OBJECTIVE OF FINANCIAL PLANNING

Introduction

Usually, a company creates a Financial Plan immediately after the vision and objectives

have been set. The Financial Plan describes each of the activities, resources, equipment and

materials that are needed to achieve these objectives, as well as the timeframes involved.

The Financial Planning activity involves the following tasks:

Assess the business environment

Confirm the business vision and objectives

Identify the types of resources needed to achieve these objectives

Quantify the amount of resource (labor, equipment, materials)

Calculate the total cost of each type of resource

Summarize the costs to create a budget

Identify any risks and issues with the budget set

Performing Financial Planning is critical to the success of any organization. It provides the

Business Plan with rigor, by confirming that the objectives set are achievable from a

financial point of view. It also helps the CEO to set financial targets for the organization, and

reward staff for meeting objectives within the budget set.

The role of financial planning includes three categories:

1. Strategic role of financial management

2. Objectives of financial management

3. The planning cycle

When drafting a financial plan, the company should establish the planning horizon, which is the

time period of the plan, whether it be on a short-term (usually 12 months) or long-term (2–5

years) basis. Also, the individual projects and investment proposals of each operational unit

within the company should be totaled and treated as one large project. This process is called

aggregation.

In the words of Gerestenbug financial planning includes:

Determination of amount of finance needed by an enterprise to carry out its operations

smoothly.

Determination of sources of funds, i.e., the pattern of securities to be issued.

Determination of suitable policies for proper utilization and administration of funds.

The financial planning begins with determination of total capital requirement. For this the

finance managers do the sales forecast and if the future prospects appear to be bright and

expect increase in sale, then firm needs to increase its production capacity which means

more requirement of long term funds. Higher level of production and increase in sales

will require higher fixed as well as working capital.

After estimating the requirement of funds the next step of financial planning is deciding

how to raise this finance. Finance may be internally generated by the business or capital

may have to be raised from external sources such as equity shares, preference shares,

debentures, loans, etc.

Financial planning is broader in scope as it does not end by raising estimated finance. It

includes long term investment decision. In financial planning finance manager analyses

various investments plans and selects the most appropriate. Finance managers make short

term financial plan called budgets.

Financial planning is the integration of all aspects of your family’s finances, including

retirement, tax and estate planning, coupled with investment and insurance strategies. True

financial planning is a process, not a product.

Advice only, fee-for-service financial planners are comprehensive advisors who can help you fit

together all the different pieces of your financial puzzle and don’t sell any products whatsoever.

It is estimated there are 150 financial planners (individuals, not companies) providing advice-

only financial planning in Canada, though unlike us, some of these individuals do also sell

products. In contrast, there are 18,000 Certified Financial Planners (CFPs), 25,000 financial

planners and 90,000 financial advisors. That means about 1/6 of 1% of Canada’s financial

advisors provide advice-only financial planning and even less are completely independent,

selling only their advice.

For most Canadians, investment advice is the only real financial advice they get. Even tax

planning advice is elusive, given that most people’s accountants simply do their tax return and

nothing more. Advice-only financial planning brings the integration of all areas of personal

finance to the forefront and makes it the sole goal of the client-advisor relationship. True advice-

only financial planning ensures that the planner and their company are compensated solely by

agreed-upon fees paid by the client. This means there are no hidden costs, third party financial

motivations or kick-backs – the planner represents the client and only the client. Objectivity is

the name of the game, which is important in a global financial market that can be fraught with

conflicts of interest.

Advice-only financial planning should not be confused with fee-based investment management,

where an investor pays an annual fee to their investment advisor based on a percentage of their

investments. A fee-based approach is simply a way to pay your investment advisor.

Advice-only financial planning keeps advice and potential products separate, so most clients who

work with an advice-only financial planner will also have a separate investment advisor and

insurance agent.

Some people are reluctant to add another advisor to their repertoire. They already meet with their

investment advisor in February to make their RRSP contribution. They meet with their

accountant in April to get their income taxes completed. They have an insurance agent who has

arranged their insurance policies. They have a lawyer who updates their wills and powers of

attorney from time to time. The problem is, even though these various professionals may be great

at what they do individually, collectively, there is often little or no integration of their

recommendations.

Advice-only financial planning fees are charged for comprehensive financial advice and are

based on expertise required, complexity, and time required. Advice-only financial planners are

professionals and charge their fees much like other professionals such as lawyers or accountants.

The fees have nothing to do with a client’s income or assets, meaning every client is just as

important as the next, and that our advice is totally unbiased. This is in contrast to the traditional

provision of financial or investment advice, where minimum investment levels apply and

compensation is paid to the advisor based on product choices. It means advice-only financial

planning is accessible by anybody on a completely objective basis.

What’s the return of investment from working with a advice-only, advice-only financial advisor?

It’s hard to say, because we never know what we’re going to find under the hood until we get

started. In many cases, there are explicit returns by achieving goals like better tax efficiency, but

most clients would also tout the implicit benefit of working with a trusted advisor with no

conflicts of interest who can answer many of the questions that others cannot.

Contrary to popular belief, financial planning is not just investing. It is a process. It allows you to

manage your finances in such a way that you link it to your goals. Making a standalone

investment in a life insurance product means nothing if you do not know the amount of cover

you need, or whether the maturity proceeds are adequate, or whether you need a life cover.

The process of financial planning should help you answer three questions. Where you are today,

that is, your current personal balance sheet, where do you want to be tomorrow, that is, finances

linked to your goals, and what you must do to get there, that is, the asset allocation and

investment strategy that will help you achieve your objectives.

Developing a financial plan needs a consideration of various factors. First, your objective or the

purpose for which the investments are being made. The time period, too, is critical, since the

longer the period of investment, the higher is the ability to absorb risks. Also, one of the most

important factors that many of us did not account for earlier is inflation.

Definition

Financial planning is the task of determining how a business will afford to achieve its

strategic goals and objectives.

Financial planning means deciding in advance how much to spend, on what to spend

according to the funds at your disposal.

Objective of Financial PlanningFinancial Planning has got many objectives to look forward to:

Determining capital requirements- This will depend upon factors like cost of current and

fixed assets, promotional expenses and long- range planning. Capital requirements have

to be looked with both aspects: short- term and long- term requirements.

Determining capital structure- The capital structure is the composition of capital, i.e., the

relative kind and proportion of capital required in the business. This includes decisions of

debt- equity ratio- both short-term and long- term.

Framing financial policies with regards to cash control, lending, borrowings, etc.

A finance manager ensures that the scarce financial resources are maximally utilized in

the best possible manner at least cost in order to get maximum returns on investment.

Financial planning is done to achieve the following two objectives:

1. To ensure availability of funds whenever these are required:

The main objective of financial planning is that sufficient fund should be available in the

company for different purposes such as for purchase of long term assets, to meet day-to-

day expenses, etc. It ensures timely availability of finance. Along with availability

financial planning also tries to specify the sources of finance.

2. To see that firm does not raise resources unnecessarily:

Excess funding is as bad as inadequate or shortage of funds. If there is surplus money,

financial planning must invest it in the best possible manner as keeping financial

resources idle is a great loss for an organization.

Financial Planning includes both short term as well as the long term planning. Long term

planning focuses on capital expenditure plan whereas short term financial plans are called

budgets. Budgets include detailed plan of action for a period of one year or less.

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Main objectives of financial planning:

1. To Ensure Timely Availability of Finance:

The first objective of financial planning is to make finance available in time. Under it, the

long-term and short-term financial needs are anticipated and then the sources of

availability of finance are located.

2. To Ensure Proper Balance of Finance:

It is always ensured that the balance of cash should neither be in excess nor short. The

balance of cash in both these situations is harmful. For example, if the balance of cash

needed is rupees five lakh but the actual cash balance is ten lakhs, the cash of five lakhs

will remain idle and it will incur loss of interest.

On the contrary, if only rupees three lakh are available instead of rupees five lakh, it will

damage the reputation of the company for not making timely payments.

In short, it can be said that the objective of the financial planning is to make finance

available in appropriate quantity and make it available well in time.

The main and foremost objectives of financial management are to maximize the wealth of equity

shareholder.The financial manager in a company makes decisions for the owners, i.e., the

shareholders of the firm. He must take such decisions which will ultimately prove gainful from

the point of view of shareholders and shareholders gain only when the price of their share

increases in market.So financial decision which results in increase in value of share is considered

very efficient decision. On the other hand, the financial decision which brings fall in the value of

equity share is considered poor decision.

This objective of maximizing the wealth of equity share automatically fulfills many other

objectives. As equity shareholders get share from residual income only, i.e., they are given

dividend only after the claims of suppliers, employees, lenders, creditors and any other legitimate

claimants. Therefore, if the shareholders are gaining, it automatically implies that all other

claimants are also gaining.

The objective of increase in value of equity share does not mean that finance manager should

involve in manipulative activities to bring rise in price. The rise in price must come with the

growth of firm, with increase in profit of firm and with satisfaction of all the parties associated

with the company. With the objective of wealth maximization of equity shareholder.

Following objectives automatically get achieved:

Profit maximization

Maintenance of liquidity

Proper utilization of funds

Meeting financial commitments with creditors.

Elements of Financial Planning

Financial planning involves the following steps or elements:

1. Determination of Financial Objectives:

For effective financial planning, it is essential to clearly lay down the financial objectives

sought to be achieved. The financial objectives should be based on the overall objectives

of the company. The objectives of financial management may be set up in the areas,

namely, investment, financing and dividend.

2. Estimation of Capital Requirements:

Capital is required for various needs of the business. Separate assessment is to be made of

the requirements of fixed and working capital. Fixed capital is needed for acquiring fixed

assets such as land and building, plant and machinery, furniture, etc. It is blocked for a

long time. Working capital is required for holding current assets like stock, bills

receivable, etc. and cash for meeting day-to-day expenses in running the business.

3. Determination of the Kinds of Securities to be issued:

A company can issue equity chares, preference shares and debentures to raise long-term

funds. The types and proportion of securities to be issued should be properly determined.

4. Formulation of Financial Policies:

Financial planning leads to formulation of policies relating to borrowing and lending,

cash control and other financial activities. Such policies will help in taking vital decisions

for the administration of capital and achieving coordination in financial activities.

Importance of Financial Planning

Sound financial planning is essential for success of any business enterprise. Its need is felt

because of the following reasons:

1. It Facilitates Collection of Optimum Funds:

The financial planning estimates the precise requirement of funds which means to avoid

wastage and over-capitalization situation.

2. It Helps in Fixing the Most Appropriate Capital Structure:

Funds can be arranged from various sources and are used for long term, medium term and

short term. Financial planning is necessary for tapping appropriate sources at appropriate

time as long term funds are generally contributed by shareholders and debenture holders,

medium term by financial institutions and short term by commercial banks.

3. Helps in Investing Finance in Right Projects:

Financial plan suggests how the funds are to be allocated for various purposes by

comparing various investment proposals.

4. Helps in Operational Activities:

The success or failure of production and distribution function of business depends upon

the financial decisions as right decision ensures smooth flow of finance and smooth

operation of production and distribution.

5. Base for Financial Control:

Financial planning acts as basis for checking the financial activities by comparing the

actual revenue with estimated revenue and actual cost with estimated cost.

6. Helps in Proper Utilization of Finance:

Finance is the life blood of business. So financial planning is an integral part of the

corporate planning of business. All business plans depend upon the soundness of

financial planning.

7. Helps in Avoiding Business Shocks and Surprises:

By anticipating the financial requirements financial planning helps to avoid shock or

surprises which otherwise firms have to face in uncertain situations.

8. Link between Investment and Financing Decisions:

Financial planning helps in deciding debt/equity ratio and by deciding where to invest

this fund. It creates a link between both the decisions.

9. Helps in Coordination:

It helps in coordinating various business functions such as production, sales function etc.

10. It Links Present with Future:

Financial planning relates present financial requirement with future requirement by

anticipating the sales and growth plans of the company

Sound financial planning is essential for the success of any business enterprise. It will provide

policies and procedures to achieve close coordination between the various functional areas of

business. This will lead to minimization of wastage of resources. Management can follow an

integrated approach in the formulation of financial policies, procedures and programs only if

there is a sound financial plan.

The important benefits of financial planning to a business are discussed below:

Financial planning provides policies and procedures for the sound administration of the

finance function.

Financial planning results in preparation of plans for the future. Thus, new projects could

be undertaken smoothly.

Financial planning ensures required funds from various sources for the smooth conduct of

business.

Uncertainty about the availability of funds is reduced. It ensures stability of business

operations.

Financial planning attempts to achieve a balance between the inflow and outflow of

funds. Adequate liquidity is ensured throughout the year. This will increase the reputation

of the company.

Cost of financing is kept to the minimum possible and scarce financial resources are used

judiciously.

Financial planning serves as the basis of financial control. The management attempts to

ensure utilization of funds in tune with the financial plans.

Finance is the life-blood of business. So financial planning is an integral part of the corporate

planning of the business. All business plans depend upon the soundness of financial planning.

Financial Planning is process of framing objectives, policies, procedures, programs and budgets

regarding the financial activities of a concern. This ensures effective and adequate financial and

investment policies. The importance can be outlined as:

Adequate funds have to be ensured.

Financial Planning helps in ensuring a reasonable balance between outflow and inflow of

funds so that stability is maintained.

Financial Planning ensures that the suppliers of funds are easily investing in companies

which exercise financial planning.

Financial Planning helps in making growth and expansion programs which helps in long-

run survival of the company.

Financial Planning reduces uncertainties with regards to changing market trends which

can be faced easily through enough funds.

Financial Planning helps in reducing the uncertainties which can be a hindrance to

growth of the company. This helps in ensuring stability and profitability in concern.

Sources of Business Ethics

Introduction

Ethics in general refers to a system of good and bad, moral and immoral, fair and unfair. It is a

code of conduct that is supposed to align behaviors within an organization and the social

framework. But the question that remains is, where and when did business ethics come into

being?

Primarily ethics in business is affected by three sources - culture, religion and laws of the state. It

is for this reason we do not have uniform or completely similar standards across the globe. These

three factors exert influences to varying degrees on humans which ultimately get reflected in the

ethics of the organization. For example, ethics followed by Infosys are different than those

followed by Reliance Industries or by Tata group for that matter. Again ethical procedures vary

across geographic boundaries.

Religion

It is one of the oldest foundations of ethical standards. Religion wields varying influences across

various sects of people. It is believed that ethics is a manifestation of the divine and so it draws a

line between the good and the bad in the society. Depending upon the degree of religious

influence we have different sects of people; we have sects, those who are referred to as orthodox

or fundamentalists and those who are called as moderates. Needless to mention, religion exerts

itself to a greater degree among the orthodox and to lesser extent in case of moderates.

Fundamentally however all the religions operate on the principle of reciprocity towards ones

fellow beings!

Culture

Culture is a pattern of behaviors and values that are transferred from one generation to another,

those that are considered as ideal or within the acceptable limits. No wonder therefore that it is

the culture that predominantly determines what is wrong and what is right. It is the culture that

defines certain behavior as acceptable and others as unacceptable.

Human civilization in fact has passed through various cultures, wherein the moral code was

redrafted depending upon the epoch that was. What was immoral or unacceptable in certain

culture became acceptable later on and vice versa.

During the early years of human development where ones who were the strongest were the ones

who survived! Violence, hostility and ferocity were thus the acceptable. Approximately 10,000

year ago when human civilization entered the settlement phase, hard work, patience and peace

were seen as virtues and the earlier ones were considered otherwise. These values are still pt in

practice by the managers of today!

Still further, when human civilization witnessed the industrial revolution, the ethics of agrarian

economy was replaced by the law pertaining to technology, property rights etc. Ever since a

tussle has ensued between the values of the agrarian and the industrial economy!

Law

Laws are procedures and code of conduct that are laid down by the legal system of the state.

They are meant to guide human behavior within the social fabric. The major problem with the

law is that all the ethical expectations cannot be covered by the law and specially with ever

changing outer environment the law keeps on changing but often fails to keep pace. In business,

complying with the rule of law is taken as ethical behavior, but organizations often break laws by

evading taxes, compromising on quality, service norms etc.

A business code of ethics is a series of established principles an organization uses when

operating in business or society. Organizations often develop these codes to ensure that all

individuals working in the company operate according to the same standards. Most individuals

have an internal code of ethics or moral principles they follow in life. A situation one individual

finds ethically reprehensible may not seem so to another individual. Using a code of ethics in

business attempts to create a basic understanding of acceptable ethical behavior to be used when

handling situations involving the company, government agencies and the general public.

Business Owner

A main source for an organizational code of ethics is the business owner. These individuals

choose the ethical stance of their company since they are responsible for all aspects of the

organization. While managers and employees may not agree with the business owner on his

ethical values, the owner may choose to hire individuals who agree with his ethical business

stance. A business owner may also develop an ethical code based on his personal or religious

beliefs regarding how individuals and organizations should operate in business or society.

Organizational Mission

Companies may use an organizational mission statement to create their code of ethics. Once the

business owner or entrepreneur leaves the company or passes on, the organization may be devoid

of its ethical compass. To rectify this situation, current directors or managers may look at the

mission statement and values the organization was started on and develop a code of ethics based

on this information. This source of business ethics allows organizations to create a lasting ethical

code that may be present in the company for years to come. An organizational mission statement

coupled with a business code of ethics may also be used as a training tool for new employees

hired by the company.

Society or Culture

An organizational code of ethics may be created based on the current societal or cultural beliefs

of the country in which the company is based. Many countries have different understandings of

business ethics or morals. An organization may choose to adopt these values as the main source

of its code of ethics in order to maintain societal norms. An organization may also use a business

code of ethics to ensure that it does not alienate the consumers in the nation’s local economic

marketplace. If the organization develops international business locations, it may need to adjust

its organizational code of ethics to meet global ethical expectations.

Business EthicsBusiness Ethics is about:

1. Decision-Making

2. By People in Business

3. According to Moral Principles or Values

1. Decision-MakingEthical decision-making involves the ability toseparate right from wrong along with

thecommitment to do what is right.

Some factors affecting decision-making:

Issue Intensity

Decision-Maker’s Personal Moral Philosophy (Moral philosophy involves

systematizing, defending, andrecommending concepts of right and wrong

behavior)

Organizational Culture

8 Steps to Sound, Ethical Decision-Making

1. Gather as many relevant & material facts ascircumstances permit.

2. Identify the relevant ethical issues (consider alt.viewpoints)

3. Identify, weigh & prioritize all the affected parties (i.e. Stakeholders)

4. Identify your existing commitments/obligations.

5. Identify various courses of action (dare to think creatively)

6. Identify the possible/probable consequences of same(both short & long-term)

7. Consider the practicality of same.

8. Consider the dictates and impacts upon your character &integrity.

2. By People in Business

Decision-Maker (Managers)

The moral foundation of the decision-maker matters. Ifhe thinks that by giving

punishments he can take hiswork out but punishment and fear is only effective inthe

short-run. Organizations that have a clear vision,and support individual integrity are

attractive placesof employment.

3. Moral Principles or Values

Values:

Guiding ideas, representing deeply held generalizedbehaviors, which are considered by

the holder, to be of greatsignificance.

Morals:

A system or set of beliefs or principles, based on values,which constitute an individual or

group’s perception of humanduty, and therefore which act as an influence or control over

theirbehavior. Morals are typically concerned with behaviors thathave potentially serious

consequences or profound impacts. Theword “morals” is derived from the Latin mores

(character, customor habit)

Ethics:

The study and assessment of morals. The word "ethics"is derived from the Greek word,

ethos (character or custom).Ethics means working in such manner which is morally right.

Objectives of Ethics

Study of human behavior and makes evaluative assessmentabout that as moral or

immoral (A diagnostic goal).

Establishes moral standards and norms of behavior.

Makes judgment upon human behavior based on thesestandards and norms.

Prescribes moral behavior and makes recommendations abouthow to or how not to

behave.

Expresses an opinion or attitude about human contact in general.

Nature of Ethics Concepts of ethics deals with human beings only. Human beingscan distinguish right or

wrong, good or evil.

The Study of ethics is a set of systematic knowledge about moralbehavior and conduct.

Study of ethics is a science – a socialscience.

Science of ethics (Normative Science): it judges the value of thefacts in terms of ideal

situation.

Deals with human conduct which is voluntary, not forced orcoerced by persons or

circumstances.

Code of Ethics in BusinessResponsibilities of Business:

1. Not to do harm knowingly,

2. To adhere all applicable laws and regulations,

3. The accurate representation of their education, training and experience,

4. Active support, practice and promotion of this code of ethics.

Honesty and Fairness:

1. Being honest in serving consumers, clients, employees, suppliers,distributors and the

public.

2. No knowingly participating in conflict of interest without prior notice to allparties

involved.

Rights and Duties of parties:

1. Products and service offered are safe and fit for their intended use,

2. Communications about offered product and services are not deceptive,

3. All parties intend to discharge their obligations, financial and otherwise, in good faith

Characteristics of Business Ethics Ethical decisions differ with individual perspective of differentpersons. Each person

views the ethical question in terms of hisor her own frame of reference. And this frame of

reference is theperson’s own unique value system.

Ethical decisions are not limited only to themselves, but affects awide range of other

situations as well. Similarly, unethicaldecisions do not end in themselves, but have

widespreadramifications.

Most ethical decisions involve a tradeoff between cost incurredand benefits received.

Cost and benefits, profits and socialresponsibilities are different ends of a single

spectrum. All cannotbe maximized simultaneously.

The consequences of most ethical or unethical decisions are not clear. The only certainty

is that somewhere, sometime, somehow, something positive will result from an ethical

decision andsomething negative from unethical one.

Every person is individually responsible for the ethical or unethical decision and action

that he or she takes. Taking an ethical decision cannot be an impersonal activity as it

involves the person’s individual unique value system along with his moralstandards.

Ethical decisions are voluntary human actions. A person cannot escape his personal

liability for his crimes citing force of circumstances or pressure.

Sources of Ethics1. Genetic Inheritance:

The qualities of goodness is a product ofgenetic traits strengthened over time by the

evolutionary process.

2. Religion:

Religious morality is clearly a primary focus in shapingour societal ethics.

3. Philosophical Systems:

The quality of pleasure to be derivedfrom an act was the essential measure of its

goodness.

4. Cultural Experience:

Individual values are shaped in largemeasure by the norms of the society.

5. The legal system:

Laws represent a rough approximation ofsociety’s ethical standards.

Golden Rules of Ethics @ Workplace Body Language

Avoid Creating Disturbance

Trust & Respect for Others Work

Don’t Interfere In Others Work

Respect the Privacy of your Co-workers

Avoid Ethnic & Gender Biasness

Improve Your Self Presentation

Avoid Lobbying

No/Least Personal Work During Work Hours

Maintain the balance betweentransparency/openness and confidentiality

Benefits of Ethics Fostering a more satisfying and productive working environment

Building and sustaining Organization reputation

Maintaining the trust of staff to ensure continued self-regulation

Providing ethical guidance for employees prior to makingdifficult decisions

Aligning the work efforts of employees with the Organization’sbroader mission and

vision

Increased employee loyalty, higher commitment and morale aswell as lower staff

turnover

Attraction of ‘high-quality’ staff

Reputation benefits (customers and suppliers)

More open and innovative culture

Decreased cost of borrowing and insurance

Generation of good-will in the communities in which thebusiness operates