Financial Plan: Meaning, Objectives and Characteristics

After reading this article you will learn about the Financial Plan:- 1. Meaning of Financial Plan 2. Objectives of Financial Plan 3. Characteristics 4. Considerations.

Meaning of Financial Plan:

A financial plan is a statement estimating the amount of capital and determining its composition. The quantum of funds needed will depend upon the assets requirements of the business. The time at which funds will be needed should be carefully decided so that finances are raised at a time when these are needed.

The next aspect of a financial plan is to determine the pattern of financing. There are a number of ways for raising funds. The selection of various securities should be done carefully.

The funds may be raised by issuing of capital and debentures, rising of loans, etc. Which source of finance should be raised and up to what amount these should be raised is very important.

Once a pattern of financing is selected then it becomes very difficult to modify it a financial plan also spells out the policies to be pursed for the floatation of various corporate securities, particular y regarding the time of their floatation.

Objectives of Financial Plan:

A financial plan has the following main objectives:

1. Adequate Funds:

A financial plan would ensure the availability of sufficient funds to achieve enterprise goals.

2. Balancing of Costs and Risks:

There should be a balancing of costs and risks so as to protect the investors.

3. Flexibility:

A financial plan should ensure flexibility so as to adjust as per the requirements. It should be adjustable as per the changing conditions.

4. Simplicity:

The financial structure should not be complicated by issuing a variety of securities. The number of securities should be less so that it is easily understood.

5. Long-term View:

A financial plan should take a long-term view. The needs for funds in the near future and over a longer period should be considered while selecting the pattern of financing.

6. Liquidity:

The liquidity of funds should always be kept in mind while preparing a financial plan. During periods of depression it is the liquidity which can keep a concern going.

7. Optimum use:

A financial plan should ensure sufficient funds for genuine needs. Neither the plans should suffer due to shortage of funds nor there should be wasteful use of them. The funds should be put to their optimum use.

8. Economy:

The cost of raising the funds should be minimum. It should not impose disproportionate burden on the company. It can be ensured by a proper debt-equity mix.

Characteristics of a Sound Financial Plan:

A Financial manager should consider the following factors while finalising a financial plan:

1. Simplicity:

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.

2. 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.

3. 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.

4. Flexibility:

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.

5. 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.

6. Cost:

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.

7. Profitability:

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:

1. 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.

2. 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.

3. Future Plans:

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.

4. 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.

5. 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.

6. Government Control:

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.