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Planning is the key to the financial manager's success. No business whether small or large, can be successful until and unless it has prepared sound financial plan. The planning process is an integral part of the financial manager's job. It is needed both in terms of long-term financing as well as in forecasting the short-term needs of funds. The Long-term aspect of financial plan is concerned with the arrangement of the financial pattern while short-term financial planning gives emphasis on cash forecasting. According to J. H. Bonneville, "The financial plan of a corporation has a two-fold aspect; 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." Thus, financial planning includes two things capital structure and financial policies. According to Solomon and Pringle, Financial planning may refer to the process of determining the financial requirements and financial structure necessary to support a given set of plans in other areas". It states (i) the quantum of finance needed, (ii) the pattern of financing, i.e. the form and proportion of various securities and (iii) the policies to be pursued for the floatation of various securities, particularly the time of flotation.
Determination of Financial Objectives - The financial objective of a firm may be divided into
short-term objectives as well as long-term objectives. The short-term objectives may be market standing, innovation or expansion, maintaining the liquidity of funds, proper maintenance of sales etc. On the other hand, the long-term objective of financial planning is to secure and employ resources in the amount and proportion necessary to increase the efficiency of the remaining factors of production. Determination of Financial Policies - It involves the evolution of such policies that act as guide to the firm in achieving its primary objectives. Some important policies may be regarding capitalization, capital structure, the policy of trading on equity, the policy of fixed assets management, the policy of dividend distribution and the policy of working capital management, etc. Determination of Financial Procedures - The next step in the process of financial planning is to develop procedures that aid in the achievement of the firm's goals and objectives. The financial executives decide about the control system. He should develop standards of performance & evaluate the performance and then compare the activities with the standards. Manager will have to employ the technique of capital budgeting, budgetary control, standard costing, financial forecasting in the process of financial planning. Provision of Flexibility : Financial planning should ensure proper flexibility in objective, policies and procedures so as to adjust it according to changing economic conditions. The objective is to make use of new opportunities for the benefit of the concern that may arise in future.
The need for financial planning in a concern can not be avoided. As a short-term aspect of financial planning, it ensures the balanced flow of funds so that the firm may be able to meet its commitments. As a long-term aspect of planning, it becomes a tool of efficient use of financial resources. The need for financial planning arises to ensure the following: Availability of sufficient cash f or meeting expenses, emergencies and contingencies. To maintain the necessary liquidity throughout the year, To indicate the points of time where funds will be required and how much. To indicate the surplus resources available for expansion or external investments. To provide ahead for any more funds, if required,
To increase the confidence in the minds of the suppliers of funds by adopting suitable financial policies.
Nature of Business: The nature of business plays a decisive role in drafting of a financial plan.
A capital intensive industry like cement, paper or fertilizer requires more capital. In addition to it, the stability and regularity of income, future prospects of growth, the fluctuation in the demand of the product being manufactured by the firm, the extern of automation, etc. play dominant role in determining the capital needs as well as its capital structure. Degree of Risk: The risk involved in the business should also be discussed while planning the sources of funds. The business having more risks should issue ownership securities only while enterprises with stable earnings expectation can take advantage of trading on equity. Status of Unit: This step includes age, size, market area, scope and nature of the field, the reputation of management and credit rating in the market etc. Appraisal of alternative Source of Finance: A study of the potential suppliers of funds has to be made and only then a firm can expect to obtain funds suited to its advantage. Attitude of Management: The attitude of management and management policies regarding trading on equity, capital gearing ratio, the desire and extent to conserve the control of enterprise, etc., affect in no small amount the pattern of financing.