Question

Question

The two most important components of financial planning are the operating plan and the financial plan. Briefly define each.

List the five uses of free cash flow and discuss how these uses are related to a financial plan

What do you think is the most difficult aspect to financial planning for a corporation?

Answer 1

Solution:-

Financial Plan: -

Financial Plan may be defined as the plan made to estimate the capital requirements of the business. The plans are made to frame such policies which are related to procurement, investment and administration of funds of an enterprise. Both short term and long term capital requirements are to be analyzed.

Financial Plan is also plan framed to determine the capital structure of the company. Decisions related to the proportion of debt and equity in the overall capital structure of the company.

Example:-

A company is planning to purchase a new plant & machinery for which company requires an initial investment of $1000000. The company is making decision as to whether the firm should arrange funds from own sources or from long term borrowing

Operational Plan:-

The plans relating to operational activities of the company are known as operational plan. The plan explains the routine operating activities of the business like location, plant, people, process and environment in the business operates. Operational plan help to identify the internal risk of the company.

Example: - Reducing the wastage from production of goods is an example of operational plan.

Five Uses of Free Cash Flows:-

1. Distribution of Dividend:- When distribution should be declared and at what rate is the decision relating to financial plan.

2. Acquisitions:- Companies trying to merge or acquire new company require freee cash flows. Decision relating to acquisition and merger bring changes to capital structure and are therefore part of financial plan.

3. Reinvestment in capital projects:- Investment in capital projects require huge fund investment and therefore it is matter of financial plan.

4.Stock Repurchase:- Companies trying to buyback or repurchase its stock from open market will bring changes in the capital structure and is therefore a matter of financial plan

5. Buying or leasing a new plant & machinery:-- Buying a machinery require huge capital outflow and therefore is a matter of financial plan

The most difficult aspect to financial planning for a corporation is chosing the proportion in which debt or equity must be included in the capital structure. A perfect mix of debt and equity in the capital structure will provide many advantages to the company. Excess of any form of capital in the structure is bad and therefore rational expert decision in this regard is required to be made.