Planning is deciding in advance what is to be done. It is a projected course of action. Financial planning is a vital part of overall planning of any business. A finance manager has to see that the funds needed are made available from most appropriate source in the required amounts, at the appropriate time and at a cost that will make their use in business profitable. Financial planning pertains to the determination of financial objectives, financial policies and financial procedures. As far as the overall objective of the company is concerned, it may be one of the several objectives but the finance manager has to keep the profit maximisation as an operative objective in his day to day activities and operations and thus maximisation of the total wealth of shareholders.
In order to achieve this objective, financial resources have to be properly managed with a systematic planning and control. Financial planning is necessary both for new as well as existing firms. In fact, the process of financial planning begins from the day the idea of forming a company is conceived by the promoters. The task of financial planning is undertaken by the promoters before the formation of a company and after that it rests with the top management. Any mistake in the financial planning in the initial stages is likely to create serious implications afterwards. If a company is incorporated with inadequate capital, it may not be able to meet its commitments and its very existence may be endangered. If on the other hand more capital is collected than warranted in terms of the amount of capitalisation, it may reduce the rate of earning at the same time pose the problem of management of surplus funds.
Financial planning aims at solving following three basic problems :
- What is the total amount of capital required for the business ? —Capitalisation
- a.) What are the different sources from which funds are to be collected ? —Capital structure, b.) What will be the proportion of different types of securities ? —Capital Gearing.
- (What is the suitable time for raising capital from a particular security and other financial policies ? —Capital Administration.