Meaning and Characteristics of Financial planning.
Finance is the life blood of business. No business can run successfully without adequate finance. Finance is required to bring a business into existence, to keep it alive and also to see it growing and prospering.
Meaning of Financial Planning:
Finance is an important function of business. The application of planning to this function is called financial planning. Financial planning is mainly concerned with the economical procurement and profitable use of funds. According to Gutlman and Dougall, “Financial planning is concerned with raising, controlling and administering of funds used in business.” In the words of Bouneville and Dewey, “Financial planning consists in the raising, providing and managing of all the money, capital of funds of any kind to be used in connection with the business.” Financial planning is an important element of the overall planning of business enterprise. Financial planning includes the following:
- Estimating the amount of capital required for financing the business enterprise;
- Determining capital structure;
- Laying down policies for the administration of capital;
- Formulating the programmes to provide the most effective use of capital.
Characteristics of a Good/ Sound Financial Planning:
The main characteristics of a good financial planning are as follows:
The financial plan should be as simple as possible so that it can be easily understood even by a layman, property executed and administered. A complicated financial plan creates unnecessary complications and confusion.
Based on Clear-cut Objectives
The financial plan should be based on the clear-cut objectives of the company. It should aim to procure adequate funds at the lowest cost so that the profitability of the business is improved.
The financial plan should not be rigid, but rather flexible enough to accommodate the changes which may be introduced in it as and when necessary. The rigid composition of the financial plan may cause unnecessary irritation and may limit the future development of the business unit.
Solvency an Liquidity
The financial plan should ensure solvency and liquidity of the business enterprise. solvency requires that short-term and long-term payments should be made on due dates positively. This will ensure credit worthiness and good will to the business enterprise. Liquidity means maintenance of adequate cash balance in hand. Sometimes insufficiency of cash may make a business enterprise bankrupt.
Financial planning should have due foresight and vision to access the future needs, scope and scale of operation of the business enterprise. On the basis, financial planning should be done in such a manner that any adjustment needed in the future may be made without much difficulty. As the business proceeds, the financial adjustments become necessary which should be adjustable properly as and when desired.
The financial plan should be able to anticipate various contingencies which may arise in the near future. The financial plan should make adequate provision for meeting the challenge of unforeseen events.
Minimum Dependence on Outside Sources
A long-term financial planning should aim at minimum dependence on outside resources. This can be possible by retaining a part of the profits for ploughing back.
Intensive Use of Capital
Financial planning should ensure intensive use of capital. As far as possible, a proper balance between fixed and working capital should be maintained.
A financial plan should be drafted in such a way that the profitability of the business enterprise is not adversely affected.
The financial plan should be quite economical i.e., the cost burden of raising various types of capital should be minimum.
Government Financial Policy and Regulation
The financial policy should be prepared in accordance with the government financial policy and regulation. It should not violate it under any circumstances.