Introduction To Financial Planning
For conducting business, all organizations need funds. Finance is considered as lifeblood on which the operations of firm depend. Thus, it is must for the manager to manage finance of the company. If company wants to succeed and survive in the competitive environment, it is important that it must have adequate funds; otherwise it will not be able to compete in the market (Barbaro and Bagajewicz, 2004).
Sources of finance
In general sources of finance can be categorized as external or internal. Internal sources are those which company manages within itself, while, external sources are those that are raised from outside the company. Retained earnings are considered as internal source of finance while loan taken from any bank is the example of external source of finance.
Apart from this, sources can also be classified as short term or long term sources of finance. Suppose the owner wants to set up a mobile phone manufacturing unit. It will require investment of around £400000 (Cowton, 2004).
Implication of different sources of finance
The owner needs to raise £400000 for setting up a manufacturing unit of mobile phones; it can either select any of the short term or long term source. If the firm selects loan from the bank, it will have to pay interest of the principle amount at regular interval, in spite it is making profit or loss. And at the end of the contract, it will have to repay the loaning amount back to the bank. The next option is to either go for private limited or public limited company (Barton, 2001).
For proper functioning of any organization, it is important that the management do proper planning. While planning for different resources, it is essential to do financial planning also. Financial planning means to assess the present and future financial condition of the company so as to predict its future cash flow, asset value, withdrawal plans, etc.
For the manufacturing unit such as mobile company, it is necessary to performing financial planning so that the firm can determine the volume of capital it will be requiring to meet all kind of expenses. In addition to this, financial planning will also assist the organization in deployment of their funds and other investment related decisions (Zahra and Nielsen, 2002).
Moreover, through financial planning, the firm can optimally design its capital structure and thus can maintain a standard debt equity ratio. Further, it will also enable the company to identify the requirement of short term and long term capital. Finally, the organization can maintain its cash flow and this can formulate effective strategies.
Cost of different sources of finance
Three of the most appropriate sources of finance available to the organization are leasing, bank loan and hire purchase. Once the loan is approved, the organization is eligible for taking overdraft facility at the time of emergency. In addition to this, bank loans can be customize as per the requirements of the customers. For taking bank loan, the company will have to incur cost of interest that it will have to pay at periodic interval.
Whether the company is making enough profit or not, it has to pay periodic interests. In addition to this, certain processing cost is also associated with the loan (Beck, Levine and Loayza, 2000). As the company is into manufacturing sector, it can also think of lease. In a lease contract, the lessor owns the asset and the lessee uses the asset.
Different financial statement
- Cash Flow Statement: It has two main elements, revenue and expense, and tells about the flow of cash of the company. It revenue is more than expense, it is called positive cash flow and if revenue is less than expense, it is called negative cash flow.
- Income Statement: It has two main elements, income and expense and shows whether the company is in profit or loss. Revenue generated is recorded under income while expenses are recorded under expense. If revenue is more than expense, the company is making profit, otherwise it’s in loss (Barbaro and Bagajewicz, 2004).
- Balance Sheet: The most important financial statement is the balance sheet and it shows financial standing of the company. It has two sides; assets, which are owned by the entity and liabilities, which entity owes to other.
After working on the different cases given in the study, it can be conclude that ratio analysis is important tool for analyzing the performance of the company. Moreover, it can also be said that capital budgeting significantly helps in making investment decision.
- Barbaro, A. and Bagajewicz, J. M., 2004. Managing financial risk in planning under uncertainty. AIChE Journal. 50(5). pp.963-989.
- Barth, E. M., 2006. Including Estimates of the Future in Today's Financial Statements. Accounting Horizons: September. 20(3). pp. 271-285.
- Barton, J., 2001. Does the Use of Financial Derivatives Affect Earnings Management Decisions. The Accounting Review. 76(1). pp. 1-26.
- Beck, T., Levine, R. and Loayza, N., 2000. Finance and the sources of growth. Journal of Financial Economics. 58(1-2). pp.261-300.
- Bhowmik, K. S. and Saha, D., 2013. Sources of Finance. Financial Institution of the Marginalized India Studies in Business and Economics. pp61-71.