Financial Planning Factors, Limitations

Financial planning has been defined as “the advance programming of all plans of financial management and the integration and coordination of these plans with the operating plans of the enterprise.” There is hardly any aspect of a business which does not have both financial requirements and financial consequences. Financial planning deals with both sources and uses of funds.

Factors affecting Financial Planning

Financial planning of a business is determined by the following factors:

(i) Objectives. Objectives of financial planning should be consistent with the overall objectives of the business. The main objectives of financial planning are to raise funds at reasonable cost and utilize them in the best possible manner.

(ii) Requirements of the Enterprise. A good financial plan should take care of the present and future requirements of the business. Provision of or various contingencies, replacement of assets, and growth and diversification of business enterprise must be made.

(iii) Economy. Case of raising capital should be reasonable. Capital structure should be such as to create an appropriate balance between the cost of funds and the company’s ability to pay.

(iv) Solvency and Liquidity. The funds should be invested in those ventures which are likely to give sufficient return on investment. Moreover, adequate cash should always to available to meet the requirements of the enterprise. The enterprise should be solvent and liquid not only in the short-term but also in the long-term.

(v) Flexibility. Financial planning should ensure flexibility allow the diversion of funds into more profitable channels. It should also make provision for raising of additional funds at a short notice.

(vi) Optimum Capital Structure. There should be proper capitallsation of the company. An optimum mix of equity shares, preference shares and debentures should be kept in mid while raising funds from different resources.

Limitations of Financial Planning

Rapid Changes:

The growing mechanisation of industry is bringing rapid changes in industrial process. The methods of production, marketing devices, consumer preferences create new demands every time. The incorporation of new changes requires a change in financial plan every time.

Once investments are made in fixed assets then these decisions cannot be reversed. It becomes very difficult to adjust a financial plan for incorporating fast changing situations. Unless a financial plan helps the adoption of new techniques, its utility becomes limited.

Difficulty in Change:

Once a financial plan is prepared then it becomes difficult to change it. A changed situation may demand change in financial plan but managerial personnel may not like it. Even otherwise, assets might have been purchased and raw material and labour costs might have been incurred. It becomes very difficult to change financial plan under such situations.

Problem of Co-ordination:

Financial function is the most important of all the functions. Other functions influence a decision about financial plan. While estimating financial needs, production policy, personnel requirements, marketing possibilities are all taken into account.

Unless there is a proper-co­ordination among all the functions, the preparation of a financial plan becomes difficult. Often there is a lack of co-ordination among different functions. Even indecision among personnel disturbs the process of financial planning.

Difficulty in Forecasting:

Financial plans are prepared by taking into account the expected situations in the future. Since, the future is always uncertain and things may not happen as these are expected, so the utility of financial planning is limited. The reliability of financial planning is uncertain and very much doubted.