Financial Plans And Policies

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 aspectsHow 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 2. 3. 4. 5. 6. 7.

programme. 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. Develop the best plans to obtain the required external funds. Establish and maintain a system of financial control governing the allocation and use of funds. Formulate programmes to provide the most effective profit-volume-cost relationship. Analyse the financial results of operations 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. 2. 3. 4. 5. 6. 7. 8. 9. 10. 11. 12. 13.

Legal Restrictions ( Transfer of profits to Reserve , as per Companies Act,1956) Magnitude and Trend of Earning Desire and Type of Shareholders Nature of Industry Age of the company Future Financial Requirements Government’s Economic Policy Taxation Policy Inflation Control Objectives Requirements of Institutional Investors Stability of Dividends 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

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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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