Principles of financial planning

While formulating the financial plans, the following principles should be kept in mind by the financial planners :

1. Objective : All financial planners should always move with one basic principle while formulating financial plans that their job is to procure capital at the lowest possible cost and make the best possible use of funds thus collected. Their objective must be in line with the overall objective of the company. For example, if the policy of management is to promote sales at any cost which may be giving liberal credit facilities, naturally, the financial planner has to make arrangement for working capital and at the same time make provision for bad debts.

2. Simplicity : As far as possible the simplicity principle should be adhered-to while drafting plans. The capital structure should not be unnecessarily stuffed with a number of securities. A simple plan is easy to understand and easy to implement.

3. Flexibility : Business is full of uncertainties. So a financial plan must be capable of being adjusted according to these changes. Even in the initial stages, promoters must make provision for contingencies and inflationary pressures. A financial plan should be such that it has scope for raising additional funds at short notice. There should be such a degree of flexibility so that it could be adopted with minimum delay to meet the changing conditions.

4. Liquidity : Adequate cash, bank balances and easily convertible securities should exist in sufficient amount to ensure liquidity. The term liquidity, in our context, means the availability of cash to make payments, whenever so required. But, where, in order to ensure liquidity, funds are kept idle, profitability is bound to be affected. So, the planners must make a judicious balance between liquidity and profitability. But at no cost, liquidity should be secrificed for the sake of profitability because this tendency endangers the safety of the company. Adequate liquidity enables the company to meet its commitments in time and face the uncertainities of future.

5. Planning foresight : Good planning needs intelligent imagination. Capital plans should take care of changes in demand, supply conditions, trends in capital market and so on. At the same time the plan should be capable of taking care of future expansion.

6. Economy : Planners must provide the desired capital at the lowest possible cost of collecting funds.  The interest bearing securities should be used only after considering the rate of return, otherwise the obligation of fixed payments may erode into company’s rate of return and cause over capitalisation.

7. Control : The plans are to be governed by the degree of control the promoters wish to retain over the company. If they wish to maintain control over the company, naturally they have to rely more on fixed interest bearing securities because the fixed interest bearing security holders do not enjoy voting rights.

8. Optimum use of fund : Mere adequacy of capital is not sufficient, its proper use is equally important. While taking decisions about the funds to be collected, the planners should continuously bear in mind, the purpose to which these are to be put. Financial plans should be so drafted that the funds once collected do not remain idle or used for unproductive purposes.

9. Self-generated growth : A financial plan should be such that it makes the company least dependable on outsiders. It should ensure sufficient return on investment so that it could be saved and ploughed back into the business year after year for the growth and expansion of the company.

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