The financial plan refers to the projection of future financial course of action to be carried for the efficient execution of operating plans and effective accomplishment of the corporate objective. The financial plan begins with the preparation of strategic plans that in turn guides the formulation of operating plans and budgets. The financial plan provides roadmap for guiding, coordinating and controlling a firm’s financial activities in order to achieve the objectives.
Objectives of the Financial Plan
Most corporate organizations spend significant time and labor in preparing the financial plan as it enables a firm:
- To identify significant actions to be taken in various aspects of the firm’s finance functions.
- To develop various options in the field of finance functions, which can be exercised as condition change.
- To state clearly the relationship between present and future financial decision.
- To systematize the interaction required between investment and financing decision.
- To ensure that the strategic plan of the firm is financially viable.
- To provide a standard against which future financial performance is compared.
Financial Planning has got many objectives to look forward to:
Determining capital requirements- This will depend upon factors like the cost of current and fixed assets, promotional expenses and long-range planning. Capital requirements have to be looked with both aspects: short- term and long- term requirements.
Determining capital structure- The capital structure is the composition of capital, i.e., the relative kind and proportion of capital required in the business. This includes decisions of debt- equity ratio- both short-term and long- term.
Framing financial policies with regards to cash control, lending, borrowings, etc.
A finance manager ensures that the scarce financial resources are maximally utilized in the best possible manner least cost in order to get maximum returns on investment.