FINANCIAL GOAL SETTING

INTRODUCTION

Financial planning includes estimating

a)the amount of capital to be raised by the firm b) Proportionate amount of securities c) Laying down the policies as to the administration of the financial plan

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There are two major areas of financial decision making 1) Funds requirement decision is concerned with the estimation of the total funds 2) Financial decision is concerned with the sources from which the funds are to be raised

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Business enterprise not only gets the funds required at reasonable cost but it is also necessary that the funds are received at proper time It is necessary that the management of an enterprise takes care of all these aspects right at the time of formation of company by having proper financial planning

FINANCIAL FORECASTING
Forecasting is the formal process of predicting future events which are going to affect significantly the functioning of an organization It implies the technique of determining in advance the requirement & utilization of funds for a future period It is also a technique of systematic presentation of data in the form of financial statements & ratios

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A forecast is a prediction of what is going to happen as a result of a given set of circumstances Forecast means: a) Prediction b) Provision against future c) Calculation of probable events

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Forecasting aims at reducing the areas of uncertainty that surround management decision making w.r.t a)costs, profits, sales, production, pricing etc It include projection of variables both controllable & non-controllable

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It is mere assessment of future events Object of forecasting is not only to determine the trend of figures that will tell exactly what will happen in future but also to make analysis It will enable the firm to take advantage of future conditions to a greater extent It is an initial step in financial planning

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It start with predicting the future events that will have significant impact on the firms business and its success or failure Forecast will lead to setting up of goals of the firm & translate the goals into operational plans for action

TECHNIQUES
1 .Percentage sales method Sales have a significant effect on the financial needs of a business Different items of expenses, assets & liabilities can be expressed as a percentage of sales Financial data can be projected on the basis of sales

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2. Days sales method Days sales method is a traditional technique used to forecast the sales by calculating the number of days sales Establishing relationship with the balance sheet items to arrive at the forecasted balance sheet It is useful for forecasting funds requirements of a firm

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3. Simple linear regression method It provides estimates of values of dependent variables from the values of independent variables It is used to estimate funds For financial forecasting sales are taken as an independent variable & then the values of each item of asset are forecasted

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4. Multiple regression method 5. Projected fund flow statement Is a statement of sources & application of funds It analyses the changes taking place between two balance sheet It shows data relating to source of funds & their possible application in fixed asset It is an important tool extensively used in financial forecating

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6. Projected cash flow statement It shows the cash flows arising from the operating activities, investing activities & financial activities It can be used in forecasting the financial requirement of the firm It focuses on the cash inflow & outflow of various items

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7. Projected income statement It can be prepared on the basis of forecast of sales & anticipated expenses for the future period The relationship between sales & expenses can be established & accordingly the expenses & income can be estimated Difference is either profit or loss for the future period

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8. Projected balance sheet It can also be prepared on the basis of future estimates of assets, liabilities & any other items Difference between assets & liabilities can be assumed as cash balance or bank overdraft

BENEFITS
Provides useful information for financial decision making

It provide warning to the mgt when the events are going out of control

It helps for successful financial planning

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It enables the firm to make optimum utilization of funds

It facilitates the firm to plan for its growth & financial needs

It makes the firm to adopt appropriate financial policies

APPROACHES TO FINANCIAL PLANNING

Basic objective of financial management are the maintenance of liquid assets & maximization of profitability of the firm

Maintenance of liquid assets means that the firm has to keep adequate cash in hand

OBJECTIVES
To ensure fair return to shareholders

To build up reserves for growth & expansion

To ensure effective utilization of financial resources

APPROACHES

Traditional

Modern

TRADITIONAL APPROACH

Traditional approach had limited the role of financial management to raising & administrating of funds needed by the company Arrangement of funds from
financial institutions Through financial instruments Looking after legal & accounting relationship

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It included the whole gamut of raising funds externally Role of finance manager is also limited It was expected to keep accurate a) financial records, b) prepare reports on the companys status & performance c) Manage cash

MODERN APPROACH

Is an analytical way of looking at the financial problems of a firm

Total volume of funds required by a firm Specific asset to be acquired by the firm Method of financing the firms requirements

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Modern approach to financial planning relates to the four broad decision areas of financial management
Fund requirement decision

Financing decision
Investment decision Dividend decision

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Estimate about total funds required by the firm Identify sources from which the funds can be raised Then amount that can be raised from each source Then cost