Characteristic of Financial Planning24/03/2020
A financial plan should be so simple that it may be easily understood even by a layman. A complicated financial structure creates complications and confusion.
Based on Clear-cut Objectives
Financial planning should be done by keeping in view the overall objectives of the company. It should aim to procure funds at the lowest cost so that profitability of the business is improved.
Less Dependence on Outside Sources
A long-term financial planning should aim to reduce dependence on outside sources. This can be possible by retaining a part of profits for ploughing back. The generation of own funds is the way of financial operations. In the beginning, outside funds may be a necessity but financial planning should be such that dependence on such funds may be reduced in due course of time.
The financial plan should not be rigid. It should allow a scope for adjustments as and when new situations emerge. There may be a scope for raising additional funds if fresh opportunities occur. Similarly, idle funds, if any, may be invested in short-term and low-risk bearing securities. Flexibility in a plan will be helpful in coping with the demands of the future.
Solvency and Liquidity
Financial planning should ensure solvency and liquidity of the enterprise. Solvency requires that short-term and long-term payments should be made on dates when these are due. This will ensure credit worthiness and goodwill to the concern.
Solvency will be possible when liquidity of assets is maintained. There should be sufficient funds whenever payments are to be made. Proper forecasting of future payments will be helpful in planning liquidity.
The cost of raising capital is an important consideration in selecting a financial plan. The selection of various sources should be such that the cost burden should be mimimum. As and when possible interest bearing securities should be returned so that this burden is reduced.
A financial plan should adjust various securities in such a way that profitability of the enterprise is not adversely affected. The interest bearing securities and other liabilities should be so adjusted that business is able to improve its profitability.
Considerations in Formulating Financial Plan
A financial plan should be carefully determined. It has long-term impact on the working of the enterprise.
The following variables should be kept in mind while selecting a financial plan:
Nature of the Industry
The needs for funds are different for various industries. The asset structure, element of seasonality, stability of earnings is not common factors for all industries. These variables will influence determining the size and structure of financial requirements.
Standing of the Concern
The standing of a concern will influence a decision about financial plan. The goodwill of the concern, credit rating in the market, past performance, attitude of the management is some of the factors which will be considered in formulating a financial plan.
The future plan of a concern should be considered while formulating a financial plan. The plans for expansion and diversification in near future will require a flexible financial plan. The sources of funds should be such which will facilitate required funds without any difficulty.
Availability of Sources
There are a number of sources from which funds can be raised. The pros and cons of all available sources should be properly discussed for taking a final decision on the sources. The sources should be able to provide sufficient and regular funds to meet needs at various periods. A financial plan should be selected by keeping in view the reliability of various sources.
General Economic Conditions
The prevailing economic conditions at the national level and international level will influence a decision about financial plan. These conditions should be considered before taking any decision about sources of funds. A favourable economic environment will help in raising funds without any difficulty. On the other hand, uncertain economic conditions may make it difficult for even a good concern to raise sufficient funds.
The government policies regarding issue of shares and debentures, payment of dividend and interest rate, entering into foreign collaborations, etc. will influence a financial plan. The legislative restrictions on using certain sources, limiting dividend and interest rates, etc.; will make it difficult to raise funds. So, government controls should be properly considered while selecting a financial plan.