to
plough back earnings by declaring the greater portion annual net income as dividends, unprofitable
operations of some sub-units.

WHERE DO WE WANT TO GO?

The different alternatives are evaluated and the best choice is made considering the projecterd
outcomes. This requires financial projections such as estimates of cash flows, revenue ,cost and
expenses and the resulting financial ratios.

WHY A COMPANY HOLDS CASH

Through understanding of why and how a firm holds cash requires an accurate look at how cash flows
into and through the enterprise.

MANAGEMENT OF THE CASH

Cash is considered as vital asset and its proper management support company development and
financial strength. An effective cash management program designed by companies can help to realize
this growth and strength. Cash is a vital element of any company needed to acquire supply resources,
equipment and other assets used in generating the products and services.

CASH MANAGEMENT

Is the stewardship or proper use of an entity’s cash resources. It Assist to keep an organizational
functioning by making the best use of cash or liquid resources of the organization. Cash management is
associated with management of cash in such a way as to realize the generally accepted objectives of
firms, maximum productivity with maximum liquidity.

FUNCTION OF CASH MANAGEMENT

It is well acknowledge in financial reports and various studies that cash management is concerned with
minimizing fruitless cash balances, investing temporarily excess cash usefully and to make the best
possible arrangements for meeting planned and unexpected demands on the firm’s cash (Hunt).

Cash management must have objective to reduce the required level of cash but minimize the risk of
being unable to discharge claims against the company as they arise.

THERE ARE FIVE CASH MANAGEMENT FUNCTIONS:

1. Cash planning
Experts emphasizes the wise planning of funds that can lead to huge success.
For any management decision, planning is the primary requirement. According to theorist,
“planning is basically an intellectual process, a mental disposition to do things in an orderly way,
to think before acting and to act in the light of the facts rather than of a guess.

2. Managing cash flows

 Second function of cash management is to properly manage cash flows. It means to manage
difficult efficiently the flow of cash coming inside the business i.e cash inflow and cash moving
out of the business (i.e cash outflows. These two can be effectively managed when a firm
succeeds in increasing the rate of cash inflow together with minimizing the cash outflows.

3. Controlling the cash flows

It has been observed that prediction is not an exact knowledge because it is based on certain
conventions. Therefore, cash planning will unavoidably be at variance with the results actually
obtained, due to this, control controlling becomes indispensable as it increases the availability of
usable cash from within the enterprise. It is understandable that the greater the speed of cash
flow cycle, greater would be and so lesser will be the cash requirement to finance the desired
volume of business during the period.

4. Optimizing the cash level

It is important that a financial manager must focus to maintain sound liquidity position i.e, cash
level. All his efforts relating to planning, managing and controlling cash should be diverted
towards maintaining optimum level of cash is to meet all requirements and to settle the
obligations well in time.
5. Investing idle cash
Idle cash or surplus cash is described as the extra cash inflows over cash outflows, which do not
have any specific operations or any other purpose to solve currently. Usually, a firm is required
to hold cash for meeting workings needs facing contingencies and to maintain as well as develop
friendliness of the bankers.