D ion Rey T.

Asis, LPT
Part-time lecturer

MODULE 1
Financial Planning and Forecasting
MODULE 2
Multinational Financial Management
MODULE 3
Hybrid Financing: Preferred Stock, Leasing,
Warrants, and Convertibles
MODULE 4
Mergers and Acquisitions
Students taking this course:

*explain the meaning of financial planning

*explain the steps involved in financial planning

*explain the principles of a sound financial plan

*understand over capitalization and under capi-

talization.

Thus, after completing this course the students

prepare and organize a sound financial plan
and forecast.

D ion Rey T. Asis, LPT

1. Learning Objectives
2. Introduction
3. Meaning of Financial Planning
4. Definition of Financial Plan
5. Steps Involved in Financial Planning
6. Limitations of Financial Planning
7. Principles Governing a Sound Financial
Plan
8. Estimation of the Financial Require-
ments of a Firm
9. Overcapitalization
10. Undercapitalization
11. Let us sum up
12. Further Readings
13. Model Questions
14. References
Page 1
 Learning Objectives:

By the end of this module you will have completed the following:
*explain the meaning of financial planning
*explain the steps involved in financial planning
*explain the principles of a sound financial plan
*understand over capitalization and under capitalization.

Pre-Assessment
I. Fill in the blanks with appropriate word(s).
______________________1. What refers to the planning, organizing, directing and controlling the
financial activities such as procurement and utilization of funds of the enterprise, likewise ap-
plying general management principles to financial resources of the enterprise.

______________________2. What part of financial planning that provide various financial infor-
mation, statements, reviews and projections of the organization’ current financial position
and where it wants to be in the forthcoming period.

______________________3. What component of financial plan that shows the amount of money
which are expected to be made and invested in the business in specified time,

______________________4. What is the lifeblood of a business enterprise, likewise an important

factor of production, and it’s the measure of the amount of resources of an enterprise.

______________________5. What concept of financial management takes place when the total
owned and borrowed capital exceeds its fixed and current assets.

II. State whether each of the following statement is true or false.

______________________1. Financial planning is deciding in advance, the course or line
of action for the future with respect to the financial management of a concern.
______________________2. Cash flow statement contains assets and liabilities of the or-
ganization.
______________________3. Personal finance planning is the management of money and other
financial resources that an individual or family unit performs to earn, save, invest and spend
such resources over a span of time.

______________________4. Financial plan helps the managers to achieve

the organization’s goals.

______________________5. If the owned capital of the firms is disproportionate

to the size of business operations and the firm has to depend upon borrowed

money and trade creditors it is a sufficient indicator of undercapitalization .

At the end of the formation of a company, the pro-

moters or the persons responsible for the management of
the company must estimate the total amount of funds,
finance or capital the company requires. Determine the
sources from which the funds have to be raised and de-
cide about the proper time at which, the funds have to
obtained through proper financial planning.
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FM8: Special Topics in FM Instructor: Dion Rey T. Asis, LPT

Meaning of Financial Planning
Financial Planning is deciding in advance, the course or line of action for the future with respect to the
financial management of a concern. It includes:
A. Estimating the amount of funds to be raised.
B. Determining the forms and the proportionate amount of the securities to be issued for raising the cap-
ital and;
C. Laying down the policies as to the administration of the financial plan.

Definition of Financial Plan

Financial plan may be defined as the plan, which property estimates the amount of funds required, pro-
portion 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 the financial plan. Financial plan states:
1. The amount capital required to be raised.
2. The proportion of debt in total capital and its form.
3. Policies bearing on the administration of capital.

Opinion of Coben and Robbins, the financial plan should:

1. Determine the financial resources required to meet the company’s operating program;
2. Forecast the extend to which, these requirements will be met by Internal generation of funds and to
what extent, they will be met from external sources;
3. Develop the best plans to obtain the required external plans;
4. Establish and maintain a system of financial controls, governing the allocation and use of funds;
5. Formulate programs to provide the most effective profit-volume-cost relationship;
6. Analyze the financial results of operations;
7. Report the facts to the top management and make recommendations on the future operations of
the firm.

From the above, we can conclude that financial plan is an advance programing of all the plans of fi-
nancial management and integration and co-ordination of all these plans with other functions of a compa-
ny.
The meaning of financial planning may be well understood with the help of the following definitions:
“The financial plan of a corporation has two-fold aspects: it refers not only to the capital structure of the
corporation, but also to the financial policies, which the corporation has adopted or intends to adopt.”
J.H. Bourneville.

The financial plan helps the managers to achieve the organization’s goals. The financial plan answers
the following questions:
A. How much funds, in short-term or long-term, does the organization need?
B. Where will that funds be provided from, i.e. which are the sources of financing (own equity or bor-
rowed equity (shares, bonds, securities etc.)
C. How is the organization going to use the funds?

The financial plan includes various financial information, statements, reviews and projections of the or-
ganization’s current financial position and where it wants to be in the forthcoming period. This information
help to determine how much funds the organization needs to run the business and where will that funds be
provided from – whether borrow or invest, and how to use the provided funds rationally. The financial plan
expresses the financial sustainability of the organization by evaluation of three perspectives - solvency, profit-
ability and liquidity.

The solvency assesses changes in net worth, profitability controls the earnings, and liquidity assesses
cash flows and possibilities for loan repayments. The financial plan should include three key components:
1. Statement of incomes and expenses,
2. Balance sheet,
3. Statement of cash flows.

In the statement of incomes, the incomes and expenses of the organization are summed. Incomes rep-
resent the result from sales of products or services and other sources of income. Expenses include production
costs, salaries, contributions, interests. The statement of incomes and expenses shows the amount of profit or
loss that the company will make for a period of one year. The statement of incomes and expenses includes:

Incomes – income growth and expectations how it is going to be achieved,

Expenses – operating expenses, such as expenses for supplier costs, interests, salaries, loan repay-
ments, contributions and taxes,
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FM8: Special Topics in FM Instructor: Dion Rey T. Asis, LPT

 Production costs – production costs of products which are being sold,
Gross profit – sales minus all costs related to sales,
Operating profit – profit of the organization after deduction of operating costs from gross profit,
Net profit - total incomes minus total expenses,
Net profit before tax – amount of profit before payment of the contributions,
Net profit after tax – net income minus contributions and taxes.
Balance sheet contains assets and liabilities of the organization. Its name is balance sheet because
there should be compliance between assets and liabilities of the organization. The balance sheet is significant
to the organization because it shows its financial position in certain time and what it possesses. The balance
sheet provides annual picture for the business finances of the organization. It includes:

Current assets – including cash, inventory, bank accounts and fixed assets. Fixed assets include equip-
ment, buildings, land and other immobile assets.

Liabilities – short term liabilities, including payments for salaries and fees, payments from bank accounts,
payment of taxes and contributions. Long-term payments, including payments for liabilities on loans and
bond at the end of the year.

Capital – investments and retained net worth of the earning for future investments.

Cash flow statement shows the amount of money which are expected to be made and invested in the
business in specified time. The cash flow predicts how much money will be made from the predicted sales,
how many loans will be got and how much money will be made from other sources, how much expenses will
be made and how will they be covered. The cash flow statement includes:
Cash inflow – how much money are expected to enter in the organization – based on projected sales
and incomes on the bank accounts on other basis,
Cash outflow – expected cash expenses on all basis.

As a document, the financial plan contains the following elements:

1. Resume
2. Basic presumptions
3. Key financial indicators
4. Profitability graph
5. Balance sheet
6. Display of projections for profit/loss,
7. Display of projections for cash flow.

The resume includes the most important characteristics from the other content of the financial plan, ob-
taining funds, key financial indicators from the other elements (subheadings).

The part for basic financial presumptions contains some presumptions which are made on the basis of
analysis relating to the capacity for payment. The following presumptions are being stated:
1. Movement of interest rates
2. Time of postponed payment?
3. Period in which payment are made?
4. Amount of taxes?
5. Amount of costs?
6. Percentage of credit sales?

Key financial indicators as an element of the financial plan include general costs, such as costs for sala-
ries, rent, operating costs, total costs per year, gross margin as difference between sales income and total
sales costs (direct costs), net profit calculated by deduction of all expenses, as well as taxes from total sales
income.

Profitability graph presents an amount of money needed in order to cover all costs of the business, how
many pieces of products or hours of services are needed in order to cover the costs. The break-even point is
the point above which the business will make profit.

Projection of profit or loss gives a description of the presumption and tabular display of profit/loss that
will also include the costs.

Analysis of cash flow indicates the movements of cash, i.e. how much money are there in the moment
for realization of business, raw materials, salaries for the employees, loan repayments, funding the business
growth. The cash flow is movement of the money inside the organization and outside, i.e. cycle of cash
inflows and outflows which, in fact, determines the solvency, ability to pay.
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FM8: Special Topics in FM Instructor: Dion Rey T. Asis, LPT

Financial Planning Process
The financial planning process is a logical, six-step procedure:
1. determining the current financial situation,
2. developing financial goals,
3. identifying alternative courses of actions,
4. evaluating alternatives,
5. creating and implementing a financial action plan,
6. reevaluating and revising the plan.

Determining the current financial situation means determination of the situation with regard to incomes, costs,
liabilities, loans, receivables.

Developing financial goals - firstly, an analysis should be performed and the needs for achieving what is
wanted should be determined, and it is followed by specifying goals and determining how the current in-
come will be spent in order to provide funds for investments for securing the future financial security.

Identifying alternative courses of actions means determining the factors which will affect the continuity of ac-
tions, expansion of the current situation, new courses of actions, the creativity in decision making and consid-
ering the possible alternative solutions which can lead to more effective decisions.

Evaluating alternatives means taking into consideration the conditions in which the business activities will be
performed, the values of the organization and current economic conditions in the environment. It needs to
be evaluated where will the assets be invested, what kind of costs will be made for production, also to evalu-
ate the risks, and which information will be used in order to make relevant decisions.

Creating and implementing a financial action plan means to develop plan, i.e. to choose way to achieve the
financial goals. The financial action plan needs to be implemented by all employees, to provide assets, to
invest, to maintain inventory, to provide shares or bonds or mutual funds.

Reevaluating and revising the plan means dynamic following of the plan implementation, assessing the finan-
cial decisions and adapting to the new changes of personal, social and economic factors. The review of the
implementation of the financial plan enables priority adjustments which will enable the organization to
achieve its financial goals

CHECK YOUR PROGRESS

Q 1: State the three (3) different components of financial plan.

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Q 2: List down the necessary steps involved in preparing and organizing a financial plan.
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ACTIVITY1
Visit a finance company of your choice and ask a copy of their financial plan

and forecast. Thereafter, list down the importance and role it provides for their company.

Or, download a corporate financial plan and forecast, explain the significance

and functions it provides in that corporate industry.

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FM8: Special Topics in FM Instructor: Dion Rey T. Asis, LPT

 LET US KNOW

YOU WANT TO KNOW

MORE ABOUT HOW TO
BETTER PLAN YOUR
PERSONAL FINANCES.

http://www.financial-planning-manila.com/
personal-finance-planning.html

https://saylordotorg.github.io/
text_exploring-business-v2.0/s18-03-the-
financial-planning-process.html

https://www.oberlo.com.ph/blog/financial-
plan

https://www.youtube.com/watch?
v=MXCvtC0HqLE

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FM8: Special Topics in FM Instructor: Dion Rey T. Asis, LPT

Limitations of Financial Planning
Financial planning is mainly based on estimation and forecasting techniques like future assumptions
and past records.
The uncertainty associated with the future along with other factors that are not in the control of the
management are limitations of financial planning. After all the hard work, these limitations may force you to
change your estimates as the execution of the project goes on. So you should be aware of that.
Some of the limitations of financial planning are discussed as follows:
I. Difficult in Accurate Forecasting
Financial plans are formulated by taking into account the expected circumstances in the future. But
future is uncertain and nothing can be said about it exactly, if the expectancy about the future circumstanc-
es were wrong, then the financial plan would not be effective. Hence, the reliability of financial planning is
uncertain. But this limitation may be overcome by periodical review of the financial plan.
II. Absence of Co-Ordination
Financial function may be the most vital of all other functions, but efficiency of the finance function de-
pends on the co-ordination of other departments with functions related to finance. Determination of financial
needs depends on personnel requirements, production policy, marketing possibilities and the research & de-
velopment policies. Formulation of optimum financial plan may be possible only when there is proper coordi-
nation among all functions. But generally, there is a lack of co-ordination among the functions of a firm.
III. Rigidity of Financial Plans
Generally, financial plans are rigid in nature. Rigidity means that the financial plan may not allow
changes, if at all it (allows) has flexibility in nature, managers may not like to change. It may not be ready,
even to make the changes that are necessary for the smooth running of the firm. There are a good number of
reasons that may make financial plan rigid. For example, commitment of investment on large projects, assets
might have been purchased, arrangement for raw materials are also made but managers are not psycholog-
ically prepared.
IV. Rapid Technological Changes in Industry and Customer Preferences
Rapid technological changes in the industry like, automated machinery, improved or new manufactur-
ing process, new marketing mechanism and consumer preferences demand changes in financial plan.
Methods to Overcoming Financial Planning:
Limitations of financial planning can be dealt with through proper planning and techniques, which are:
1. The planner should be given sufficient time and tools.
2. Gather information and data from a very reliable source. The base data should be cross-checked with
other sources to make it more reliable.
3. Involve concerns persons to make the planning more accurate and error-free.
4. The information system should be properly implemented, which gathers, processes and makes reports of
relevant data.
You should be aware of current political and economic signals coming from government sectors to base your
predictions more accurately.

Principles Governing a Sound Financial Plan

The various consideration or principles that should be kept in mind by a concern, while formulating its
financial plan are:
1. Simplicity: The financial plan should contain a simple financial structure that can be implemented and
managed easily.
2. Long-term view: The financial plan should be formulated, keeping in view the long-term requirements and
not just the immediate or short-term requirement of the concern.
3. Flexibility: The financial plan should be such, that it can be revised or changed according to the changing
needs of the business with the minimum possible delay.
4. Foresight: The financial plan must be visualized with much foresight. A financial plan visualized without fore-
sight may fail to meet the present as well as the future requirement of funds and bring disaster to the con-
cern.
5. Optimum use: A business should neither starve for funds nor should have unnecessary idle funds. That
means, the financial plan should provide for the optimum use of funds. While framing the financial plan,
the financial planners should keep in view, the maximization of wealth and at the same time there must be
proper balance between long-term funds and short-term funds.
6. Contingencies: The financial plan should make adequate provision of funds meeting the contingencies
likely to arise in the future.
7. Liquidity: There should be adequate liquidity in the financial plan. Adequate liquidity in the financial plan
will act as a shock absorber in the event of business operations deviating from normal course.
8. Economy: The financial plan should ensure, that the cost of raising the funds is the minimum. This is possible
by having a proper debt-equity mix in the capital structure.
9. Investor’s Temperament: Investors, who are bold and venturesome, prefer equity shares. Investors, who are
not very bold, have a liking for preference shares. Investors, who are cautious, go for debentures. As such,
the financial plan should keep in mind the temperament of preferences of investors. That is, the finan-
cial plan should be formulated in consonance with the preferences of the investors.
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FM8: Special Topics in FM Instructor: Dion Rey T. Asis, LPT

Estimation of the Financial Requirements of a Firm
On the basis of their forecast of the volume of business operations of the company, the finance execu-
tives have to estimate the amount of fixed capital and working capital required in a given period of time, say
one year, two years, four years and so on.
This part of module throws light upon the five points to be kept in mind while estimating the capital re-
quirements of a company. The points are: 1. Promotional Expenses 2. Cost of Fixed Assets 3. Cost of Current
Assets 4. Cost of Capital Procurement 5. Cost of Future Development and Expansion.
1. Promotional Expenses:
A company is generally a big venture. To promote a company is expensive. Preliminary and other
legal expenses are so heavy that even before the incorporation of a company; the promoters are to keep
themselves ready for these expenses, of course, to be recovered from future income.
Without going into details of the expenditure at the promotional stage, we can say that these expanses are
to be incurred before any receipt. Heavy expenditure of the capital nature may also enter into promotional
stage. So, this needs initiative, alertness, foresightedness, boldness and team spirit to proceed further and to
financially sound plan for the company to come up.
2. Cost of Fixed Assets:
Expenses for fixed assets should not be delinked from promo-tional expenses altogether. For in-
stance, a workshop has to be set up, lands to be purchased and construction has to be made. These also
involve colossal amount and these are promotional expenses.
Ma-chinery and other appliances may be purchased after incorporation/receipt of certificate of com-
mencement but a little bit of structure may be necessary and land acquisition may also be necessary for ob-
taining the certificate of incorporation and in case of a public com-pany for the permission of the Registrar to
commence business.
Plants, machinery, land, building etc. are all fixed expenses. Their cost should be calculated on
realistic basis; valuation is very much significant for correct calculation of capital requirements. Escalation
feature and inflationary economic condition should guide the finan-cial management for a near-correct val-
uation of fixed assets which is a very important component of total capital requirements.
3. Cost of Current Assets:
Daily running expenses including cost of materials are included in current assets. Debtors, stock in
trade, bills receivable, short term investment, cash in hand and at bank — all are considered current assets. In
the estimation of capital requirements, these assets have to be revalued and adequate provision should be
made for sundry debtors.
The realizable value of investment should be made on practical basis — both analytical and
comparative methods of calculation should be applied. Cash available from current assets is available for
repayment of liabilities. So, this has significance in the correct esti-mation of capital requirements of a compa-
ny.
4. Cost of Capital Procurement:
From various sources, corporate finance can now be made avail-able, but all these sources are
neither desirable nor suitable for a company in # particular position and situation and in the consider-ation of
other factors that may influence the future of the company.
The usual sources of corporate finance are:
Shares, debentures, ploughing back of profits' (in case of existing companies), loans from financial insti-
tutions, public deposits etc. Unlike previous days, availability of finance today has become easier but the se-
lection of the proper source of finance is not so easy.
It needs financial expertise to choose between equity capital and preference capital, share or deben-
ture, (own or loan), loans from pub-lic financial institutions or ploughing back of profits or public depos-its.
Every source has its merits and demerits. The planners are to compare, scrutinize and then decide
from which source the finance should be secured. The period for which the finance is needed, the constraints
and conditions attached to a particular source are matters deserving very careful consideration.
Not only the rate of interest or the cost, as we say, is the only point that the financial management is to bother
about but quite a host of other matters vitally affecting the company either at present or likely to affect the
company in fu-ture needs be considered.
5. Cost of Future Development and Expansion:
‘Expansion is life and contraction is death’ —so says our Swami Vivekananda. It is equally true in
the case of a company which has come up- It will carry on its business in such way that it can expand. More
sales, more production, more expenditure — all are signs of life — a life dynamic enough.
A company remaining static and main-taining its existence and there is no Endeavour on the part
of its man-agement personnel to develop or to expand, will ultimately meet death through decay. So, capital
estimation leaving enough scope for expansion and development must be borne in the minds of the plan-
ners.
To sum up, a host of factors act and react-to find out the capital’ requirements of a company.
Not only present but also future play a very important role and the existing economic condition cannot be
considered in isolation from the future economic condition.
This needs forecasting and sufficient prudence in financial observation. Ratio analysis, cash flow,
funds flow and other financial tools are used to estimate capital requirements of a company.
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FM8: Special Topics in FM Instructor: Dion Rey T. Asis, LPT

 CHECK YOUR PROGRESS
Q 3: State the two (2) limitation of financial planning.

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Q 4: State three (3) principles governing a sound financial plan.

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ACTIVITY 2
Visit
https://www.businessmanagementideas.com/financial-
management/capital/capital-meaning-types-and-features-
industries/10535

Thereafter, answer the following questions:

1. What is capital?
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2. What are the classifications of capital

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3. What are the types of capital and give five (5) examples each.
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4. State five (5) features of capital.

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Over- Capitalization and Under Capitalization of a Firm

The capital structure of a company should be fair, neither overcapitalized, nor undercapitalized.
The availability of funds should be neither too much nor too low.

Over- Capitalization
A company is said to be over-capitalized when its earnings are not sufficient to justify a fair return
on the amount of capital raised through equity and debentures.
It is said to be over capitalized when the total of owned and borrowed capital exceeds its fixed
and current assets. This happens when it shows accumulated losses on the assets side of the balance
sheet.
An over capitalized company is like a bulky person who is not able to carry his weight properly.
Such a person is prone to many diseases and is definitely not likely to be requisite active life. Unless the
condition of overcapitalization is rectified, the company may suffer from many difficulties.

Causes of Over Capitalization

1. Idle funds
2. Over-valuation of acquired assets
3. Fall in value of fixed assets
4. Inadequate depreciation provision
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FM8: Special Topics in FM Instructor: Dion Rey T. Asis, LPT

The important reasons of over-capitalization are:
1. Idle funds:
The company may have unused funds lying idle in banks or in the form of low yield investments,
and there is no likelihood of using it properly in the near future.
2. Over-valuation of acquired assets:
The fixed assets, particularly goodwill, might have been bought at a much higher cost than war-
ranted by the services to be rendered.
3. Fall in value of fixed assets:
Fixed assets might have been acquired at a time when prices were high and now the prices have
corrected substantially. But in the balance sheet the assets are yet shown at their book value less deprecia-
tion written off.
4. Inadequate depreciation provision:
If proper and adequate depreciation has not been provided on the fixed assets the result would
be more profits in the Profit & Loss Account. This book profit might have been distributed as dividend and
leaving no funds with which to replace the assets at the right time.

Remedies of over-capitalization:
The process of remedying overcapitalization is very painful. It can be remedied through following
measures:
1. Reduction in its capital so as to obtain a satisfactory relationship between proprietary funds and net
profit.
2. If over-capitalization is because of result of over-valuation of assets then it can be remedied by bring-
ing down the values of assets to their proper values.
3. Reduction of debt burden. For which negotiations with the big lenders may be made to reduce the
interest obligation.
4. Preference shares may be redeemed through capital reduction scheme.
5. Reducing face value and paid up value of equity shares.
6. Initiating merger with well managed profit making companies interested in taking over ailing compa-
ny.
Many companies have resorted to remedying overcapitalization through the measures mentioned
above.

Under- Capitalization:
If the owned capital of the firm is disproportionate to the size of business operations and the firm has to
depend upon borrowed money and trade creditors it is a sufficient indicator of undercapitalization. It may
also be because of over-trading, trading beyond capacity. It must be noted that undercapitalization is differ-
ent from high capital gearing.
In capital gearing there is a comparison between equity capital and fixed interest bearing capital
(which includes preference share capital and excludes trade creditors) whereas in the case of under capitali-
zation, comparison is made between total owned capital (both equity and preference share capital) and
total borrowed capital (which includes trade creditors as well). Under capitalization is signaled by low proprie-
tary ratio, high current ratio, and high return on equity capital.

Causes of Undercapitalization:
1. Under-estimation of future earnings in the beginning and also later stages of the company.
2. Extraordinary increase in earnings.
3. Lower estimation of total fund requirements.
4. Being highly efficient through improved technology.
5. Companies established during recession make higher earnings as and when the recession is over.
6. Companies following conservative dividend policy will in due course find themselves gradually rising
profits.
7. Purchase of assets at exceptionally low prices.

How does Undercapitalization affect?

Undercapitalization affects different stakeholders in the different ways:
Firm:
Undercapitalization brings in greater reputation, greater earnings and greater market share. High-
er rate of return leads to higher competition in the market. Higher profit means better products to follow.
There would be excessive interest on borrowed capital. However, the employees would demand higher sala-
ries, and the government may impose heavy tax.
Shareholders:
Due to increase in market share and profitability, the company enjoys better reputation. The com-
pany’s equity shares valuation goes up in the stock market. The shareholders can expect better dividends.
Consumers:
Consumers often feel that they are being overcharged, and thus feel being on the receiving
end.
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FM8: Special Topics in FM Instructor: Dion Rey T. Asis, LPT

 Society:
High earnings, high profitability, and high market valuation of shares affects society in an adverse
manner. Public feels being overcharged on the one hand, and expects such firms to raise innovations, on the
other. In the stock market for such firms often unhealthy things get into currency.

Remedies of undercapitalization:
1. To reduce the dividend per share split up at the shares; Many Indian companies, including Luxmi Ma-
chine Works, have done it.
2. Issue of bonus share will reduce both the dividend per share and earnings per share.

CHECK YOUR PROGRESS

Q 5: State the causes of over-capitalization.

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Q 6: State the effects of under-capitalization.

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ACTIVITY3

Research about the theories of capitalization.

Based on what you’ve read and understand explain each theories .

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LET US SUM UP
*Financial Management refers to the planning, organizing, directing and con-
trolling the financial activities such as procurement and utilization of funds of
the enterprise, likewise applying general management principles to financial
resources of the enterprise.
*Financial planning is deciding in advance, the course or line of action for the
future with respect to the financial management of a concern.
*The financial planning process is a logical, six-step procedure: *The financial or capital requirements of
1. determining the current financial situation, a business enterprise can be broadly
2. developing financial goals, classified into:
3. identifying alternative courses of actions, 1. Fixed capital requirement or fixed
4. evaluating alternatives, capital
5. creating and implementing a financial action plan, 2. Working capital requirement or work-
6. reevaluating and revising the plan. ing capital
*The various consideration or principles that should be kept in
mind by a concern, while formulating its financial plan are: *Five (5) points to be kept in mind while
1. Simplicity 6. Contingencies estimating the capital requirements of
2. Long-term view 7. Liquidity a company. The points are:
3. Flexibility 8. Economy 1. Promotional Expenses
4. Foresight 9. Investor’s Temperament 2. Cost of Fixed Assets
5. Optimum use 3. Cost of Current Assets
A company is said to be over-capitalized when its earnings are 4. Cost of Capital Procurement
not sufficient to justify a fair return on the amount of capital raised 5. Cost of Future Development and Ex-
through equity and debentures. pansion.
Undercapitalization, whereas, means that the rate of profit on
capital invested is higher than the normal return.
Page 13

FM8: Special Topics in FM Instructor: Dion Rey T. Asis, LPT

 F U R T H E R R E A D I N G S

For your groupwork and research study

Introduction to Risk Management

(https://www.shahucollegelatur.org.in/Department/Studymaterial/comm/
bcom3yr/1%20Inroduction%20to%20risk%20management.pdf)

Risk Management
https://www.smfg.co.jp/english/aboutus/pdf/risk.pdf

Financial Risk Management

https://www.cimaglobal .com/Documents/ImportedDocuments/
cid_mag_financial_risk_jan09.pdf

MODEL
QUESTIONS

1. Based on what you’ve read and understand from the Module 1,

explain the concepts, principles, and processes of financial planning
with no less than 150 words nor not exceed 250 words.
This will be rated according to the criteria or rubrics given.
(Downloadable from your google classroom)

……………………………………………………………………………………………………………………………………
……………………………………………………………………………………………………………………………………………
……………………………………………………………………………………………………………………………………………
……………………………………………………………………………………………………………………………………………
………………………………………………………………………………………….....................................................................
............................................................................................................................. ..........................

2. Prepare and organize your personal financial plan based from the student’s perspective
and by following this template from

https://saylordotorg.github.io/text_exploring-business-
v2.0/s18-03-the-financial-planning-process.html
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FM8: Special Topics in FM Instructor: Dion Rey T. Asis, LPT

 Pos t-Assessment
I. Fill in the blanks with appropriate word(s).
______________________1. What refers to the planning, organizing, directing and controlling the
financial activities such as procurement and utilization of funds of the enterprise, likewise ap-
plying general management principles to financial resources of the enterprise.

______________________2. What part of financial planning that provide various financial infor-
mation, statements, reviews and projections of the organization’ current financial position
and where it wants to be in the forthcoming period.

______________________3. What component of financial plan that shows the amount of money
which are expected to be made and invested in the business in specified time,

______________________4. What is the lifeblood of a business enterprise, likewise an important

factor of production, and it’s the measure of the amount of resources of an enterprise.

______________________5. What concept of financial management takes place when the total
owned and borrowed capital exceeds its fixed and current assets.

II. State whether each of the following statement is true or false.

______________________1. Financial planning is deciding in advance, the course or line
of action for the future with respect to the financial management of a concern.

______________________2. Cash flow statement contains assets and liabilities of the or-
ganization.
______________________3. Personal finance planning is the management of money and other
financial resources that an individual or family unit performs to earn, save, invest and spend
such resources over a span of time.

______________________4. Financial plan helps the managers to achieve

the organization’s goals.

______________________5. If the owned capital of the firms is disproportionate

to the size of business operations and the firm has to depend upon borrowed

money and trade creditors it is a sufficient indicator of undercapitalization . Page 15

FM8: Special Topics in FM Instructor: Dion Rey T. Asis, LPT

 REFERENCES
Bhat, S. (2013). Financial Planning and Forecasting. In Financial
Management Principles and Practices (p. 17)
https://www.bplans.com/financial-planning-business-plan/financial-plan/
https://saylordotorg.github.io/text_exploring-business-v2.0/s18-03-the-financial-
planning-process.html
https://www.ilearnlot.com/financial-planning-steps-elements-advantages-
limitations/57760/
https://exinfm.com/training/pdfiles/course02.pdf
http://www.financial-planning-manila.com/personal-finance-planning.html
https://edurev.in/studytube/Estimating-Capital-Requirements-Financial-
Planning/f6d9da4e-15d5-4b40-a1ad-072dbd531ba7_t
https://www.businessmanagementideas.com/financial-management/
capital/capital-meaning-types-and-features-industries/10535
https://www.preservearticles.com/management/over-capitalization-and-
under-capitalization-company-management/30368

Stay focused and never give up"

"Never lie, never cheat, never steal but do your best and trust yourself"
God bless on your First Module

Prepared by:

DION REY T. ASIS, LPT

Part-time Lecturer,
FM 8: Special Topics in Financial Management

Reviewed by:

EVALIZA F. MORENO, MABA

Financial Management Program Chairperson

Approved:

MARBETH MARCELO-FADRIQUELA, MABA

Dean, CBA
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FM8: Special Topics in FM Instructor: Dion Rey T. Asis, LPT