BBA Business Organisation Concept of Finance Planning

BBA Business Organisation Concept of Finance Planning

 

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Concept of Finance Planning

Concept of Finance : Finance is that activity which involves the estimation, acquisition and administration of funds of any kind used in meeting the needs and objectives of business firms. It is concerned with the procurement and utilization of funds for business.

According to Howard and Upton, “Finance is that administrative area or get or set of administrative functions in an organization which relate to the management of cash and credit, so that the organization may have means to carry out its objectives as satisfactory as possible.”

According to H. Guthman and H. Douggal, “The activity concerned with the planning, raising controlling and administering of funds used in the business.”

Therefore, finance is said to be the life-blood of any business. Finance should be available in adequate quantity to face trade cycles, recessions and other critical times.

Role of Financial Planning

The term financial plans refers to the plan that indicates the requirements of finance, the sources from which, it is to be raised and the application of funds. It is the process of planning the policies, procedures and programmes for effective management of the financial activities of an organization. Financial planning consists of the following activities :

  1. Estimating the amount of capital required for various needs of business.
  2. Determining the different sources of finance and the proportion in which they will be used to raise the required capital.
  3. Formulating the policies for the utilization and administration of funds.

Needs for a Good Financial Planning

Financial Planning is an important part of the overall planning of an enterprise. Sound financial planning is needed for the following:

  1. Financial planning involves accurate forecast of the present and future capital requirements. Therefore, it helps to avoid the problem of shortage or excess of funds.
  2. It provides policies and procedures for effective co-ordination between various activities in the business. This hands to elimination of wastage of resources.
  3. Financial policies serves as broad guides in the effective procurement, allocation, utilization and disbursement of funds. All this is necessary to maintain profitability, solvency and liquidity of business.
  4. Financial plans enables the management to maintain effective control over the financial operations of the enterprise.

Thus, the success of a business enterprise depends greatly upon sound financial planning.

Characteristics of a Good Financial Plaaning

  1. Simplicity : A good financial plan should provide a simple financial structure which is easy to manage. If all possible resources of finance are used and different varieties of securities are issued. It may be very difficult to manage the financial structure.
  2. Flexibility : The financial plan should provide sufficient scope for adjustments in the financial structure. It should permit raising of more-funds to finance expansion and modernization programmes.
  3. Availability of Adequate Funds : A sound financial plan must ensure the supply of adequate funds to meet both the current and future requirements of business.
  4. Economy: The funds required by the enterprise should be made available at the minimum possible cost. The composition of total capital should be designed to obtain the most economical financial structure.
  5. Liquidity: A sound financial plan must ensure a judicious balance between profitability and liquidity. The funds should be so invested that they yield good returns.
  6. Solvency: The financial plan should ensure the survival and creditworthiness of a business. The burden of fixed charges should be such that the enterprise can pay them in time out of its earnings.
  7. Optimum use of Funds: A good financial plan is one which ensures the best possible utilization of funds raised from various sources. There should be noddle funds and at the same time funds should be made in the use of business opportunities.

Factors Affecting the Capital Structure

  1. Trading on Equity : The term ‘equity’ refers to the ownership funds to a company and trading means taking advantage’. Therefore trading on equity implies taking advantage of equity stock to raise fixed change funds at reasonable cost.
  2. Desire to Retain Control : When the promoters of a company wish to retain control over the company in their own hands, they may raise more funds by issuing preference shares and debentures. The holders of these securities do not enjoy voting right and therefore, there is a little possibility of loss of control.
  3. Need for Flexibility : It implies the freedom to adopt the capitalization and mix of securities to the changing conditions of the business. Equity shares take the capital structure rigid as they cannot generally be paid back before winding up of the company.
  4. Nature of Business : Companies enjoying regular and liberal earnings, e.g., public utilities, can afford to have high capital gearing. On the other hand, business firms which are subject to wide fluctuations in demand and earning may find it safer to depend more on equity capital and preference shares.
  5. Cost of Financing : In a good financial structure the cost of capital should be reasonably low. Cost of financial includes the interest on dividend to be paid and the administrative expenses of issuing a particular type of security.
  6. Capital Market Conditions : The general state of capital market influences the choice of securities to be issued. During boom, investors are willing to take risk and invest in equity shares. But in a bearish market or downswing, investor prefer safe investment.
  7. Statutory Requirements : Banking companies are prohibited from issuing any type of security, eycite equity shares. Government of India has also laid down ceilings on public deposits and the ratio between capital and debt.
  8. Period of Finance : Generally, permanent of long term capital is raised through equity share and preference shares medium term funds can better be raised through redeemable preference shares or debentures.
  9. Purpose of Finance : if funds are to be raised for modernization, expansion and other purposes, that will add to the earnings of the firm debentures and long term debt can be used.
  10. Assets Structure : The choice of securities should be appropriate to the liquidity and composition of assets. The cash flows of the company must be sufficient to meet the changes for funds.

Long Term Finance Sources

  1. Issue of Shares : The owned capital of a company is divided into a large number of small equal parts. Each such part is known as share. A company can issue two types of securities :
  2. Debentures : Debentures denote borrowing by a company and represent its loan capital. Debenture holders are the creditors of the company. A debenture is a document or certificate issued by a company as a proof of the money but to it by the holder.
  3. Underwriting : When a company makes an issue of shares or debentures, it is not quite sure that public will subscribe for the entire issue. In order to ensuftens the entire issue is sold out, it makes an arrangement known as underwriting with a financial.
  4. Ploughing Back of Profit (Self Financing) : Retained earnings represent that portion of a company’s net profit which is kept in business for investment purpose and not distributed among the shareholders as dividend. This is also called self financing.
  5. Institutional Financing : The government has set-up a number of special financial institutions in the country to provide long-term finance to business enterprise. The IFCI, IDBI, ICICI,SFC are the main among such financial institutions.
  6. Public Deposits : It implies any money received by a non-banking company by way of deposit or loan from the public including the employees, customers and shareholders of the company, other than in the form of shares and debentures.
  7. Hire Purchase : Hire purchase is a type of instalment credit under which the high purchaser, called the hirer, agree to take goods on hire at a stated mental, which is inclusive of the repayment of principal as well as the interest, with an option of purchase,

Importance of Financial Planning

  1. Successful Promotion: Effective financial planning ensures successful promotion of the business which is only is only possible through well thought out flexible financial plan drafted in anticipation of the establishment of the business.
  2. Effective Direction: Business operations require funds. The successful operation of a business depends on adequate and timely availability of finance for the promotion of business, purchase of assets and raw materials, production and marketing of goods. Thus, the success or failure of a firm is closely linked with financial planning.
  3. Conservation of Capital: Sound financial planning is necessary for the effective utilization of capital. Plant and machinery acquired by an enterprise become obsolete soon after the arrival of new machinery in the market with improved technology. Thus, sound financial planning is inevitable for conservation of capital investment in assets.
  4. Expansion and Development: The objective of a business enterprise is profit-maximization. This requires the expansion and development of the business unit for achieving its optimum operational efficiency. Efficient financial planning eliminates financial planning is inevitable for the conservation of capital investment in assets.
  5. Adequate Liquidity: Efficient financial planning makes the firm capable of maintaining adequate liquid funds to meet its obligations to the creditors. Availability of adequate liquid funds prevent the firm from the situation of over-trading and strengthens its repayment capacity.
  6. Adequate Return on Capital Employed: Sound financial planning leads to the effective utilization of capital by avoiding both under-capitalization and over-capitalization both of which are harmful to the financial interests of a corporation. Thus, efficient financial planning leads to a higher return on capital employed by the firm.
  7. Optimal capital structure at Minimum Cost: Efficient financial planning leads to the optimal capital structures of the firm at a minimum cost. In deciding the ratio of different forms of capital in the total capital of the firm, the financial manager ensures that the firm pays the least cost and incurs less risk. After analyzing the costs and risks involved in different forms of capital, he finally selects those which involve the least cost without much risk.
  8. Unity and Co-ordination in Operative Functions: Financial planning leads to the most effective utilization of the firm’s capital by establishing ineffective co-ordination in different operative functions and unity in action by all executives at different levels. Thus, it serves as a guide to effective coordination among various operative functions and unity in action. At different levels, the executives follow financial policies, procedures, and objectives as set out in the financial plan.

Function of IFCI

Function of SSC BBA Notes

  1. To provide loans to small and medium scale industrial concens for a maximum period of 20 Years.
  2. To provide guarantee of loans used by companies which are available within a period of 20 Years.
  3. To Subscription to the debentures floated by industrial concern.
  4. To assist the small scale sector in backward areas.
  5. To underwrite the issue of shares, stocks, debentures, bonds etc., by industrial concerns, which have to be disposed of within 7 years.

IFSC (Industrial Finance Corporation of India) : IFCI was set up on 1st July 1948 under the IFCI Act of parliament, of provide medium and long term financial Assistance to industrial concerns.

Function of IFCI BBA Notes Business Organisation

  1. To provided medium and long term loans in loan to industrial concern for :
  2. Setting up of new industrial undertakings.
  3. Expansion or diversification of existing concerns.
  4. Modernization and renovation of existing concerns.
  5. Meeting working capital requirements.
  6. Meeting existing liabilities.
  7. To grant loans to industrial concerns repayable within 25 years.
  8. To underwriter shares, stocks, debenture, bones etc.
  9. To subscribe directly to the shares and debentures of public Ltd. Co.

IFCI (Industrial Finance Corporation of India) : Industrial Finance Corporation of India was the first financial set up in India in 1948, with the aim of providing medium and long-term finance to industrial concerns in the country.

Objectives : The primary objective of IFCI is to make medium and long-term credits more readily available to industrial concerns in India, particularly in the circumstances where normal banking accommodation is inappropriate to capital issue channels is impracticable.

Management : The head office of the IFCI is in New Delhi. It has its regional and branch offices in other part of the country. The management of the IFCI is vested in a Board of Directors consisting of one full-time chairman appointed by the Central Government in consultation with the board.

It has 12 Directors of which two of the directors are nominated by the Central Government, four by the IDBI, two by scheduled commercial Banks, two by Co-operative Banks and the committees to assets in its efficient functioning.

Functions The IFCI performs the following functions :

  • Granting loans and advances to or subscribing to debentures of approved industrial concerns, repayable within a period of 25 years.
  • Guaranteeing loans raised by industrial enterprise from scheduled banks or state co-operative banks, which are repayable within a period of 25 years.
  • Underwriting of shares, debentures, bonds or stocks issued by industrial concerns and corporation,
  • Subscribing directly to the shares of industrial concerns eligible for assistance from the corporation.
  • Acting as an agent for the Central Government and the world Bank (IBRD) in respect of loans granted by them to industrial concerns.

Financial Resources 

BBA Business Organisation Concept of Finance Planning

The financial resources of the IFCI consist of ownership capital borrowing from Central Government and borrowing from market by issue of bonds. The Industrial Finance Corporation (Amendment) Act, 1986 has increased the authorized capital to 259 crores from the earlier limit of 100 Crores. On June 30,1989 its paid up capital stood at 58 corores.

The IFCI is authorized to issue and sell bonds and debentures for raising its working capital. The total amount of bonds, debentures and contingent liabilities should not exceed ten times the amount of the IFCI ‘s paid up share capital and retained earnings.

The IFCI is also authorized to borrow from the Central Government, Reserve Bank of India and Industrial Development Bank of India and to Accept deposits from the public, state Government and Local Authorities for a period of less than 5 years. The total amount of such deposits should not Exceed 10 Crores at any time. It is also empowered to raise money from foreign credits in foreign Currency.

Area of Operation BBA Notes

BBA Business Organisation Concept of Finance Planning

The IFCI provides assistance to public limited companies and co-operative societies engaged in the manufacture, preservation or processing of goods, or in the shipping, mining or hotel industry or in the generation or distribution of electricity or any other form of power.

The proprietary industrial concerns and firms are not eligible for financial assistance from the FICI, which may be granted for a maximum period of 25 Years in any of the forms mentioned above, while the effective rate of interest is 14 percent on rupee loans the concessional rate of interest on rupee loan for projects located in the notified less developed areas is 12.5 percent.

Responsibilities of Financial Management

BBA Business Organisation Concept of Finance Planning

Financial management is varied as an integral part of over-all management rather than as a staff specially concerned with the fund-rasising operations only. Though all the important financial decisions are made by the top management, the financial executive is deeply involved in this process. His main responsibility is to provide all the necessary accounting information, analyze and discuss the various alternatives and to suggest suitable solutions. His responsibilities lie in the following spheres of finance function :

  1. Financial Planning: It is the chief responsibility of a financial executive to make a sound financial forecast and then to play for achievement. He tries for efficient management so that the firm might not experience a financial crisis and defer its payments. The goodwill of the firm suffers severely and even the liquidation of the firm may be demanded by the creditors if the financial crisis continues for a long time.
  2. Raising of Necessary Funds: Another main responsibility of financial management is to supply adequate funds to the firm for its various operations. A cost benefit analysis of various alternative sources must be made before raising funds from any particular source. Impact of additional financing on the risk, control, and income of equity shareholders should be evaluated in term of its costs and its impact on the capital structure, etc.
  3. Controlling the use of funds: A business firm is basically a profit earning concern, whose earnings depend to a large extent upon the efficient utilization of funds. This requires sound investment decision, roper asset-management policies, proper depreciation provision and efficient management of working capital. there, effective control on cash-inflow and outflow should be maintained and financial checks should be followed.
  4. Disposition of Profits: The proper disposition of profits is also an important responsibility for financial management. Regarding the allocation of net profits after payment of taxes a typical firm may be said to have two choices :
  5. Efforts to Maximise Value: it is a regular and recurring responsibility of the financial manager to make continuous efforts to maximize the value of the firm for its shareholders. According to Prof. Solomon Ezra of Standard University the main goal of financial management is wealth maximization which depends to a large extent on the quality of decisions taken by a firm as evident from the following chart :
  6. Responsibilities to Owners: Shareholders are the real owners of a concern. The financial manager has the prime responsibility to those who have committed funds to the enerprise. He maintains the owners adequately for the risk capital they provided.
  7. Legal Obligation: The financial manager is under an obligation to consider the enterprise in light of its legal obligation. A host of laws, taxes and rules or regulations cover nearly every move and policy. Efficient financial management helps to develop a sound legal framework.
  8. Responsibilities to Employees: The financial management must try to realize a healthy going industrial concern capable of maintaining regular employment at satisfactory rates of pay under favorable working conditions. He should be given ample opportunity to participate in the financial decision making valuable suggestions to improve the financial health of the firm. He should think over various suggestions seriously and give effect to them in a thrust to boost their morale. As the long term financial interests of management, employees, and owners are common, the financial management should safeguard the interest of all these.
  9. Responsibilities to Customers: Financial management is necessary in order to make the payments of customer’s bill effective and ensure the creditors for the continued supply of raw materials.
  10. Wealth Maximisation: According to, Proof, Solomon of Stanford University the main goal of the finance function is wealth maximization .if the financial management follows the wealth maximization goal, other goals may be archived automatically. The financial manager is responsible for maximizing the wealth of the shareholders.

To conclude, the financial manager is responsible not only to maintain the financial health of the organization but also to increase the economic welfare of the shareholders by utilizing the funds in an effective manner.

 


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