ADVERTIsem*nTS:
Some of the important characteristics of a sound financial planning are: (1) Simplicity (2) Foresight (3) Flexibility (4) Optimum use of funds (5) Liquidity (6) Anticipation of contingencies and (7) Economy.
Sound financial planning is necessary for the success of any business enterprise. It entails policies and procedures for proper co-ordination between the various functional areas of business. This involves proper allocation of resources among various departments and thus leads to minimisation of waste of resources.
ADVERTIsem*nTS:
While preparing the plan of capitalisation in a company, the following canons or factors should always be kept in view:
(1) Simplicity:
A sound financial structure should provide simple financial structure which could be managed easily and understandable even to a layman. “Simplicity’ is an essential sine qua non which helps the promoters and the management in acquiring the required amount of capital. It is also easy to work out a simple financial plan.
(2) Foresight:
Foresight must be used in planning the scope of operation in order that the needs for capital may be estimated as accurately as possible. A plan visualised without foresight spells disaster for the company, if it fails to meet the needs for both fixed and working capital. In simple words, the canon of foresight means that besides the needs of ‘today’ the requirements of ‘tomorrow’ should also be kept in view.
(3) Flexibility:
ADVERTIsem*nTS:
Financial readjustments become necessary often. The financial plan must be easily adaptable to them. There should be a degree of flexibility so that financial plan can be adopted with a minimum of delay to meet changing conditions in the future.
(4) Optimum use of funds:
Capital should not only be adequate but should also be productively employed. Financial plan should prevent wasteful use of capital, avoid idle capacity and ensure proper utilisation of funds to build up earning capacity of the enterprise.
There should be optimum utilisation of available financial resources. If this is not done, the profitability will decline. There should be a proper balance between the fixed capital and the working capital.
(5) Liquidity:
It means that a reasonable percentage of the current assets must be kept in the form of liquid cash. Cash is required to finance purchases, to pay salaries, wages and other incidental expenses. The degree of liquidity to be maintained is determined by the size of the company, its age, its credit status, the nature of its operations, the rate of turnover etc.
(6) Anticipation of contingencies:
ADVERTIsem*nTS:
The planners should visualise contingencies or emergency situations in designing their financial plan. This may lead to keeping of some surplus capital for meeting the unforeseen events. It would be better if these contingencies are anticipated in advance.
(7) Economy:
Last but not the least, the financial open be made in such a manner that the cost of capital procurement should be minimum. The capital mobilised should not impose disproportionate burden on the company. The fixed dividend on preference shares, the interest on loans and debentures should be related to the earning capacity. The fixed interest payments should not reduce the profits of the company and hamper its sustained growth.
