Importance of Financial Planning-Btechnd
Explain the importance of financial planning
Financial planning is a way to determine how a business will be able to achieve its goals and objectives. It helps the company to make the decision about how a fund can be spent effectively to achieve the target goals. People are in business to make a profit; therefore, business owners need to check if the company is making the profit or not. There is a distinction between profit and revenue. Revenue is very important because this is the money saved by the company after the deduction of other expenses.
The objective of the financial planning is to determine how much the company will require executing a project and when the project will be executed.
The decision makers will take into consideration financial capability of the company before the fund can be released. They are Assets, Liabilities, Expenses, cash flow forecast, break-even, profit and loss account and Balance sheet
There is needs to disseminate the financial information of the company to various decision makers.
The decision makers would like to know the strength of the company, their financial capabilities. In order to know what the company worth the company most revealed the assets they have
Which could be fixed or currents, the fixed are the premises used, the machinery and equipment. The decision makers also need to know about the company cash flow, the break even, profit and loss account and the balance sheet. (Dyson, J R 2010)
Assessing the information needs of decision makers.
The investor will require an information about any possible risk and to know if they would be able to recoup their funds with interest. They would like to know if the company will not bankrupt before investing their money before they can make investment decision.
Employees as well would like to know if the company would be able to pay their salary and remuneration as well as providing long term job.
The lenders as well would like to know if the company would be able to pay back the money they lend the money with interest.
Suppliers as well would like to know if they would be paid after supplying goods to the company.
Customers would like to know if products have warranties before buying it.
Conclusion: It should be concluded that all the information required must be produce and warranty must be on all products.
Explain the impact of finance on the financial statements.
(a) R Riggs Limited net assets is £35337.00.
Obtaining a 5-year loan of £20000.00 at 10 % interest per annum.
The 10% interest per annum would be 10/100*20000 which is equal to £2000 .00.
This shows the company will be paying £2000 every year.
In 5 years the interest rate will be £10,000.
The loan of £20000.00 will have no negative effect on the company
because it will be repayable within 5 years and the company net
assets are already £35337.00
R Riggs will be able to pay back the money conveniently but it will be an added liability, which is the change in liability.
(b)R. Riggs limited net assets is £35337.00, obtaining a line credit of £5,500 will have no effect on the company and there will not be any related change to the balance sheet as well. This will be an added liability for the company, so changing in liability will increase
(c) R. Riggs net assets is £35337.00, issuing additional 1,000 shares at
£4.50 per share is a plus to the company because the company net assets will increase by £4,500 to £39,837.00. This will have a positive effect on the business of R Riggs and increase in capital.
(d) R. Riggs net assets is £35337.00, so selling office furniture worth £3000 with no profit will reduce their net assets to £32337.00.
This will have a negative effect on the balance sheet, so this is a loss to the company.
Budget is defined as follow:
- Policies: a budget is based on the policies needed to fulfil the objectives of the entity.
- Data: it is usually expressed in monetary terms.
- Documentation: it is usually written down.
A budget is a part of the financial plan for the organisation. Most business usually prepares a considerable number of what might be called sub-budgets which would be combined with an overall budget known as a master budget.
Budget are useful because they encourage managers to examine what they have done in relation to what they could do.
Budgeting control is when the actual results for a period are compared with the budgeted results.
The budgetary control cycles consist of 7 stages:
1 Responsibilities defined: managerial responsibilities are clearly defined.
2 Action plan: individual budgets lay down a detailed plan of action for a particular sphere of responsibility.
3 Adherence: managers have a responsibility to adhere to their budgets once the budgets have been approved.
4 Monitoring the actual performance is monitored constantly and compared with the budgeted results.
5 Correction: corrective action is taken if the actual results differ significantly from the budget.
6 Approval: departures from the budget are only permitted if they have been approved by senior management.
- Variances: those that are unaccounted for are subject to individual investigation. (Dyson, J R 2010, p.349 -350)
Purpose of Budgetary Control:
- Forecasting and Planning annual operations.
- Coordinating the activities of the various parts of the organisation and ensuring that the parts are in harmony with each other.
- Communicating plans to the various responsibility centre managers.
- Controlling the gaps by variance analysis.
- Evaluating the performance of managers. (Dyson, J R 2010). Order Now