Financial Planning Class 12 explains the meaning, Objectives and Importance of financial planning. One can understand all the important topics related to financial planning by properly going through this document. A detailed explanation of the topics is given below, scroll down for the explanation.
Meaning of Financial Planning Class 12
People often confuse financial planning with financial management but financial planning is just a part of financial management. Financial management is broad; it deals with the different options available for acquiring finance and choosing the best available alternative of the same. It keeps in mind the cost and risk factors and focuses on getting the maximum returns. The main aim of financial management is to improve the financial health of the company by increasing the shareholder’s wealth. Financial planning on the other hand is a narrow concept in front of financial management. Financial planning focuses on the fund requirement in an organization and its availability and at the same time ensures that the fund is not wasted by excess availability and no hindrance to the operations because of its shortage.
Objectives of financial planning Class 12
Financial planning thus has two main objectives. These objectives are important for the survival of the business, decision-making, and creating financial discipline in the company. These objectives are as under:
Ensuring availability of funds whenever required
Objectives of Financial Planning Class 12 explains that Financial planning revolves around the estimation of the funds required. The amount of funds that are required by the firm along with its duration is calculated under the financial planning. It also lists down the possible sources of finance that will be available to fulfil the need for funds in the firm. Estimation of requirements is done on the basis of facts, figures, and forecasts done by the competent financial manager. This estimation is regarding either the long-term needs of the firm such as the purchase of machineries or short-term needs such as current assets or the day-to-day operations.
To avoid unnecessary raising of funds under Financial Planning Class 12
Ideal financing is the goal of financial planning. Shortage of funds is harmful to the business as it creates hindrance in the completion of the activities or commitments made by the firm. Similarly, excess funds are also equally harmful because funds come with a cost, and excess funds will unnecessarily raise the cost and will not even yield any return. It is the quality of a good financial manager to put idle finance to the best possible use.
Elements of financial planning
There are various elements included in financial planning which directly help in better planning of the business finance. They are as under:
Determination of financial objectives under Financial Planning Class 12
There are certain objectives of the business. These objectives are aligned with the main objective of the firm. One of those objectives is the financial objective. This objective mainly focuses on three broad categories- financing, investment, and dividend. The financing objective of the firm is regarding the quantum of finance to be raised and the sources of finance that are available. The investment objective is regarding the investment of the funds raised depending upon the lowest risk, lowest possible cost, and highest possible return. The dividend objective involves the decision regarding the earning of the business- how much should be distributed among the shareholders and how much should be retained.
Estimation of capital requirement
Business finance is required by the firm at each level starting from the initial stage of setting up the firm, then for day-to-day activities and for further investment activities. It is required for getting the resources for the firm such as man, materials, and machinery.
Estimation for these requirements is based on the forecast, facts, and figures. It can be for the short term or for the long term. Although, estimating for the long term becomes difficult and sometimes useless because of the dynamic environment of the business. Short-term estimation is also called a budget.
Formulation of financial policies under Financial Planning Class 12
Financial planning in an organization helps in framing financial policies. These policies are regarding the borrowing of funds, lending of funds, cash or credit sales, cash or credit purchase of raw materials, and other financial activities. Such policies help in bringing financial discipline into an organization by improving control and coordination.
Importance of Financial Planning Class 12
Planning is defined as the filling up of the gap between the current position and the position we want to reach. Similarly, financial planning helps us reach the ideal position in terms of finance by fulfilling the need for funds as per the requirements and an ideal time. Thus it is very important for any organization. The importance of financial planning is as under:
Preparation for future
Financial planning Class 12 is a way to predict the future. This prediction is done with scientifically tested methods such as facts, figures, and forecasts. This estimation of future needs helps in avoiding the shortage of funds when required which may create a hindrance in fulfilling the commitment.
This helps the firm in adjusting to various situations of the environment. For example, a business organization may have predicted its profit to be 10% this year but under the change in circumstances, the profit achieved was only 7%, which may lead to different expenses and investments compared to the planned ones.
Avoiding shocks and surprises under Financial Planning Class 12
Business brings shocks and surprises with it each time when there is any change in the business environment. These changes may affect the business positively or negatively. To be aware and respond in a prepared manner it becomes important for a business to plan for finance. For example, a firm may have forecasted a reduction in the cost of a product due to improved technology but suddenly government increased the prices of the raw material and it may lead to shock for a firm.
Helps in coordination
Financial planning Class 12 helps in formulating policies and procedures for the business. These policies and procedures help in bringing coordination among various business activities. These activities when working according to the policies framed brings discipline to the organization which helps in the smooth functioning of the organization. It helps in coordinating various departments such as sales and production departments will get coordinated according to policy regarding the purchase of raw materials based on the finance available in the organization.
Reduce waste or duplication under Financial Planning Class 12
Planning is done for reducing wastage if any. Financial planning on similar lines helps in reducing the wastage of money. Excess finance leads to idle finance in the organization which cannot be used anywhere or is used in an activity that does not yield a good return. This excess fund also increases the cost and risk. To avoid this wastage or duplication and to fill the gap, proper planning is required in an organization regarding the requirement of funds in quantity and the time when it is needed.
Helps in taking various decisions
There are various decisions to be taken in an organization related to marketing, production, and sales. These decisions are linked to financial decisions because finance is the blood of the business. These decisions when linked together can be performed efficiently and they give the best results possible. The decisions related to acquiring the finance, investment to be made and dividend to be distributed are also linked together and affect each other.
Improves administration of the business
Every organization needs finance. This finance when managed properly helps in bringing sound administration to the organization due to its ability to make a sound plan and when everything is going according to the plan then processes become smooth.
Controlling becomes easy under Financial Planning Class 12
Financial planning Class 12 starts with making a plan. This plan is based on the scientific analysis of past performance and forecast of the future position. Financial planning is a quantitative process and thus helps in recording and it is thus easy to refer to the records whenever required for analysis.
When the plan is ready and processes are done according to the set plan then it becomes easy to compare the actual results with the pre-planned performance and this makes the evaluation easy. This also helps in bridging the gap between the present position of the firm and the future position of the firm by taking proper corrective measures.
Financial planning Class 12 is thus the process in which twin objectives are to be taken care of. First, the proper analysis is to be done of the requirements of the finance in the firm. Second, the availability of the funds is to be taken care of by properly checking various sources of finance and selecting the best possible sources, and bringing the funds whenever required without creating excess or shortage.
Excess and shortage of funds are very harmful to any organization because of the negative results they yield. Financial planning cannot be taken for granted because of the benefits it offers. It helps not only in the present situation of the firm but also helps in avoiding any shocks or surprises by improving the administration of the firm.
BST Chapter 9 – Financial Management