Executive Summary

The financial management deals with short term items and long term items. It is immense for
every financial analyst in which the working capital has the special in present day of industrial
function. The important aspect is the estimation of how much cash, stock and other liquid assets
of the firm can keep operating day to-day function. Here, financial analysis helps the
management to make the best use of its financial strength and to spot out the financial weakness
to take corrective actions. Thus, it could be stated that it is starting point for using any
sophisticated forecasting a planning procedures. Business finance mainly involves, rising of
funds and their effective utilization keeping in view the overall objectives of the firm. This
requires great caution and wisdom on the part of management.

Forecasting in financial management is used to estimate firm future financial needs. If the
financial manager has not attempted to anticipate his firm’s future financing requirements, then a
crisis occurs every time the firms cash inflows fall below its cash outflow. Planning for growth,
it means that the financial manager can anticipate the firms financing requirements and plan for
them well in advance of the needs. Financial planning is essentially concerned with the
economical procurement and profitable use of funds a use which determined by realistic
investment decisions.

The main function of bank is accepting deposits and lending money to the people. The
percentage of credit to working capital and deposit is showing an increasing trend, during this
study period.

1
INTRODUCTION

The financial management deals with short term items and long term items. It is immense
for every financial analyst in which the working capital has the special in present day of
industrial function. The important aspect is the estimation of how much cash, stock and other
liquid assets of the firm can keep operating day to-day function.
Financial analysis is the process of identifying the financial strengths and weakness of the
firm by properly establishing relationship between the item of the balance sheet and profit and
loss account.

Financial management is the operational activity of a business that is responsible for

obtaining and effectively utilizing the funds necessary for efficient operation.” By Joseph &
Mass.

Forecasting in financial management is used to estimate firm future financial needs. If the
financial manager has not attempted to anticipate his firm’s future financing requirements, then a
crisis occurs every time the firms cash inflows fall below its cash outflow.
One of the key challenges facing companies today is the ability to plan for the future and
to predict operating performance. An effective, timeous and accurate budgeting, forecasting and
financial planning process offers organizations an opportunity to prepare for and be in a position
to succeed in a rapidly changing business environment. Companies that can update plans and
forecasts quickly are in a better position to take advantage of opportunities and respond to threats
(Stretch, 2009: 90).
Budgeting, forecasting and variance analysis are management accounting tools that can
help organisations gain a more in depth understanding of the industry in which they operate.
Over time, the understanding is refined and these tools can ultimately add value to the
organisations’ strategic decision-making process.
Achieving true value through the financial planning process is dependent on a number of
factors, namely:
 understanding of the industry-specific challenges and opportunities

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  corporate culture of the organization regarding planning and budgeting

 the organizations ability to quickly change the scope of its assumptions as the business
environment changes

 time and costs involved in the process

 integration of all the functional areas of the organization in the planning process

Organizations need to carefully consider the economic environment as well as take

cognizance of the various internal and external factors which may have an impact on its
operations. According to Botten (2008: 42) organizations should maintain a weather-eye on its
environment, watching out for emerging opportunities and threats. Each industry has its own set
of challenges and opportunities that organizations have to take into account in their strategic
planning. Therefore, budgeting and forecasting have to consider these general and industry-
specific opportunities and threats.
An organizations attitude toward planning is important, buy-in from the whole organization
must be obtained in order for the process to add value and to be effective. Stretch (2009: 89)
argues that many managers are burdened with planning systems developed years ago in a
relatively static, easy to understand, industrial age. This kind of organizational scenario at a
managerial level could lead to negativity and a lack of buy-in to the planning process. Other
reasons for criticism and lack of buy-in are highlighted by Collier & Agyei-Ampomah (2007: 39
- 40) as follows, budgets;

 are time-consuming and expensive

 provide poor value to users

 are too rigid and prevent fast response

 can lead to unethical behavior

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 In an environment where timely and accurate information is invaluable to making strategic
decisions, an organizations ability to change or update the original plan quickly is crucial. The
use of flexible budgets or rolling forecasts has given organizations this opportunity. A flexible
budget or forecast is a much better basis for investigating variances, especially when key drivers
such as planned volumes differ from the original plan (Collier & Agyei-Ampomah, 2007: 41).
Shortened budgeting and planning cycles are also integral to the success of the financial planning
process. According to PricewaterhouseCoopers (2011: 9), the consequence of lengthy planning
and budgeting cycles often mean that the final budget falls out of step with quickly evolving
business conditions. Shortened planning cycles also mean there are less costs involved in the
process. The role of the finance department is to provide a financial evaluation of agreed-upon
sales volumes, macro-economic and internal assumptions.

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 Although finance drives the budgeting process, it has to originate at a strategic level
through the company’s mission statement, key corporate objectives and goals. Financial planning
must be an integrated process involving all the functional areas of the organization.
PricewaterhouseCoopers (2011: 3) states the importance of linking sales and operational
planning activities with the financial planning process. Ogilvie (2008: 28-35) argues that
financial analysis requires an understanding of the products, services and operating
characteristics of the entity. This reiterates the need for finance to be closely involved with the
various functional areas of the organization throughout the planning process. Improving the
finance department’s understanding of the business will ultimately improve the quality and
accuracy of the financial evaluation.

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2.1. Introduction

Research methodology, also known as the research paradigm, is the way one thinks about
research, how one collects and analyses the data and the way in which one writes the
dissertation. Two types of research have been identified; namely, qualitative and quantitative
research.
Qualitative research is concerned with qualities and non-numerical characteristics while
quantitative research is all about data that is collected in a numerical format. Phenomenological
research tends to produce qualitative data and positivistic research tends to produce quantitative
data (Collis & Hussey, 2003).
The main advantage of a quantitative approach to data collection is the ease and speed
with which the data can be collected. In this research it is possible to use large samples while in a
qualitative study the sample size may be small. For example, a case study may consist of one
respondent. A qualitative data collection method can be time consuming and costly, although it
can be argued that qualitative data provides a more real basis for interpretation and analysis.
The research project will follow a mixed research approach which is a combination of qualitative
and quantitative approaches.

2.2. Objectives of the study

2.2.1. Primary objective

The primary objective of the study is to assess whether organizations are using their
budgeting, forecasting and financial planning information as a strategic tool in the decision-
making process. The research aims to investigate the various factors that hinder the success of
the finance department in delivering a quality financial plan, budget or forecast to top
management and the rest of the organization.

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2.2.2. Secondary Objectives
To achieve the primary objectives, the following secondary objectives will be pursued:
 to investigate current organizational paradigms towards budgeting, forecasting and
financial planning

 to explore the various factors influencing budget and forecast accuracy and quality

 to explore the role of the finance department in a value-adding budgeting, forecasting and
financial planning process

 to determine the role of financial planning information in the strategic decision-making of

firms

2.2.3 Research design objectives

The following research design objectives will be pursued in this study:
 to conduct a literature review on existing, available and current information regarding
budgeting, forecasting and financial planning

 based on the literature review, to construct a questionnaire which will be used to collect
the primary data needed to address the research objectives

 to finalize the questionnaire and seek ethics clearance for the questionnaire from the
NMMU Ethics Committee

 to execute the data collection procedure by mailing the questionnaire to a selected sample
of organizations in the Eastern Cape’s manufacturing sector

 to analyze and interpret the data and make conclusions

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2.3. Scope of the study
 The study covers all deposits and loans of the HDFC Bank. Provide as over views of
working capital and measure the effectiveness of the various aspect of current assets and
liabilities.
 It gives the overview performance of the bank, and various challenges and opportunities
ahead for the HDFC Bank.

2.4. Review of Literature

Literature regarding budgets and their importance within a company is important. In the
current economic climate, companies are starting to pay more attention to efficient management
of resources and, for this purpose, use budgets as tools for financial management at company’s
level and at the level of the main types of company’s activities. So, the budget is the most
important tool in conducting any activity successfully. A budget is the tool by which a
company’s management translates into action the corporate strategies and quantitative mission
statements.

The existence, development and environmental adaptation of an economic entity generate

a complex network of financial flows that define the general assembly of financial economics at
both microeconomic and macroeconomic level, nationally and internationally. Developing a
company must be based on knowledge of its capabilities, weaknesses and strengths as well as
external macroeconomic environment. From these results it is absolutely necessary to develop an
appropriate policy to ensure not only the maintenance of the business to a certain level but also
for development in accordance with the changing economic environment in which it exists and
operates.

For this policy to be as accurate and useful to executive bodies of the economic entity it
must set clear financial goals to be achieved and to accurately scale capital needs that can be
used cost-effectively. Also, such a policy must be geared towards the future and try to predict
optimal financing possibilities depending on existing costs on raw materials, capital and finished
goods markets in which the company operates.

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 To ensure a dynamic balance on both short and long term, the company’s management is
obliged to pay attention to how they are planned and carried out all financial processes within the
company:

 capital needs assessment;

 finding funding opportunities;
 Organization of raised capital using in the most efficient manner possible.
In the context of a competitive market economy, business activity should be conducted
profitably according to a balanced relationship between revenues and expenditures.

2.5. Data collection methods

The company may choose from a wide range of forecasting techniques. There are
basically two approaches to forecasting, qualitative and quantitative:

Approach 1: Qualitative- Using qualitative approach, a company forecasts based on judgment

and opinion. Grouped under this approach are:

 Executive opinions
 Delphi technique
 Sales force polling
 Consumer surveys

Approach 2: Quantitative- Using quantitative approach, a company forecasts based on:

a. Historical data forecasts – Grouped under historical data forecasts are the followings:

 Naive methods
 Moving average
 Exponential smoothing
 Trend analysis
 Decomposition of time series

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b. Associative (causal) forecasts – Grouped under the acsociative forecasts are the followings:

 Simple regression
 Multiple regression
 Econometric modeling

2.6. Selection of samples

Selection of Forecasting Method

The choice of a forecasting technique is influenced significantly by the stage of the

product life cycle and sometimes by the firm or industry for which a decision is being made. In
the beginning of the product life cycle, relatively small expenditures are made for research and
market investigation.

During the first phase of product introduction, these expenditures start to increase. In the
rapid growth stage, considerable amounts of money are involved in the decisions, so a high level
of accuracy is desirable. After the product has entered the maturity stage, the decisions are more
routine, involving marketing and manufacturing. These are important considerations when
determining the appropriate sales forecast technique.

After evaluating the particular stages of the product and firm and industry life cycles, a
further probe is necessary. Instead of selecting a forecasting technique by using whatever seems
an applicable, decision maker should determine what is appropriate.

Some of the techniques are quite simple and rather inexpensive to develop and use.
Others are extremely complex, require significant amounts of time to develop, and may be quite
expensive. Some are best suited for short-term projections, others for intermediate- or long-term
forecasts.

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What technique or techniques to select depends on six criteria:

 What is the cost associated with developing the forecasting model, compared with
potential gains resulting from its use?
 How complicated are the relationships that are being forecasted?
 Is it for short-run or long-run purposes?
 How much accuracy is desired?
 Is there a minimum tolerance level of errors?
 How much data are available? Techniques vary in the amount of data they require.

The choice is one of benefit-cost trade-off. Quantitative models work superbly as long as little
or no systematic change in the environment takes place. When patterns or relationships do
change, by themselves, the objective models are of little use. It is here where the qualitative
approach, based on human judgment, is indispensable. Because judgmental forecasting also
bases forecasts on observation of existing trends, they too are subject to a number of
shortcomings. The advantage, however, is that they can identify systematic change more quickly
and interpret better the effect of such change on the future.

2.7. Hypothesis

Hypothesis testing comes to the aid for such decision making. Hypothesis testing is a
mathematical model for testing a claim, idea or hypothesis about a parameter of interest in a
given population set, using data measured in a sample set. Calculations are performed on
selected samples to gather more decisive information about characteristics of the entire
population, which enables a systematic way to test claims or ideas about the entire dataset.

Different methodologies exist for hypothesis testing. The following four basic steps are
involved:

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Step 1: Define the hypothesis:

Usually the reported value (or the claim statistics) is stated as the hypothesis and presumed to
be true. For the above examples, hypothesis will be:

 Example A: Students in the school score an average of 7 out 10 in exams

 Example B: Annual return of the mutual fund is 8% per annum

This stated description constitutes the “Null Hypothesis (H0)” and is assumed to be true.
Like a jury trial starts by assuming innocence of the suspect followed by determination whether
the assumption is false. Similarly, hypothesis testing starts by stating and assuming the “Null
Hypothesis”, and then the process determines whether the assumption is likely to be true or false.

The important point to note is that we are testing the null hypothesis because there is an
element of doubt about its validity. Whatever information that is against the stated null
hypothesis is captured in the Alternative Hypothesis (H1). For the above examples, alternative
hypothesis will be:

 Students score an average which is not equal to 7

 Annual return of the mutual fund is not equal to 8% per annum

In summary, Alternative hypothesis is a direct contradiction of the null hypothesis.

Step 2: Set the decision criteria

As per the standard statistics postulate about sampling distribution, “For any sample size
n, the sampling distribution of X̅ is normal if the population X from which the sample is drawn is
normally distributed.” Hence, the probabilities of all other possible sample means one could
select are normally distributed.

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 For e.g., determine if the average daily return, of any stock listed on XYZ stock market,
around New Year's time is greater than 2%.

H0: Null Hypothesis: mean = 2%

H1: Alternative Hypothesis: mean > 2% (This is what we want to prove)

Take the sample (say of 50 stocks out of total 500) and compute the mean of sample.

For a normal distribution, 95% of the values lie within 2 standard deviations of the
population mean. Hence, this normal distribution and central limit assumption for the sample
dataset allows us to establish 5% as a significance level. It makes sense as under this assumption;
there is less than a 5% probability (100-95) of getting outliers that are beyond 2 standard
deviations from the population mean. Depending upon the nature of datasets, other significance
levels can be taken at 1%, 5% or 10%. For financial calculations (including behavioral finance),
5% is the generally accepted limit. If we find any calculations that go beyond the usual 2
standard deviations, then we have a strong case of outliers to reject the null
hypothesis. Standard deviations are extremely important to understanding statistical data.
Graphically, it is represented as follows:

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 In the above example, if the mean of the sample is much larger than 2% (say 3.5%), then
we reject the null hypothesis. The alternative hypothesis (mean >2%) is accepted, which
confirms that the average daily return of the stocks are indeed above 2%.

Step 3: Calculate the test statistic:

This step involves calculating the required figure(s), known as test statistics (like mean, z-
score, p-value, etc.), for the selected sample. The various values to be calculated are covered in a
later section with examples.

Step 4: Make conclusions about the hypothesis

With the computed value(s), decide on the null hypothesis. If the probability of getting a sample
mean is less than 5%, then the conclusion is to reject the null hypothesis. Otherwise, accept and
retain the null hypothesis.

Types of Errors in decision making:

There can be four possible outcomes in sample-based decision making, with regards to the
correct applicability to entire population:

Decision to Retain Decision to Reject

Incorrect
Applies to entire
Correct
population
(TYPE 1 Error - a)
Incorrect
Does not apply to
Correct
entire population
(TYPE 2 Error - b)

The “Correct” cases are the ones where the decisions taken on the samples are truly
applicable to the entire population. The cases of errors arise when one decides to retain (or

14
reject) the null hypothesis based on sample calculations, but that decision does not really apply
for the entire population. These cases constitute Type 1 (alpha) and Type 2 (beta) errors, as
indicated in the table above.

2.8. Limitation of the study

 The study covers a period of five years only that is from 2006 to 2011. This
research has been contained only to financial statement available in the bank.
 The analysis of past performance of the bank can give broad outline only it
predicts the future only to some extent. This study has been made on the basis
information contained in the financial statement.

15
3.1. Introduction

Financial planning is a continuous process of directing and allocating financial resources

to meet strategic goals and objectives. The output from financial planning takes the form of
budgets. The most widely used form of budgets is Pro Forma or Budgeted Financial Statements.
The foundation for Budgeted Financial Statements is Detail Budgets. Detail Budgets include
sales forecasts, production forecasts, and other estimates in support of the Financial Plan.
Collectively, all of these budgets are referred to as the Master Budget.

We can also break financial planning down into planning for operations and planning for
financing. Operating people focus on sales and production while financial planners are interested
in how to finance the operations. Therefore, we can have an Operating Plan and a Financial Plan.
However, to keep things simple and to make sure we integrate the process fully, we will consider
financial planning as one single process that encompasses both operations and financing.

3.2. Start with Strategic planninganning

Financial Planning starts at the top of the organization with strategic planning. Since
strategic decisions have financial implications, you must start your budgeting process within the
strategic planning process. Failure to link and connect budgeting with strategic planning can
result in budgets that are "dead on arrival."

Strategic planning is a formal process for establishing goals and objectives over the long
run. Strategic planning involves developing a mission statement that captures why the
organization exists and plans for how the organization will thrive in the future. Strategic
objectives and corresponding goals are developed based on a very thorough assessment of the
organization and the external environment. Finally, strategic plans are implemented by
developing an Operating or Action Plan. Within this Operating Plan, we will include a complete
set of financial plans or budgets.

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3.3. The Sales Forecast

In order to develop budgets, we will start with a forecast of what drives much of our
financial activity; namely sales. Therefore, the first forecast we will prepare is the Sales Forecast.
In order to estimate sales, we will look at past sales histories and various factors that influence
sales. For example, marketing research may reveal that future sales are expected to stabilize.
Maybe we cannot meet growing sales because of limited production capacities or maybe there
will be a general economic slowdown resulting in falling sales. Therefore, we need to look at
several factors in arriving at our sales forecast.

After we have collected and analyzed all of the relevant information, we can estimate
sales volumes for the planning period. It is very important that we arrive at a good estimate since
this estimate will be used for several other estimates in our budgets. The Sales Forecast has to
take into account what we expect to sell at what sales price.

3.4. Percent of Sales

We now need to estimate account changes because of estimated sales. One way to
estimate and forecast certain account balances is with the Percent of Sales Method. By looking at
past account balances and past changes in sales, we can establish a percentage relationship. For
example, all variable costs and most current assets and current liabilities will vary as sales
change.

17
3.5. Making the Budgeting Process Work

Now that we understand what goes into financial planning, it is time to focus on how to
make the process into a value-added activity. Many organizations are attempting to re-engineer
budgeting practices since budgeting is usually a non-value added activity; i.e. it does not add
value to the decision making process. The goal is to make the entire financial planning process
into a decision support service within the organization whereby the benefits of the process
exceed the costs.

In order to fully comprehend the problems associated with budgeting, let's quickly list the
top ten problems with budgeting according to Controller Magazine:

1. Takes too long to prepare.

2. Doesn't help us run our business.

3. Budgets are out-of-date by the time we get them.

4. Too much playing with the numbers.

5. Too many iterations / repetitive tasks within the process.

6. Budgets are cast in stone in a constantly changing business environment.

7. Too many people are involved in the budgeting process.

8. Unable to control budget allocations.

9. By the time budgets are complete, I don't recognize the numbers.

10. Budgets do not match the strategic goals and objectives of the organization.

3.5.1. Automate the process

In order for budgeting to be value-added, it must accept revisions quickly and easily. A
highly automated budgeting process can help streamline the process for quick and easy updating.

18
 As a minimum, budgets should be maintained on spreadsheets. A spreadsheet (such as
Excel, Lotus 1-2-3, etc.) can have an input panel for entering variables and automatic generation
of budgets within a fully integrated set of spreadsheets. For example, we can use a formula to
calculate interest expense as:

Interest Rate x (Beginning Long Term Debt + Current Portion of Long Term Debt +
External Financing Using Long Term Debt)

Spreadsheets also allow us to perform sensitivity analysis. We can simply enter new
variables into the input panel and review the impact on our budgets.

We can also use more formal software programs for budgeting. The best software
programs will give us the option of controlling the level of detail. For example, do we want a
cash budget by customer or do we want cash budgets by account or can we simply enter the cash

flow data ourselves? It is very important that we have control over the detail since commercial
programs sometimes over-analyze transactions and provide way too much detail. This is why
many financial planners prefer spreadsheets over commercial programs.

3.5.2. Ten Best Practices in Budgeting

Finally, here are some best practices that can transform budgeting into a value-added
activity:

1. Budgeting must be linked to strategic planning since strategic decisions usually have financial
implications.

2. Make budgeting procedures part of strategic planning. For example, strategic assessments
should include historical trends, competitive analysis, and other procedures that might otherwise
take place within the budgeting process.

3. The Budgeting Process should minimize the time spent collecting and gathering data and
spend more time generating information for strategic decision making.

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4. Get agreement on summary budgets before you spend time preparing detail budgets.

5. Automate the collection and consolidation of budgets within the entire organization. Users
should have access to budgeting systems for easy updating.

6. Budgets need to accept changes quickly and easily. Budgeting should be a continuous process
that encourages alternative thinking.

7. Line item detail in budgets should be based on material thresholds and not rely on a system of
general ledger accounts.

8. Budgets should give lower level managers some form of fiscal control over what is going on.

9. Leverage your financial systems by establishing a data warehouse that can be used for both
financial reporting and budgeting.

10. Multi-National Companies should have a budgeting system that can handle intercompany
eliminations and foreign currency conversions.

3.6. NEED OF THE STUDY

Working capital is considered as the blood of business. Inadequate working capital
disturbs the continuous production, when there is adequate working capital the payment to
creditors is done without failure. As result, the bank gains goodwill. It will also help to get loans
and cash discounts. Excess of working capital affects the profitability of the firm; inadequate
working capital prevents the firm from fulfilling the current obligations.

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4.1. Qualitative and Quantitative techniques

You should forecast for a specific reason - to help make better decisions. Forecasting is
extremely difficult and you must pull from all relevant sources. We previously discussed the
Percent of Sales Method and Trend Analysis as a way of forecasting. These forecasting
techniques are quantitative. Quantitative techniques of forecasting are best used when changes
are infrequent. In today's world of rapid change, quantitative techniques tend to be of little use.

We need to add more qualitative techniques into the budgeting process. Qualitative
techniques include surveys, interviews with people who are "in the know", market reports,
articles, and other information sources that allow us to make a better judgement. Qualitative or
Judgmental Forecasting can help improve the budgeting process, especially if we are operating in
a rapidly changing environment.

The Delphi Method is an example of a qualitative technique where a group of experts

gets together and reaches a consensus on what will happen in the future. A questionnaire is
sometimes used to facilitate the process. Two disadvantages of the Delphi Method are low
reliability with the consensus and inability to reach a clear consensus.

4.2. Smoothing out the numbers

One simple approach to forecasting is to setup a model that relies on averages from past
historical data. For example, we can take an average of the last five years. As we move forward
to the next planning period, a new moving average is calculated and used as the forecast for the
next planning period. Exponential smoothing can be used whereby we place more weight on the
most recent set of actual numbers. This can be important where changes have occurred, making
older data less reliable.

4.3. Regression Analysis

A statistical approach can be used for forecasting. We can rely on the average
relationships between a dependent variable and an independent variable. Simple regressions look
at one independent variable (such as sales pricing or advertising expenses) whereas multiple
regressions consider two or more variables (such as sales pricing and advertising expenses

21
together). Regression analysis is very popular for forecasting sales since it helps us find the right
fit over a range of observations. For example, if we plot out the following observations, we can
prepare a scatter graph and find the right fit:

4.4. Sensitivity Analysis

We can measure how sensitive our forecast is to changes in certain variables. We can
develop a range of possibilities under different assumptions and prepare alternative plans. If Plan
A fails, we can quickly move to Plan B. Sensitivity analysis also tells us which assumptions have
the biggest impact on the forecast. Managers can concentrate most of their resources on the
biggest impact areas for improving the forecast. The main benefit of sensitivity analysis is to
measure the possibility of errors in the forecast.

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4.5. Financial Models

Budgets can be prepared with the use of formal models which take advantage of
techniques like regressions and sensitivity analysis. Models are built around the collection of
equations, logic, and data that flows according to the relationships between operating variables
and financial outputs. Financial variables (costs, sales, investments, taxes, etc.) can be
manipulated by the user so that the user can see the outcome of a decision before it is made. This
can help facilitate strategic thinking within the budgeting process. Two types of financial models
are simulation and optimization. Simulation attempts to duplicate the effects of a decision and
show its impact. Optimization seeks to optimize (maximize or minimize) a forecast objective
(revenues, production costs, etc.).

Financial models provide decision support services for improvements within budgeting.
Some of the benefits of financial models include:

 Shows the results of planning under a variety of assumptions, allowing the user to assess
the impacts of estimates that have been used.
 Generates the Budgeted Income Statement and Budgeted Balance Sheet as well as
forecasted financials by business unit or department.
In order to build a financial model, we need to establish variables, parameters, and relationships.
Additionally, we can divide variables into three types:

1. Control Variables: The inputs that the company can control, such as the level of debt financing
or the level of capital spending.

2. External Variables: Inputs that the company cannot control, such as economic conditions,
consumer spending, interest rates, etc.

3. Policy Variables: Goals and objectives of the company can impact the expected outcomes. For
example, management may set targets for sales, profitability, and costs.

Parameters are the baselines or boundaries for the financial model. For example, the level
of debt may have a minimum and maximum value.

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 Data Analysis and Interpretation

Analysis of financial functions

An analysis of financial resource requirements will include: a) At a minimum, an analysis

of financial results, and possibly also b) An analysis of the Full Term Forecast, and c) An
analysis of the Overall Financial Plan.

The basic steps for analyzing financial results follow:

Step 1: Provide draft financial results

The project administrator/finance staff should provide the draft financial results (income,
expenditure and forecast for the year, where applicable) to the project manager and other project
staff at the end or each quarter (right after the quarter’s closing). The data should be summarized
using the WWF Standard Project Quarterly Financial Report (R3). Raw data should also be
available for review.
A forecast is a projection of the financial results of the project, covering a reporting
period (in this case a financial year). This is usually compiled using actual figures for the period
from the start of the year to the date of the forecast, plus an estimate of the figures for the period
from the date of the forecast to the end of the year. A simple multiplication process may suffice
at this stage (e.g. data for one quarter can be multiplied by 4, data for two quarters can be
multiplied by 2, etc.).

Step 2: Analyze financial performance

The project manager and project administrator, together with other project and financial
staff as necessary, should review the draft financial results.

Actuals (R3)
You should make the following checks:
- Check that payments charged and income received belong to the project

- Make any corrections to the accounts as necessary

24
Forecast the full year (R3)
-Review the accuracy of the forecast figures.
-Make sure that the forecast figures include any important expenditure timed to occur in a
subsequent quarter or expenditure that has been high but is now reduced.

Variances (“Notes to the R3”)

-Using the draft R3 report, and any more detailed reports, identify key variances between actuals
and your budget. Consider them in light of your project’s work plan, staffing, and any changes
encountered during the quarter under review.
Use the variance analysis spreadsheet (“Notes to the R3”) to help you consider the following
points:

 Is the project spending funds as initially planned?

 If not, what are the budget lines that differ from the initial plan?
 Why do they differ? (e.g. change in timing, higher/lower unit costs, better utilization of
resources, etc.)
 How will this affect your ability to deliver the expected results within the agreed budget?
 If necessary, what measures can you undertake to rectify the situation?
 Does the budget need to be revised and approval sought from donors?
Your analysis may raise further questions to be investigated before you finalize the reports.
For example, you may want to discuss with your finance staff the suitability of a detailed
assessment of cash flow in order to identify with greater precision the extent and timing of any
cash flow problems.

Be aware also of the possibility of foreign exchange rates losses or gains, in the case where
the contracting currency is different from the spend currency.

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Step 3: Agree on actions required (“Notes to the R3”)

Based on your analysis, prepare a commentary which will complete the financial report.
This should be expressed, as far as possible, in terms of project activities and management
actions. It will generally contain:

 An explanation of the variances;

 A summary of the problems identified; and
 A plan setting out the proposed solutions to the problems, the person(s) who will initiate
each proposed solution, and the date by which your team hopes it will be achieved.
The “Notes to the R3” worksheet provides an indicative format for this qualitative reporting.

Step 4: Communicate with partners and donors

You should submit your financial and technical reports by the required dates. Where
relevant, make key issues clear to your partners and donors.

Clearly it may also be important to periodically review your overall financial plan (if this is
different from your contracted plan), taking account of future potential activities. Essentially this
means you need to review your broad financial needs assessment (or financial model) and decide
what action is required. Issues to be addressed may include:

 Funding gaps;
 Simplification of funding arrangements (e.g. simplifying management of restricted and
unrestricted funds);
 Timeframe and sustainability of funding arrangements.

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6.1. Current Ratio

Current ratio is the relationship between current assets and current liabilities.

A current ratio of 2:1 is considered deal. That is, for every one rupee of current of current
liability there must be current assets of Rs.2. If the ratio is less than two, it may be difficult for a
firm to pay current liabilities. If the ratio is more than two, it is an indicator of idle funds.

6.2. Findings

 The Current Ratios are in satisfactory level. It was Increasing that, the bank liquidity
position is satisfactory.
 The comparative statement shows the current and long term financial position of the bank
activities.
 The common size statement shows the movement of cash position and changes of
financial position in the bank

6.3. Suggestions

 The bank management may take necessary steps to employ more numbers of staff
considering the burden of work load.
 The bank work can be performed smoothly and successfully only if it has sufficient
number of staff. At present the number of staff in the bank is inadequate.
 The capacity of members in bank, it can still increase through motivation and specialized
service.
 The bank has extended adequate financial assistance to the members to develop in trade
and industry.

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  Advertisement and publicity should be given so as to make the awareness to the public.
 The bank should increase the share capital.
 Special types of deposits scheme have to be introduced the benefit of the deposit.
 The central and state government is spending a substantial amount to improve the
standard of work done by the bank employees. The management may take into
consideration while revising the pay structure of the staff.

6.4. Conclusion

Financial Planning is a continuous process that flows with strategic decision making. The

Operating Plan and the Financial Plan will both support the Strategic Plan. The best place to start
in preparing a budget is with sales since this is a driving force behind much of our financial
activity. However, we have to take into account numerous factors before we can finalize our
budgets.

Budgeting should be flexible, allowing modification when something changes. For

example, the following will impact budgeting:

 Life cycle of the business

 Financial conditions of the business
 General economic conditions
 Competitive situation
 Technology trends
 Availability of resources
Budgeting should be both top down and bottom up; i.e. upper level management and middle
level management will both work to finalize a budget. We can streamline the budgeting process
by developing a financial model. Financial models can facilitate "what if" analysis so we can
assess decisions before they are made. This can dramatically improve the budgeting process.

One of the biggest challenges within financial planning and budgeting is how do we
make it value-added. Budgeting requires clear channels of communication, support from upper-

28
level management, participation from various personnel, and predictive characteristics.
Budgeting should not strive for accuracy, but should strive to support the decision making
process. If we focus too much on accuracy, we will end-up with a budgeting process that incurs
time and costs in excess of the benefits derived. The challenge is to make financial planning a
value added activity that helps the organization achieve its strategic goals and objectives.

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 CASE STUDY- HDFC BANK LTD

In 2002, HDFC Bank witnessed its merger with Times Bank Limited (a private sector
bank promoted by Bennett, Coleman & Co. / Times Group). With this, HDFC and Times became
the first two private banks in the New Generation Private Sector Banks to have gone through a
merger. In 2008, RBI approved the amalgamation of Centurion Bank of Punjab with HDFC
Bank. With this, the Deposits of the merged entity became Rs. 1, 22,000 crores, while the
Advances were Rs. 89,000 crore and Balance Sheet size was Rs. 1, 63,000 crores.

Technology Development

HDFC Bank has always prided itself on a highly automated environment, be it in terms of
information technology or communication systems. All the branches of the bank boast of online
connectivity with the other, ensuring speedy funds transfer for the clients. At the same time, the
bank's branch network and Automated Teller Machines (ATMs) allow multi-branch access to
retail clients. The bank makes use of its up-to-date technology, along with market position and
expertise, to create a competitive advantage and build market share.

Capital Structure

At present, HDFC Bank boasts of an authorized capital of Rs 550 crores (Rs5.5 billion),
of this the paid-up amount is Rs 424.6 crores (Rs.4.2 billion). In terms of equity share, the HDFC
Group holds 19.4%. Foreign Institutional Investors (FIIs) have around 28% of the equity and
about 17.6% is held by the ADS Depository (in respect of the bank's American Depository
Shares (ADS) Issue). The bank has about 570,000 shareholders. Its shares find a listing on the
Stock Exchange, Mumbai and National Stock Exchange, while its American Depository Shares
are listed on the New York Stock Exchange (NYSE), under the symbol 'HDB'.

Personal Banking Services

 Savings Accounts Investments & Insurance

 Salary Accounts Forex Services
 Current Accounts Payment Services
 Fixed Deposits Net Banking

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 Demat Account InstaAlerts
 Safe Deposit Lockers Mobile Banking
 Loans Insta Query
 Credit Cards ATM
 Debit Cards Phone Banking

31
32
33
34
 The HDFC Bank has been serving the people of Thanjavur and surrounding areas for the
past 95 years. The main function of bank is accepting deposits and lending money to the people.
The percentage of credit to working capital and deposit is showing an increasing trend, during
this study period. It clearly indicates lack of scientific portfolio management, of the HDFC bank.

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Bibliography

 Accounting, Fifth edition, New Delhi.

 Botten, N., 2008. Enterprise Strategy Paper E3. Burlington: CIMA publishing in
association with Elsevier Ltd.
 Castellina, N. & Hatch, D., 2011. Financial planning, budgeting and forecasting in the
new economy [pdf]
 C.R.Kothari, 2004 – Research methodology, second edition, New Delhi Willey Fastern
Limited.
 Dr.S.N.Maheswari, 2006 – Financial Management, Fourth edition, New Delhi.
 Klein-Brigham Series: Case 37, “Space-Age Materials, Inc.”; Case 38, “Automated
Banking Management, Inc.”; Case 52, “Expert Systems”; and Case 69, “Medical
Management Systems, Inc.”
 N.L.Hingorani, A..R.Ramanathan and T.S.Grewal, 2000 – Management
 T.S.Reddy And J. Hari Prasad, 2007 – Management Accounting, Third edition, Margam
Publications.

Website

 http://www.investopedia.com/articles/active-trading/092214/hypothesis-testing-finance-
concept-examples.asp

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