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Question
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.
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Solution
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.
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RELATED QUESTIONS
Name and state the aspect of financial management that enables to foresee the fund requirements both in terms of 'the quantum' and 'the timings'.
Aval Ltd. is engaged in the business of export of canvas goods and bags. In the past, the performance of the company had been upto the expectations. In line with the latest demand in the market, the company decided to venture into leather goods for which it required specialised machinery. For this, the Finance Manager Prabhu prepared a financial blueprint of the organisation’s future operations to estimate the amount of funds required and the timings with the objective to ensure that enough funds are available at right time. 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.
a. Identify the financial concept discussed in the above paragraph. Also, state the objectives to be achieved by the use of financial concept so identified. ( Financial Planning).
b. ‘There is no restriction on payment of dividend by a company’. Comment. ( Legal & Contractual Constraints)
Financial planning arrives at :
Detailed plans of action are prepared under financial planning. What benefits does this result in?
Mr. Raghav, Finance manager of Manav InfraTech Pvt. Ltd., prepared a detailed plan of financial needs of the firm in coming six months and the sources from where funds will be acquired to meet out these needs as company is planning to open a new branch in other states of India. Identify the financial concept discussed here:
| Harish is working as a finance manager in 'Kozee Softwares Ltd.' He has been awarded “Best employee of the year Award’ because of his foresightedness. He always aims at smooth operations of all the financial activities by focusing on fund requirements and their availability in the light of financial decisions. He takes into consideration the growth, performance, investments and requirement of funds for a given period so that financial resources are not left idle and don't unnecessarily add to the cost. |
By doing all this Harish strives to achieve the two main objectives of an important concept of financial management. Identify the concept and explain its two objectives.
What is the focus of financial planning?
What does financial management choose to increase shareholders’ wealth?
What are plans up to one year called?
What is the starting point in the basic steps of financial planning?
Which capital needs are considered when preparing financial statements?
After estimating profits and retained earnings, what funding decisions are made?
Which budgets are made as part of the basic steps of financial planning?
What can happen when a business has too much debt?
How does higher industry volatility affect the amount of debt a business should carry?
How does lower industry volatility affect the amount of debt a business may carry?
What do banks check when considering debt?
What may some lenders rely on more than earnings?
