Flashcards: Financial Planning — 58 cards

What is financial planning in business?

It is the process of estimating financial needs and managing funds efficiently.

What does financial planning ensure about funds?

Adequate funds are available at the right time and used efficiently.

How do Walker and Baughn define financial planning?

As determining a firm's financial objectives, policies, and procedures.

What does Henry Hoagland say a corporation's financial plan represents?

Its pattern of outstanding stocks and debentures.

What does financial planning ensure for a business's funds?

An adequate supply of funds for establishing, operating, and expanding the business.

What policies does financial planning formulate?

Policies for raising and utilizing funds, managing cash flow, making investments, and distributing income.

What does financial planning determine to improve financial decisions?

Procedures for implementing financial policies.

What future financial needs does financial planning estimate?

Future cash and capital requirements.

How does financial planning help a business meet daily obligations?

By maintaining liquidity.

How does financial planning reduce uncertainty?

By anticipating future business conditions and financial needs.

What confidence does proper financial planning build?

Confidence among management, shareholders, creditors, lenders, and investors in the firm's financial stability.

Which securities do investors prefer during a boom?

Equity shares.

Which securities do investors prefer during a depression?

Safer securities such as debentures.

Why does management prefer preference shares or debentures to equity shares?

To retain control and avoid ownership dilution.

What type of securities can companies with valuable fixed assets issue?

Secured debentures against those assets.

What financing sources may large capital requirements need?

A combination of equity shares and debentures.

Why do stable earnings support issuing preference shares and debentures?

Because fixed dividends and interest can be paid regularly.

How do legal restrictions and taxation affect security choice?

Debenture interest is tax-deductible and cheaper when interest rates are low.

Which security type generally has higher issuing costs?

Equity shares.

What is the first step in the FRESOP financial planning procedure?

Determining Financial objectives.

What is the long-term financial objective of a firm?

To maximize the firm's wealth.

What is the short-term financial objective of a firm?

To maintain sufficient liquidity for daily operations.

What do long-term funds finance?

Fixed assets and expansion.

What do short-term funds finance?

Day-to-day working capital requirements.

Which factors does management consider when selecting sources of funds?

Cost, risk, repayment period, and company policies.

How can funds be obtained according to the financial planning procedure?

By issuing shares or debentures, negotiating with banks, and completing legal formalities.

What must management establish after obtaining funds?

Budgets, policies, procedures, and financial control for fund usage.

What period does a short-term financial plan cover?

Up to one year.

What do short-term financial plans focus on?

Working capital and day-to-day financial requirements.

Name one component included in short-term financial plans.

Sales budgets.

What period does a long-term financial plan cover?

More than one year, generally five years or more.

What is the aim of a long-term financial plan?

To maximize firm wealth through capital use, expansion, and future development.

What does an overall financial plan integrate?

All financial requirements and activities with operating plans.

What should fixed assets generally be financed with?

Long-term funds.

What does an optimal capital structure combine?

Equity and debt to minimize cost of capital while maintaining liquidity and stability.

What should a financial plan support in a business?

The specific goals of the business.

How should resources and funds for fixed assets be managed?

Resources should be used intensively and funds for fixed assets not diverted to working capital.

Why must a financial plan remain flexible?

To adapt to business conditions like expansion or recession.

What cash level should a business maintain?

Enough cash and liquid assets to meet current liabilities without excess idle funds.

What should financial planning provide for without raising excessive funds?

Unexpected events.

What characterizes economical financial planning?

Raising sufficient funds at minimum cost.

Which funding source do stable-income businesses use more?

Debentures.

Which funding source do unstable-income businesses rely on more?

Equity shares.

How does financial planning prevent waste in business?

By coordinating activities and avoiding unnecessary purchases.

What does financial planning estimate regarding funds?

The amount and sources of funds required.

How does financial planning help maintain capital structure?

It helps maintain an ideal capital structure.

Why are advance estimates of capital expenditure important?

They enable timely purchase of fixed assets.

How does financial planning protect against future risks?

By warning management about uncertainties and encouraging preparation.

What does financial planning do about sources of finance?

It selects economical sources of finance.

How does financial planning control income distribution?

By balancing retained earnings with dividend payments.

How does financial planning attract funds from different investors?

By considering preferences and offering suitable securities.

Why is financial planning considered uncertain?

It relies on estimates and assumptions that may become inaccurate.

What negative effect can strict adherence to a plan have on employees?

It can reduce employees' initiative.

How can a rigid management attitude cause failure during a recession?

By not modifying the plan to adapt to changing conditions.

What reduces the effectiveness of financial planning related to communication?

Inefficient communication reduces its effectiveness.

How does an inflexible capital structure affect financial planning?

It makes it difficult to raise funds and increases financial risk.

What risk arises from excessive dependence on borrowed capital?

Creditors may restrict further finance, increasing financial risk.

Which unexpected cost increases can raise revenue expenses above budget?

Increases in wages, taxes, and electricity charges can raise expenses.