Contents

1. Financial planning Contents CONTENTS Capital Structure CONTENTS CONTENTS Financial Planning CONTENTS CONTENTS Working capital Fixed capital

2. Financial Management Financial Planning Financial planning is essentially preparation of a financial blueprint of an organisation’s future operations. The objective of financial planning is to ensure that enough funds are available at right time.

3. Financial Management Objectives of Financial Planning Financial planning aims to achieve twin objectives of ensuring the proper availability of finance and at the same time it also tries to ensure that the firm does not raise resources unnecessarily.

4. Financial Management Importance of Financial Planning It aims at enabling the company to tackle the uncertainty in respect of the availability and timing of the funds and helps in smooth functioning of an organisation.

5. Importance of Financial Planning Forecasting the future It tries to forecast what may happen in future under different business situations. By doing so, it helps the firms to face the eventual situation in a better way.

6. Importance of Financial Planning Evaluation of Performance By spelling out detailed objectives for various business segments, it makes the evaluation of actual performance easier.

7. Importance of Financial Planning Preparing for the future It helps in avoiding business shocks and surprises and helps the company in preparing for the future.

8. Importance of Financial Planning Coordinating Business Functions If helps in co-ordinating various business functions e.g., sales and production functions, by providing clear policies and procedures.

9. Importance of Financial Planning Reduction of waste and duplication Detailed plans of action prepared under financial planning reduce waste, duplication of efforts, and gaps in planning.

10. Importance of Financial Planning Facilitate Linking process Investment Decisions future Financial Planning Financing Decisions Past It provides a link between investment and financing decisions on a continuous basis. It also links the past with future.

11. Financial Management Capital Structure On the basis of ownership, the sources of business finance can be broadly classified into two categories viz., ‘owners funds’ and ‘borrowed funds’. Capital structure refers to the mix between owners and borrowed funds. These shall be referred as equity and debt in the subsequent text.

12. Financial Management Capital Structure While deciding the ratio between debt and equity in the capital structure, the management has to consider various factors influencing it. They are discussed below.

13. Factors Influencing Capital Structure Cash flow position Size of projected cash flows must be considered before borrowing. Cash flows must not only cover fixed cash payment obligations but there must be sufficient buffer also.

14. Factors Influencing Capital Structure Stock market conditions If the stock markets are bullish, equity shares are more easily sold even at a higher price. Use of equity is often preferred by companies in such a situation.

15. Factors Influencing Capital Structure Return on Investment(RoI) Cost Benefits Beneficial Return Financial Non-Financial If the R O I of the company is higher, it can choose to use trading on equity to increase its EPS, i.e., its ability to use debt is greater.

16. Factors Influencing Capital Structure Cost of Debt A firm’s ability to borrow at a lower rate increases its capacity to employ higher debt. Thus, more debt can be used if debt can be raised at a lower rate.

17. Factors Influencing Capital Structure Floatation cost Process of raising resources also involves some cost. Where the floatation cost involved is high, debt capital may be desirable.

18. Factors Influencing Capital Structure Tax Rate Since interest is a deductible expense, cost of debt is affected by the tax rate. If the tax rate is high, debt will be more attractive.