Financial Planing

Unit 4

Financial planning (like all planning)
begins with the establish­ment of goals and objectives. Next, planners
must assign costs to these goals and objectives. That is, they
must determine how much money is needed to accomplish each one. Finally, financial
planners must identify available sources of financing and decide which to
use. In the process, they must make sure that financing needs are
realistic and that sufficient funding is available to meet those
needs.

THREE STEPS OF
FINANCIAL PLANNING

1. Establishing
Organizational Goals and Objectives. Es­tablishing
goals and objectives is an important management task. A goal is an end state
that the organization wants to achieve. Ob­jectives are specific
statements detailing what the organization intends to accomplish
within a certain period of time. If goals and objectives are not
specific and measurable, they cannot be trans­lated into costs, and
financial planning cannot proceed. They must also be realistic.
Otherwise, it may be impossible to finance or achieve them.

2. Budgeting for
Financial Needs. A budget is a financial statement
that projects income and/or expenditures over a speci­fied future period
of time. Once planners know what the firm's goals and objectives
are for a specific period of time - say, the next calendar year-
they can estimate the various costs the firm will incur and the
revenues it will receive. By combining these items into a
companywide budget, financial planners can deter­mine whether they
must seek additional funding from sources out­side the firm.

Usually the budgeting process begins with the
construction of individual budgets for sales and for each of the various
types of expenses: production, human resources, promotion,
administra­tion, and so on. Budgeting accuracy is improved when
budgets are first constructed for individual departments and for
shorter peri­ods of time. These budgets can easily be combined into a
com-

panywide cash budget. In addition, departmental
budgets can help managers monitor and evaluate financial performance throughout
the period covered by the overall cash budget.

Most firms today use one of two approaches to
budgeting. In the traditional approach, each new budget is based on
the dollar amounts contained in the budget for the preceding year.
These amounts are modified to reflect any revised goals, and managers must
justify only new expenditures. The problem with this ap­proach is
that it leaves room for the manipulation of budget items to
protect the (sometimes selfish) interests of the budgeter or his or her
department.

This problem is essentially eliminated
through zero-base bud­geting.

Zero-base budgeting is a
budgeting approach in which every expense must be justified in every
budget. It can dramatically re­duce unnecessary spending. However, some
managers feel that zero-base budgeting requires too much time-consuming paper­work.

3. Identifying Sources
of Funds. The four primary sources of funds are sales
revenue, equity capital, debt capital, and the sale of
assets. Future sales generally provide the greatest part of a firm's
financing.

Sales
revenue is the first type of funding.

The second type of funding is equity capital,
which is money received from the sale of shares of ownership in the
business. Equity capital is used almost exclusively for long-term
financing. Thus it might be used to start a business and to fund
expansions or mergers. It would not be considered for short-term
financing needs.

The third type of funding is debt capital,
which is money ob­tained through loans. Debt capital may be borrowed for
either short- or long-term use.

The fourth type of funding is the sale of
assets. A firm gener­ally acquires assets because it needs them
for its business opera­tions. Therefore, selling assets is a
drastic step. However, it may