Question

Somnath Ltd. is engaged in the business of export of garments. In the past, the performance of the company had been upto the expectations. In line with the latest technology, the company decided to upgrade its machinery. For this, the Finance Manager, Dalmia estimated the amount of funds required and the timings. This will help the company in linking the investment and the financing decisions on a continuous basis. Dalmia therefore, began with the preparation of a sales forecast for the next four years. He also collected the relevant data about the profit estimates in the coming years. By doing this, he wanted to be sure about the availability of funds from the internal sources of the business. For the remaining funds he is trying to find out alternative sources from outside.

1. Identify the financial concept discussed in the above para. (1)
2. Also state the scope/objectives to be achieved by the use of financial concept, so identified. (3)
3. Discuss the factors which the Finance Manager should keep in mind while undertaking the process of the financial concept identified in part (a). (4)

Answer 1

1. Financial Planning
2. The scope/objectives of financial planning include:
   • Estimating financial requirements of the business (both amount and timing).
   • Ensuring availability of funds at the right time from the right sources.
   • Ensuring balance between investment and financing decisions.
   • Ensuring smooth business operations without financial bottlenecks.
   • Minimising uncertainties and business shocks by planning for the future.
3. Factors to consider while preparing a financial plan:
   1. Nature and Size of Business: A large manufacturing business needs more funds than a small trading firm.
   2. Financial Needs: Both fixed capital (for machinery) and working capital (for day-to-day operations) must be estimated.
   3. Sources of Finance: Whether to use internal sources (retained earnings) or external sources (loans, equity).
   4. Cost of Finance: Select sources with lower costs to reduce the burden on the business.
   5. Risk-Return Trade-off: Balance between using debt (cheaper but risky) and equity (safer but dilutes control).
   6. Market Conditions: Consider the economic environment and availability of funds.
   7. Flexibility and Adaptability: The plan should allow changes if the market conditions or business needs change.