Question

Somnath Ltd. is engaged in the business of export of garments. In the past, the performance of the company had been upto the expectations. In line with the latest technology, the company decided to upgrade its machinery. For this the Finance Manager Dalmia estimated the amount of funds required and the timings. This will help the company in linking the investment and the financial decisions on a continuous basis. Dalmia therefore, began with the preparation of a sales forecast for the next four years. He also collected the relevant data about the profit estimates in the coming years. By doing this he wanted to be sure about the availability of funds from the internal sources of the business. For the remaining funds he is trying to find out alternative sources from outside.

Identify the financial concept discussed in the above para. Also state the objectives to be achieved by the use of financial concept, so identified.

Answer 1

Financial Planning: Financial planning refers to the planning regarding financial needs of the enterprise, various sources of raising funds and their optimum utilisation.

Objectives of financial planning:

(i) To ensure availability of adequate funds at the right time: This includes a proper estimation of funds required for different purposes such as for the purchase of long-term assets or to meet day-to-day expenses of business. Apart from this, it is essential to estimate the time at which the funds are to be made available. Based on these facts, funds could be raised from short-term and long, term sources.

(ii) To see that the firm does not rase resources unnecessarily: Excess funding is almost as bad as inadequate funding. So, the financial manager must see to it that the company does not raise more capital than the requirement of the business. In case there is surplus cash or liquidity, the excess funds should be utilized judiciously.