DATE - 30/07/20 FINANCIAL MANAGEMENT ANUSHKA AGRAWAL

ACM 301 B.COM 2ND YEAR

DHA-O5 1950153

ELLORA CENTER

FINANCIAL PLANNING
DEFINITION
Financial Planning is the process of estimating the capital required and
determining it’s competition. It is the process of framing financial policies in
relation to procurement, investment and administration of funds of an enterprise .

Financial planning has been defined as advance programming of all the plans of
financial management and the integration and co-ordination of them with rest of
the functions of the organisation.

STEPS INVOLVED IN FINANCIAL PLANNING

STEP 1: ESTABLISHING OBJECTIVES

STEP 2: POLICY FORMULATION

STEP 3: FORECASTING

STEP 4: FORMULATION OF PROCEDURES

 According to Earnest W Walker and William H Baughn, there are four steps in
financial planning:

(1) Establishing Objectives: The financial objective of any business is to employ

the factors of production i.e. an optimum way to achieve the overall objective of
the enterprise. Both short run and long run objectives should be so established as
to use capital in correct proportion.

(2) Policy formulation: Financial policies act as guides for procuring, disbursing of
funds and monitoring the utilisation which may be:

 Policies governing the amount of capital required for firms.

 Policies which determine the control of parties.
 Policies to determine the use of debt.
 Policies which decide the ratio of debt and equity.
 Policies which determine the credit and collection.

(3) Forecasting: The diligence of finance manager is reflected in forecasting the

future course of action and the combination of factors of production.

(4) Formulation of Procedures: A proper financial planning is successful only with

a proper implementation with formulation of strategies and policies.

FEATURES OF GOOD FINANCIAL PLANNING

There are many features of good financial planning. Some are:-

SIMPLICITY PROFITABILITY

FEATURES OF
FORESIGHT GOOD FINANCIAL
INTENSIVE USE
PLANNING

FLEXIBILITY LIQUIDITY
 SIMPLICITY
A financial plan should be so simple that it may be easily understood even
by a layman. A complicated financial structure creates complications and
confusion.

 FORESIGHT
Foresight must be used in planning the scope of operation in order that the
needs for capital may be estimated as accurately as possible. A plan
visualised without foresight spells disaster for the company, if it fails to
meet the needs for both fixed and working capital. In simple words, the
canon of foresight means that besides the needs of ‘today’ the
requirements of ‘tomorrow’ should also be kept in view.
 FLEXIBILITY
Financial readjustments become necessary often. The financial plan must
be easily adaptable to them. There should be a degree of flexibility so that
financial plan can be adopted with a minimum of delay to meet changing
conditions in the future.
 PROFITABILITY
A financial plan should maintain the required proportion between
fixed charge obligations and the liabilities in such a way that the
profitability of the organisation is not adversely affected.
 INTENSIVE USE
Capital should not only be adequate but should also be productively
employed. Financial plan should prevent wasteful use of capital, avoid idle
capacity and ensure proper utilisation of funds to build up earning capacity
of the enterprise. There should be optimum utilisation of available financial
resources.

 LIQUIDITY

It means that a reasonable percentage of the current assets must be kept in

the form of liquid cash. Cash is required to finance purchases, to pay
salaries, wages and other incidental expenses. The degree of liquidity to be
maintained is determined by the size of the company, its age, its credit
status, the nature of its operations, the rate of turnover etc.