 Hello learners, welcome to today's discussion. Today, we'll discuss about fundamentals of financial management oflookum second semester. Unit number three,the name of the unit is financial planning. this discussion will be discussed with three parts in three parts part one will discuss about the meaning elements and objectives of financial planning steps in financial planning part two will discuss about financial plans characteristics of a good financial plan ingredients of a financial plan and part three will discuss about financial policies forecasting financial requirements first of all part one meaning of financial planning financial planning is one of the systematic approaches for attaining effective management performance it is the process of determining objectives, policies, procedures and programs to deal with the financial activities of an organization financial planning is the process of analyzing a firm's investing decision estimating the firm's requirements and deciding the choices of funds any organization irrespective of size requires some sort of financial planning financial planning enables a closer coordination between various functions of the organization and helps management to make proper utilization of funds which would be otherwise lead to a wastage now the elements of financial planning the basic elements of financial planning comprises of investment opportunities amount of debt and amount of cash investment opportunities is the opportunities the firm choose to take advantage of amount of debt is the collected funds the firm choose to employ and the amount of cash is the funds debt the firm strings is necessary and appropriate to pay shareholders now the objectives of financial planning the objectives of financial planning can be discussed in various forms and they are number one to ensure, educate and regular capital flow from various sources for smooth functioning of the organization next one to ensure liquidity throughout the year by achieving a balance between the inflow and outflow of the funds the third one is to minimize the cost of financing through the judicious application of the financial resources and the last one is to facilitate financial control now we will discuss about the steps in financial planning the financial planning will be done through various steps the first step is to establish objectives the first step in the financial planning is the formulation of financial objectives in tune with business objectives the financial planner should formulate both short and long term objectives in order to be successful in the changing economic conditions the next step is estimating the amount of capital required the basic aim of the financial planning is the determination of capital requirements the financial planner should estimate the amount of both fixed and working capital required for various needs of the business the fourth one is determining the capital structure the financial planner should determine the types of securities to be issued and the relative proportion of each type of security it refers to the proportion of different kinds of securities raised by the firms as long term finance the fifth step is formulating financial policies financial policies deal with procuring, administering and distributing the funds of business firms now we know about financial policies whenever we think about financial policies financial policies of a business firm may be brought into various broad categories 1. policies governing the amount of capital required 2. policies which determine the control by the parties who furnish the capital 3. policies which act as a guide in the use of debt or equity capital the next one is policies which guide management in the selection of sources of funds the next policies relating to payment of dividends and last one is policies which govern credit and collection activities now coming to assumptions of financial planning financial plans always entail alternative set of assumptions the assumptions are a worst case, a normal case and a best case while in a worst case this plan would be required making the worst possible assumptions about the company's products and the state of the economy the second one a normal case this plan would require making the most likely assumptions about the company and the economy and in the case of a best case this plan would require making the most optimistic assumptions now coming to goals of financial planning there are so many goals for formulating financial planning number one is the interactions or connections financial plans must make the linkage between investment proposals for the different operating activities of the firm and the financing choice available to the firm's explicit the next one is options the financial plan provides the opportunity for the firm to work through various investment and financing options the firm addresses questions of what financing arrangements are optional next one is feasibility the different plans must fit into overall corporate objective of the maximizing shareholders wealth next one is avoiding surprise financial planning should identify what may happen in the future in certain events take place if certain events take place thus one of the purpose of financial planning is to avoid surprises this is all about part one we will discuss part two now here in part two we will discuss about financial plan financial plan is a statement of what is to be done in future time in an uncertain world decisions need to be made far in advance of their implementation therefore every organization should have a good financial plan a good financial plan has some characteristics we will discuss those characteristics of a good financial plan the first characteristic of a good financial plan is simplicity a good financial plan should be free from complexity it should be drafted in terms of the purposes for which the enterprise is organized next one is flexibility a good financial plan of a firm should be in a position to finance expansion expansion programs without much difficulty as the environment or organizational structure of a firm may change from time to time it is desirable to have a more flexible the next one is intensive use a good financial plan should be such that it will provide for an optimum use of capital capital should not remain idle not there any scarcity of capital otherwise the profitability will suffer the fourth one is foresight a financial plan should be based on the vision and experience of the management there should be systematic prediction of various contingencies no business can assume that it will always have smooth sailing the next one is cost the cost of raising fund is an important consideration in the formulation of a financial plan the selection of various sources should be such that the cost burden is minimum an excessive burden of peak surges on the earning of the firm might fill its cost of capital the next one is objectivity the figures and report to the use for financial plan should be free from partially prejudices and personal bias the next characteristic is liquidity a good financial plan should be based on the principle of liquidity which means the ability to produce cash on demand the degree of liquidity to be maintained depends on the size of the organization its age, its credit standing and nature of its business the next characteristic is profitability a good financial plan should be based on the principle of profitability a financial plan should maintain the required proportion between the fixed surges the obligations and the liabilities in such a manner that the profitability of the organization is not adversely affected now coming to ingredients of a financial plan just as companies differ in size and products financial plans are also differ for all companies there are some common elements and those elements are number one sales forecast all financial plans requires a sales forecast a good sales forecast should be the consequence of having identified all valuable investment opportunities the next one is pro forma statements the financial plan will have a forecast balance sheet an income statement and a sources and user statement these are called pro format statements next one is asset requirements the plan will desirable projected capital spending in addition it will discuss the proposed uses of networking capital the fourth one is financial requirements the plan will include a section on financing arrangements this part of the plan should discuss dividend policy and debt policy the plan must consider what kind of securities must be sold and what methods of issuance are most appropriate the next one is economic assumption the plan must clearly state the economic environment in which the firm expects to be in a further life of the plan assumption need to be met for the level of interest rates here the part 2 ended and part 3 will discuss about financial policies now coming to part 3 financial policies the financial policies of an organization are related to the availability of funds we discussed this policy areas under the hedge procurement of funds and utilization of funds we discussed these policies two heads that is procurement of funds and utilization of funds first of all procurement of funds the important decisions that needs to be taken with regard to fund procurement is the type of capital structure or the proportion of different securities that can be used for raising funds there should be a healthy mix of equity and debt in a company's capital structure to minimize returns to its owners to maximize returns to its owners a company has many alternatives while raising funds such as equity shares term loans from financial institutions debentures, public deposits bank finance, inter-corporate deposits and trade credit time and cost factors while mobilizing funds should be kept in mind the second one is utilization of funds the amount of funds raised through various sources should be put to the right use a proper balance should be maintained while investing in fixed assets and current assets apart from investing in fixed assets a firm has also working capital requirements for financing its current assets working capital refers to the excess of current assets over current liabilities working capital may be expressed in two ways gross working capital and networking capital the working capital position determines the firm's profitability and liquidity current assets should be deployed properly to improve overall profitability now coming to aspects of short term financial policy the policy that a firm adopts for short term finance will be composed of at least two elements number one the size of the firm's investment in current assets these may be flexible or accommodative short term or restrictive short term financial policy a flexible or accommodative short term financial policy would maintain a high ratio of current assets to sales a restrictive short term financial policy would entail a low ratio of current assets to sales the second one is the financing of current assets points that are taken into consideration at the time of financing of current assets are cash reserve, maturity hedging, term structure and first of all cash reserves the flexibility financing strategy implies surplus cash and little short term borrowing this reduces the probability of financial distress maturity hedging firms tend to avoid financing long term assets with short term borrowings this type of maturity mismatching is risky last one is term structure short term interest rates are normally lower than long term interest rates rely on long term borrowing is more costly than short term borrowing now coming to an important part of financial planning that is forecasting forecasting financial requirements forecasting is a systematic projection of the expected action of finance through financial statements it is a kind of plan which will be formulated at a future date for a specified period there are three methods of forecasting financial requirements there number one traditional method engineering analysis and operation analysis first of all traditional method under this traditional method a funds needs is terms of the number of days for which its sales are tied up in an individual balance sheet item are taken into account engineering analysis is a combination of technical know-how and judgment an operational analysis is realized mainly on judgment and on an understanding of the different kinds of operations in which a firm is engaged now coming to factors to be considered for estimating financial requirements while estimate the financial requirements of an organization there are some factors to be considered number one is cost of financing the cost of financing such as advertisement expenses brokerage etc are to be minimum the next one is repayment the time for which finances required should be taken into account while estimating financial requirements for a concern for a firm then liquidity two regards should be given to liquidity as poor liquidity may lead to insolvency the fourth one is interest payment interest payment should be the minimum and next one is claim on assets the borrowings of the concern may result in a search on its assets the next one is control the capital structure of a concern should ensure that control does not pass into the hands of the outsiders the most important factors that to be considered is risk it is better not to launch risky projects when equity finance is not available to the desired extent then next one is seasonality the financial requirements of a concern are highly influenced by seasonality which cannot be easily predicted the events like strikes, changes in technology etc affect financial requirements next one is cost of promotion expenses incurred before the incorporation of a company are called promotion expenses these include expenses on preliminary investigation accounting, marketing and legal advice etc next one is cost of fixed assets the amount invested in fixed assets like land and buildings plant and machinery, furniture etc should be based on estimates supplied by the production and engineering departments the next one is cost of current assets the requirements of current assets such as cash, stock of goods book debts etc should be assessed on the basis of estimated sales and production schedules or projections and the last one is cost of establishing the business the capital requirements at the time of establishment of a concern may be studied under the heads of fixed capital and working capital so we have discussed in the session three parts part one have discussed the meaning, elements and objectives of financial planning steps in financial planning part two discussed about financial plans, characteristics of a good financial plan ingredients of a financial plan and part three discussed about financial policies forecasting financial requirements etc that's all for this session the next session will be discussed on capital structure of an organization thank you