Factors Affecting Financial Planning

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Factors Affecting Financial Planning

Financial planning of a business is determined by the following factors:

(i)    Objectives. Objectives of financial planning should be consistent with the overall objectives of the business. The main objectives of financial planning are to raise funds at reasonable cost and utilize them in the best possible manner.

(ii)    Requirements of the Enterprise. A good financial plan should take care of the present and future requirements of the business. Provision of or various contingencies, replacement of assets, and growth and diversification of business enterprise must be made.

(iii)    Economy. Case of raising capital should be reasonable. Capital structure should be such as to create an appropriate balance between the cost of funds and the company’s ability to pay.

(iv)    Solvency and Liquidity. The funds should be invested in those ventures which are likely to give sufficient return on investment. Moreover, adequate cash should always to available to meet the requirements of the enterprise. The enterprise should be solvent and liquid not only in the short-term but also in the long-term.

(v)    Flexibility. Financial planning should ensure flexibility allow the diversion of funds into more profitable channels. It should also make provision for raising of additional funds at a short notice.

(vi)    Optimum Capital Structure. There should be proper capitallsation of the company. An optimum mix of equity shares, preference shares and debentures should be kept in mid while raising funds form different resources.

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