Ramnath Ltd. is dealing in import of organic food items in bulk. The company sells the items in smaller quantities in attractive packages. Performance of the company has been up to the expectations in the past. Keeping up with the latest packaging technology, the company decided to upgrade its machinery. For this, the Finance Manager of the company, Mr Vikrant Dhull, 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. Therefore, Mr Vikrant Dhull 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.
For the remaining funds, he is trying to find out alternative sources. Identify the financial concept discussed in the above paragraph. Also, State any two Points of the importance of the financial concept, so identified.
Financial planning has been discussed in the paragraph. Financial planning involves identifying the sources from where the funds can be obtained and ensuring that the required funds are available to the firm as and when needed. One of the basic objectives of financial planning is to ensure that there is neither shortage of funds nor excess funding (glut).
Points highlighting the importance of financial planning are
- Financial planning helps in forecasting the future. For instance, with financial planning, it is possible to forecast whether an expansion would be beneficial in terms of sales and profits.
- It would help in avoiding situations such as shortage or surplus of funds.