Presented by

Jagannath Pati
FINANCIAL PLAN
 A financial plan is a statement estimating the amount of
capital requirements and determining its composition.
 It emphasizes on the following aspects-
How much fund is require ?
When the fund is require ?
How the fund should be raised ?
How to use the funds ?
DEFINITION
According to Cohen and Robbins Financial planning should :

1. Determine the financial resources require to meet the company’s operating

programme.
2. Forecast the extent to which these requirements will be met by internal generation of
funds and the extent to which they will be met from external sources.
3. Develop the best plans to obtain the required external funds.
4. Establish and maintain a system of financial control governing the allocation and use
of funds.
5. Formulate programmes to provide the most effective profit-volume-cost relationship.
6. Analyse the financial results of operations
7. Report facts to the top management and make recommendations on future operations
of the firm
OBJECTIVES OF FINANCIAL PLAN
Adequate Funds
Flexibility
Long-term View
Liquidity
Optimum use
Economy
CHARACTERISTICS/PRINCIPLES OF A
SOUND FINANCIAL PLAN
Simplicity
Based on clear-cut Objectives
Less Dependence on Outside Sources
Flexibility
Solvency and Liquidity
Cost
Profitability
CONSIDERATIONS IN FORMULATING
FINANCIAL PLAN
Nature of Industry
Standing of the concern
Future Plans
Availability of Sources
General Economic conditions
Government Control
STEPS IN FINANCIAL
PLANNING
Establishing Financial Objectives
Formulating Financial Policies
Formulating Procedures
Providing for flexibility
ESTIMATING LONG-TERM AND
SHORT-TERM FINANCIAL NEEDS
The finance required for a business can be broadly classified
into two main categories :
1. Fixed Capital Requirements, and
2. Working Capital Requirements
ASSESSMENT OF FIXED CAPITAL
REQUIREMENTS
Estimation of Fixed Assets Requirements
 Estimation of Intangible Assets Requirements
FACTORS AFFECTING THE ESTIMATION
OF FIXED ASSETS REQUIREMENTS
Internal Factors
a) Nature of Business
b) Size of Business
c) Activities Undertaken by the Enterprise or Scope of Business
d) Production Techniques
e) Mode of acquisition of Fixed assets(Extent of Lease or Hire)
f) Acquisition of old Equipment and Plant
g) Decision as Regards Ancilliary Units
h) Availability of Fixed Assets at Concessional Rates
External Factors
a) International conditions and Economic Outlook
b) Population Trends and its composition
c) Shift in consumer Preferences
d) Competitive factors
e) Shift in technology
f) Government Regulations
ESTIMATION OF INTANGIBLE ASSETS
REQUIREMENTS
1. Promotion Expenses
2. Incorporation and Organization Expenses
3. Cost of Financing
4. Initial Operating losses
5. Cost of Acquisition of patents, Copyrights,
Goodwill etc.
ASSESSMENT OF WORKING
CAPITAL REQUIREMENTS
1. Nature or character of business
2. Size of business/scale of operations
3. Production Policy
4. Manufacturing process/Length of Production cycle
5. Seasonal variations
6. Working capital cycle
7. Rate of stock turnover
8. Credit Policy
9. Business cycles
10. Rate of Growth of business
11. Earning capacity and dividend policy
12. Price level changes
DIFFERENCE BETWEEN PLAN
AND POLICY
A plan is a set out of actions that will be
undertaken to achieve a goal. Plans give
direction to actions and ensure that all actions
are moving towards stated goals.

A policy is a set of guiding principles or rules

which is framed to influence decisions and
actions in implementation of plan that reflects
the ultimate behavior of the organization.
FINANCIAL POLICIES
Definition :
Criteria describing a corporation's choices
regarding its debt/equity mix, capital
structure, method of financing investment
projects, and hedging decisions with a goal of
maximizing the value of the firm to some set
of stockholders.
ISSUES RELATED TO FINANCIAL
POLICIES
The Financial policies of a corporate mainly are related to the
following issues :
1. Sources of Finance
2. Capital Structure decision
3. Capital Budgeting
4. Dividend Decision
5. Working Capital Management
6. Financial Reporting
7. Financial Analysis
SOURCES OF FINANCE
1. Internal Source
Past Accumulated Profit
Provisions
2. External Source
i) Ownership Capital
Equity Shares
Preference Shares
ii) Borrowed Capital
Debentures/Bonds
Loans and Credits
 COST OF RAISING
FUND/CAPITAL
The cost of capital means cost of obtaining funds.
A decision to invest in a particular project depend
upon the cost of capital of the firm or the cut off rate
which is minimum rate of return expected by the
investors.
It affects the market price of the shares of the firm.
Higher the risk involved in a firm, higher the cost of
capital.
METHODS OF RAISING FUNDS
Public Issue
Right Issue
Offer of Sale
Private Placement
Appointing Underwriter
Borrowings
CAPITAL STRUCTURE
Refers to the kinds of securities and its composition and
proportion.
The capital structure may be in following forms :
a) Equity shares only,
b) Equity shares and Preference Shares,
c) Equity shares and Debentures,
d) Equity shares and Preference Shares and Debentures
CAPITAL BUDGETING
Capital Budgeting is the process of making investment decision
in capital expenditures.
Its objectives is to increase the profitability, that can be
achieved by the following :
a) Increasing revenue
b) Reducing cost
There are various methods are used for capital budgeting :
a) Pay Back Period Method
b) Rate of Return Method
c) Net Present Value Method
d) Internal Rate of Return Method
e) Profitability Index Method
FACTORS INFLUENCING CAPITAL
BUDGETING DECISION
Urgency
Degree of certainty
Intangible factors
Legal factors
Availability of funds
Future earnings
Obsolescence
Research & Development projects
Cost considerations
DIVIDEND DECISION
Dividend refers to that part of profits of the
company which is distributed by the company
among its shareholders.
It is the consideration that is given by
company for using the funds of investors.
DETERMINANTS OF DIVIDEND POLICY
1. Legal Restrictions ( Transfer of profits to Reserve , as per
Companies Act,1956)
2. Magnitude and Trend of Earning
3. Desire and Type of Shareholders
4. Nature of Industry
5. Age of the company
6. Future Financial Requirements
7. Government’s Economic Policy
8. Taxation Policy
9. Inflation
10. Control Objectives
11. Requirements of Institutional Investors
12. Stability of Dividends
13. Liquid resourses
Types of dividend policy
Stable dividend policy
Regular dividend policy
Irregular dividend policy
No dividend policy
Working Capital Management
Working capital is the amount of funds necessary to cover
the cost of operating the enterprise.
 For Example -Purchase of raw materials, Payment of
wages and other day to day expenses etc.
Types :
1.Permanent or Fixed Working Capital
2.Temporary or Variable Working Capital

Determinants of Working Capital

- Same as Slide 13 -
FINANCIAL REPORTING
Financial Reporting is nothing but the presentation of
financial facts relating to the performances and
activities of the enterprise.
Methods of Reporting:
1. Oral
2. Written
3. Graphic
 Reporting is made as per the level of management.
LEVELS OF MANAGEMENT

Reportin
g
.

The Annual Financial Reporting is made as per

following guidelines
Reporting of Banking Companies---RBI
Reporting of Insurance Companies ---IRDA
Reporting of other Corporate ----AS/IAS
FINANCIAL ANALYSIS
Financial Analysis is evaluation and
interpretation of financial data and reports
finding out the results thereof.
It says about the problems and its reasons, on
the basis of which corrective actions are
taken.
It includes Ratio analysis, Funds flow
Statements, Cash Flow Statements,
Comparative Statements, Standard Costing
and Variances, Budgetary Control etc.
.
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