Financial Planning

CHAPTER 3 Tools and Concepts

Learning Outcomes:
1.Enumerate the different steps in the financial
planning process.
2.Using the proper format, illustrate the
preparation of budgets and projected financial
statements through the formula.
3.Apply the tools in managing cash, receivables
and inventory.
What is a Financial Planning?
Introduction

Financial Planning is the process of

estimating the capital requirements
and determining their sources
including their efficient utilization. It
is also the process of outlining the
financial policies of an enterprise in
terms of procurement, investment
Objectives of Financial Planning

Financial planning is geared towards the following

objectives:
1.To determine the capital requirements of the firm
2.To determine the appropriate capital structure
3.To outline the financial policies with regard to cash
control, lending and borrowings.
4.To ensure maximum utilization of scarce financial
resources at least cost to yield expected returns on
investment.
Importance of Financial Planning
Financial Planning is a process of setting the
objectives, policies, procedures, programs and budgets
relative to the financial activities and transactions of a
firm. The following state why financial planning is
important.
1. Financial Planning ensures adequacy of funds.

2. Financial Planning helps in maintaining stability

through a reasonable balance between outflow and
Importance of Financial Planning

3. Financial Planning ensures the support of investors

in the provision of funds due to the presence of sound
financial and investment policies.

4. Financial Planning helps in prioritizing expansion

programs needed for long-run survival of the company.
Importance of Financial Planning

5. Financial Planning reduces uncertainties brought by

the changing market trends which can be faced easily
through the establishment of enough funds.

6. Financial Planning helps to avoid hindrances to

growth of the company by considering the capital
requirements both for short term and future plans.
Steps in Financial Planning

Financial forecasts form the basis for financial

planning. Forecasts are based on past performance of
the firm which may not necessarily be repeated in the
future.
The main steps involved in financial planning are as
follows:

1. Analysis of the firm's earlier periods' performance

with a view to understand the firm's core competencies
Steps in Financial Planning

2. Understanding the firm's operating characteristics

covering products, markets, competition, marketing
strategies and operating risks with a view to decide
about the business portfolio and growth objective

3. Determining the investment requirements of the

firm and the available choices in view of the desired
growth
Steps in Financial Planning

4. Estimating the cash flows, i.e. revenues and expense

and funds requirement considering the investment and
dividend decisions

5. Deciding the financing sources, i.e. debt or equity

and selecting suitable methods for raising funds
Preparing Budgets
Most organizations prepare budgets as bases in
evaluating the results of their operations by comparing
the actual figures over the previous years.
The following are the basic steps in the preparation of
a budget:

1. Update budget assumptions.

2. Review bottlenecks.
Preparing Budgets

3. Available funding.

4. Costs considerations.

5. Create budget package.

6. Issuance of budget package.

Preparing Budgets

7. Obtain revenue forecast.

8. Obtain department budgets.

9. Obtain capital budget requests.

10. Update the budget model.

Preparing Budgets

11. Review the budget.

12. Process budget iterations.

13. Issue the budget.

14. Load the budget.

 Criteria Level 4 Level 3 Level 2 Level 1
Mastery of the The reporters The reporters The reporters The reporters
topic demonstrate total demonstrate demonstrate demonstrate no
mastery of the knowledge of the knowledge of some mastery of any
contents of their important contents contents of their contents of their
report of their report report report

Delivery of and The group delivers The group delivers The group delivers The group delivers
Presentation of the a very creative a creative the topic orally the topic orally
topic presentation of the presentation of the with visual aids without any visual
topic topic aids

Instructional The instructional The instructional The instructional The instructional

materials materials used are materials used are materials used are materials used
very innovative innovative not so exhibit no effort or
extraordinary preparation

Cooperation All members One member Two members Three members

participate actively become inactive in become inactive in become inactive in
the preparation and the preparation and the preparation and
presentation presentation presentation