1. Chapter - 2 FINANCIAL MANAGEMENT, Dr. RATNESH CHATURVEDI 2 Chapter FINANCIAL PLANNING

2. Chapter - 2 FINANCIAL MANAGEMENT, Dr. RATNESH CHATURVEDI What you mean by Financial plan? Financial plan may be defined as the plan, which properly estimates the amount of funds required, proportion 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 financial plan. Financial plan states: 1. The amount of capital required to be raised, 2. The proportion of debt in total capital and its form, and 3. Policies bearing on the administration of capital. FINANCIAL PLANNING

3. Chapter - 2 FINANCIAL MANAGEMENT, Dr. RATNESH CHATURVEDI NEED FOR FINANCIAL PLANNING:  Many technically sound and economically viable industrial projects have failed simply because of poor financial planning. Thus, it is essential tool for any business undertaking. 1.Financial Planning is needed not only in the case of enterprises proposed to be setup, but is equally needed for on-going enterprises as well. 2.The need for financial planning arises from the following reasons : 3.Goode financial planning : 4.would ensure liquidity throughout the year. 5.Would bring to light the surplus of funds available for expansion 6.Would contribute to rational utilisation of the available resources to get the maximum benefit. 7.Would make things easy for the management team to function smoothly. FINANCIAL PLANNING

4. Chapter - 2 FINANCIAL MANAGEMENT, Dr. RATNESH CHATURVEDI Steps In Financial Planning 1. Estimating the Capital Requirements : It is the first step in financial planning. Requirement of the concern will be estimated on the basis of the following factors :  The cost of fixed assets like hand, buildings, plant and machinery furnitures and fittings, required to be acquired  The cost of intangible assets like patents, goodwill etc., to be acquired  The amount required to be invested in current assets like stock of raw materials, stores, stock of finished goods, sundry debtors, cash etc.  The cost of promotion and the cost of financing i.e., the amount of expenses to be incurred on the promotion of the concern like registration fee, stamp duty, legal charges etc., and the amount of expenses to be incurred on the printing of prospectus, share application forms etc. FINANCIAL PLANNING

5. Chapter - 2 FINANCIAL MANAGEMENT, Dr. RATNESH CHATURVEDI Steps In Financial Planning 2.Determination of the Form and the Proportionate Amount of Securities to be issued: The second step in Financial Planning is the determination of the forms and the proportion of the various securities to be issued by the concern for raising capital. 3.Other Steps  Projection of Financial Statements  Determinations of Funds Needed  Forecast the Availability of Funds  Establish and Maintain Systems of Controls  Develop Procedures  Establish of Performance-Based Management Compensation System FINANCIAL PLANNING

6. Chapter - 2 FINANCIAL MANAGEMENT, Dr. RATNESH CHATURVEDI Financial Planning Process  Projection of Financial Statements  Determinations of Funds Needed  Forecast the Availability of Funds  Establish and Maintain Systems of Controls  Develop Procedures  Establish of Performance-Based Management Compensation System FINANCIAL PLANNING

7. Chapter - 2 FINANCIAL MANAGEMENT, Dr. RATNESH CHATURVEDI Factors Affecting Financial Plan  Nature of the Industry  Status of the Company in Industry  Evaluation of Alternative Sources of Finance  Attitude of Management Towards Control  Magnitude of External Capital Requirements  Capital Structure  Flexibility  Government Policy FINANCIAL PLANNING

8. Chapter - 2 FINANCIAL MANAGEMENT, Dr. RATNESH CHATURVEDI Limitations of Financial Planning  Difficult in Accurate Forecasting  Absence of Co-Ordination  Rigidity of Financial Plans  Rapid Technological Changes in Industry and Customer Preferences FINANCIAL PLANNING

9. Chapter - 2 FINANCIAL MANAGEMENT, Dr. RATNESH CHATURVEDI Principles Governing a Sound Financial Plan :  Simplicity  Long-term view  Flexibility  Foresight  Optimum use  Contingencies  Liquidity  Economy  Investor’s Temperament : FINANCIAL PLANNING

10. Chapter - 2 FINANCIAL MANAGEMENT, Dr. RATNESH CHATURVEDI CAPITALISATION:  In financial management the term ‘capitalisation’ is used in two different senses, viz. (1) in a broad sense and (2) in a narrow sense. In a broad sense, the term ‘capitalisation’ is considered synonymous with financial planning. So, the term is taken to refer to the determination of the amount of capital to be raised, the securities through which the capital is to be raised and the relative proportions of the various types of securities to be issued, and also the administration of the capital.  In a narrow sense, the term ‘capitalisation’ is taken to mean the determination of only the quantity of finance required by a company. FINANCIAL PLANNING

11. Chapter - 2 FINANCIAL MANAGEMENT, Dr. RATNESH CHATURVEDI Over - Capitalisation A company is said to be over- capitalized, when its actual earnings or profits are not sufficient to pay dividend at proper rate to the shareholders. In short, when the actual capitalization of a company (i.e., the capitalization of a company arrived at by adding up the par value or paid-up value of share capital, reserves and surplus, debentures and other long-term borrowings) is more than the proper capitalization (i.e. the capitalization determined on the basis of either the cost approach or the earnings approach). FINANCIAL PLANNING

12. Chapter - 2 FINANCIAL MANAGEMENT, Dr. RATNESH CHATURVEDI Over – Capitalisation Vs. Excess Capital  Over-capitalisation arises when the existing capital of a company is not effectively or properly utilized, as indicated by the fall in the earning of the company.  On the other hand, excess capital arises when the company has raised capital in excess of its requirements.  It may be interesting to note that, sometimes, a company may be over-capitalisation, but it may suffer from shortage of capital. FINANCIAL PLANNING

13. Chapter - 2 FINANCIAL MANAGEMENT, Dr. RATNESH CHATURVEDI Under–Capitalisation  Under-Capitalisation refers to a situation where the actual capitalization of a company is much less than its proper capitalization (i.e., the capitalization warranted by its earnings).  For instance, if the general rate of return or fair rate of return on the ivestment or capital employed in the industry is 10%, the average annual earnings or profits of a company are Rs. 60,000 and the actual capitalization of the company is Rs. 5,00,000, the company is under-capitalised. The company is under- capitalised. FINANCIAL PLANNING