Financial Planning is the process of estimating the capital required and determining it’s competition.
It is the process of framing financial policies in relation to procurement, investment and administration of funds of an enterprise.
The projection of sales, income, and assets based on alternative production and marketing strategies, as well as the determination of the resources needed to achieve these projection is called financial planning.
Steps in Financial Forecasting
1. Forecast sales
2. Project the assets needed to support sales
3. Project internally generated funds
4. Project outside funds needed
5. Decide how to raise funds
6. See effects of plan on ratios and stock price
Types of Financial Planning
Financial Planning are usually 2 types:
Short-Term (Operating) Financial Planning:
Short term financial planning is the analysis of decisions that affect current assets and current liabilities. A financial plan outlining investment and other financial goals for the coming fiscal year. It deals with –
a. Cash and Liquidity Management
b. Credit and Inventory Management
c. Key inputs include the sales forecast and other operating and financial data.
d. Key outputs include operating budgets, the cash budget, and pro forma financial statements
Long-Term (Strategic) Financial Plans:
An investment plan or strategy with a term of usually longer than one year. It deals with –
i. Capital Budgeting & Proposed fixed asset investments
ii. Dividend Policy
iii. Financial Structure
iv. Research and development activities
v. Marketing and product development
vi. Sources of financing
The systematic charging of a portion of the costs of fixed assets against annual revenues over time is called Depreciation. This is a historical cost of fixed assets over time.
Depreciable life of an Asset :
The time period over which an asset is depreciated is called depreciable life of that asset.
The depreciable value of an asset (the amount to be depreciated) is its full cost, including outlays for installation. No adjustment is required for expected salvage value.
Example: Orin Corporation acquired a new machine at a price of $38000 and installation costs of $2000. What is the depreciable value of the machine?
Now, the Depreciable Value is: $40000