Busıness Fınance 1 Dersi 7. Ünite Sorularla Öğrenelim

Financial planning is the process of creating a picture of future given the assumptions of today as determined by the prevailing market and corporate circumstances as well as strategies. 

Financial Planning has got many objectives to look forward to, but mainly it serves for determining capital requirements in short and long term and proper capital structure for the relevant time frame. Financial planning;

• helps in ensuring a reasonable balance between outflow and inflow of funds so that stability is maintained.

• ensures that the supply of funds are easily and effectively invested

• helps in making growth and expansion programmes which helps in long-run survival of the company

• reduces uncertainties with regards to changing market trends which can be faced easily through enough funds, and

• helps in reducing the uncertainties which can be a hindrance to growth of the company. This helps in ensuring stability and profitability in concern.

The planning process should be designed to be revised periodically to reflect the effects of those changes to the financial plans. The assumptions used may be:

• The effectiveness and length of cash conversion cycle

• The sales and collection policies,

• Capital budgeting techniques,

• The cost of capital and its revisions

  depending on the financial circumstances,

• Target capital structure,

• The cash dividend policy,

• The tendency to finance the working capital

  needs by short-term borrowings

The following operational and financial data is required for the financial planning process:

• Short and long term profit targets,

• Divisional financial reports,

• Transactions creating cash flow for the

  divisions and the company,

• Divisional proforma and realized budgets,

• Cost accounting data on product basis,

• Special financial analysis in relation with

  profitability by product, logistics costs and

  other expenditure,

• Analysis of security portfolio and

  subsidiaries,

• Labor productivity reports,

• Internal control reports.

The material goal of the financial planning is to generate a set of reports, budgets and strategy documents to be used in the managerial decision making.

The basic two components of the financial planning are cash and profit planning. The cash planning is realized by the formulating the cash budget of the company, whereas profit planning requires the proforma financial statements. The financial planning commences with the development of strategic long term financial plans and these plans give direction to the development of short-term operational plans and budgets.

These plans contain the envisaged long term financial activities and they figure out the effects of these activities on the financial position of the company. Although the time frame covered is 2-5 years, 5 year strategic plans which are revised as the new data arrives are used generally. Typically the companies that have higher operational risk and short production cycles prefer shorter term planning horizons. Longer term plans are generally used by the purposes of Research and Development, marketing and new product development, fixed investments and basic financing. These plans are supported by annual budgets and profit plans.

Short-term (Operational) Financial Plans: They consist of the envisaged financial activities and the projected effects of these activities on the financial position of the company. Short term financial plans cover generally 1-2 years and uses the sales forecasts, operational and financial data as inputs. The basic outputs, the operational budgets for divisions, cash budget and proforma financial reports.

Budgets are used for the purposes of profit planning and control and visualize all of the aspect of the planned future activities in detail (Sealey, 1978, 20).

The budget is defined as the numerical report or set of reports addressing the future policy and activities in order to achieve predetermined set of targets.

The sales should contain the following information derived from the market research and sales expectations:

• The alternatives of sale on account credit terms including term and interest and the collection policy ,

• The specific market for each product and service,

• The after sales service and the service providers’ responsibility,

• In the case of new market penetrationand product development, the relevantstrategies containing the targeted sales volume and its’ effects on the prices,

• The expenditures required to apply the sales budget and funding sources,

• The inflation expectations and pricing policy.

The production budget should include the planning of the main production input of direct materials, direct labor and manufacturing overhead.

The production budgets should be prepared in terms of volume of production as paralel to sales budget and in details of product types. It should address the following aspects of production:

• The term of production budget,

• The volume of production to substantiate the sales budget, as well as the required level of inventory,

• The timing of production of each product type,

• The location of production,

• The mandatory activities within the production process,

• The tools to measure the productivity of the production process,

• The plans for labor, machinery and equipments and service requirements,

• The cost figures to determine the cost per unit

The direct labor budget is used to determine the required labor hours in order to produce the volume of products as stipulated in the production budget.

Cash budget is a management plan for the most important factor of a company’s viability — its cash position.

The basic aims to prepare the cash budgets are (Tezel and McManus, 1999, 78) :

• To make available the required amount of cash for the realization of planned activities,

• To determine the cash shortfall and/or excess,

• To coordinate the cash management for working capital, sales, liabilities and

  procurements,

• To define the funding sources when necessary,

• To plan an effective collection policy,

• To stipulate the availability of cash for

  investments,

In order to prepare the proforma financial reports, the existing financial reports are used as starting point. The following forecasts and estimations should be made in order to prepare the proforma financial reports:

• Sales, direct materials, direct labor and manufacturing overhead budgets,

• The forecasted sales, management expensesbudget,

• Existing funding structure,

• The ownership structure,

• The volume and amount of direct materials,

• The volume and amount of finished

  products,

• The existing amount of fixed assets,

• The receivables and payables,

• The sales and proceeds,

• Non operating and extraordinary expenses,

• Operating expenses,

• Net profit.

Proforma financial statements are the complete set of financial reports issued by an entity incorporating assumptions or hypothetical conditions about events that may have occurred in the past or which may occur in the future which is usually used to present a view of corporate results to insiders to run the operation smoothly as per plan and to outsiders as part of an investment or lending proposal.

Financial controls are the means by which an organization’s resources are directed, monitored, and measured.It is fact that budgets and proforma financial statements are the major tools of financial control. The financial control can be defined as the analysis of a company’s realized financial results compared to its short, medium and long-term objectives and business plans, as well as budgets.