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INTRODUCTION

In simple words, a financial plan is a path to help you achieve your lifes financial

goals. It is the process of making learned money management decisions in order to

safeguard your future.

A financial plan helps you to fulfill financial goals and meet personal priorities. It

takes into consideration your available resources, responsibilities, lifestyle and risk

appetite. Allocating your savings across various asset classes to achieve an

appropriate risk-reward balance and ensuring long-term financial security are the

basics of financial plan.

You need to ask yourself some questions before making a financial plan, like:

What is your current financial situation? What is your vision of your future

financial situation? How do you plan to achieve your vision?

You need to analyze what your financial needs and goals are. Then, you measure

the resources you need to meet those goals in money terms. Specify the time period

during which you want to achieve these goals. Then you write an action plan to

fulfill your goals, like, what products to buy and what types of savings to make.

You can of course make your financial plan yourself, but a financial planningexpert can offer the right financial skills and tools to help you realize your

financial plan.

The basics of financial plan may include some of the following questions:

Will your family be financially secure, whatever happens to you?

Are your finances taxes efficient?

Are you getting the best return in a rising or a falling stock market on your

investments?

Is your childs education financially secure? How about for their wedding?

Do you have enough money for your retirement?


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You should feel comfortable if your answers are yes to all the above questions.

But even a single no means that you should feel uncomfortable. You need a good

financial plan. See a financial planning expert to chart out the best

recommendations for you. Your introduction to financial plan starts right here.


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WHAT IS FINANCIAL PLANNING

Financial Planning is the process of meeting your life goals through the

management of your personal finances. Financial planning is about setting short

and long-term life goals and developing strategies to achieve those goals. Life

goals can include buying a home, saving for your child's education, planning for

retirement, or estate planning to name a few.

According to the Financial Planning Association of Australia, financial planning

involves a six step process:

1. Gathering your financial data

2. Identifying your goals

3. Identifying any financial issues

4. Preparing your financial plan

5. Implementing your financial plan

6. Reviewing and revising your plan

Why plan? Financial Planning provides direction and meaning to your financialdecisions. It puts you in control and allows you to understand how each financial

decision you make affects other areas of your finances and/or life goals.

What does a financial advisor do

A good analogy for a financial advisor is a sports coach. They are your financial

coach to help you achieve your short and long term financial goals.

A good financial planner will help you:

identify your goals

make informed decisions about your money
http://www.fpa.asn.au/http://www.fpa.asn.au/


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use and protect your money to your best advantage

choose financial products that suit your needs and circumstances

By law a financial adviser must have a license or must be an authorised

representative of an business that holds an Australian financial services (AFS)

license in order to provide financial advice. The Australian Securities and

Investment Commission (ASIC) is the body responsible for regulating and

administering legislation regarding the financial services industry.


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THE IMPORTANCE OF FINANCIAL PLANNING

1. INCOME

To manage income more efficiently. The cash and need analysis and income

expenditure budgeting will show the best way possible in managing income.

Regardless of the amount of income earned, part of the earning will go for tax

payment, expenditure and what's left would be the saving. Thus, proper

management of income is necessary in increasing cash flow.

2. CASH FLOW

To increase cash flow and monitor spending habits and expenses. Financialplanning will help in determining what should be done to generate cash flow in

order to make investing possible. Tax planning, careful budgeting and prudent

spending are aspects that need to be paid attention to in generating cash flow. This

will help as part of the cash can be preserved for long term use.

3. CAPITAL

To build a long term capital-base and shape your financial future. Once there is an

increase in cash flow, it means an increase in capital base too. This allows one to

be able to venture into various portfolio investment. With a strong capital base, one

can have a wider portfolio of investment.

4. INVESTMENT

To identify investment opportunities relevant to your financial situation. Financialplanning can help in evaluating the best investment opportunities. A good

investment planning can turn goals from dreams into realities. Apart from picking

the `right` investment, it shows how to allocate money among different type of

investment. This can have a greater effect on investment success.


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5. FAMILY SECURITY

To provide for your family's financial security with proper coverage through right

kind of policies. The good old days when a worker retired with a nice pension

seem to be gone now. Today, one need to take charge and plan for the family's

future security. How much income should one plan in needing for the family's

financial security? In doing these projections, inflation effects must be considered

too. This is where financial planning can be of help.

6. FINANCIAL UNDERSTANDING

To get a whole new approach to budgeting and gain control over your financial

lifestyle. One can evaluate the level of risk in an investment portfolio or adjust a

retirement plan due to changing family circumstances for example. It becomes

obvious that financial understanding has been attained when measurable financial

goals are set, the effect of each financial decision is understood, the financial

situation is periodically evaluated, financial planning is done as soon as possible

with realistic expectations and ultimately when one realizes that only he or she is

fully in charge of it.

7. STANDARD OF LIVING

To maintain your family's present standard of living by maximizing the household

insurance portfolio. One can create a personal and family financial plan so that

there are clearly defined goals or targets and there is enough savings to get there.

For example, one can make sure that there is enough disability coverage to replace

any lost income. This can ensure that the family remains financially secure if the

head of the family or the bread winner dies. Thus, the family's standard of living

doesn't suffer and is maintained.


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8. SAVINGS

It used to be called saving for a rainy day. But sudden financial changes can still

throw one off the track. An emergency fund for example might be be ideal. It has

to be always very liquid. It means that it should be very easy to convert that fund

into cash. Savings bank or money market accounts are examples of investment

with high liquidity. This way, a systematic and organized saving and investment

plan can be provided to fund children's education and secure a comfortable

retirement and on top of that, be ready for any unexpected occurrences.

9. ASSETS

To insure assets accumulation and liability cancellation to leave the maximum

amount of wealth to your heirs. In the process of accumulating assets, many fail to

realize that it usually comes with a liability package. In order to determine the true

worth of any asset, the liabilities need to be settled, or cancelled. Only then, the

true value of the assets would be of use and help for the heirs. Otherwise, assets

can easily mean unwanted or unexpected financial burden.

10.FINANCIAL SECURITY AND MASTERY

To assist you and your family to attain the ultimate objective of financial security

and mastery. Financial planning will provide directions and meaning to one's

financial decisions. It allows an understanding of how financial decisions made can

affect other areas of finances. By viewing each financial decision as part of a

whole, the short and the long term effects on one's life goals can be considered.

This will help in adapting more easily to life changes and feel more secure

financially, knowing that financial mastery has been achieved.


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SIX SIMPLE STEPS TO PLANNING

1. Setting Financial Goals

# Financial planner informs client on proper financial goals.

# Set out goals relevant to the interest of the client.

2. Gathering Relevant Data

# The planner leads the client through the process.

# Collect financial information needed to generate a proper financial

proposal.

# Use the Financial Wizard to enhance the data gathering process.

3. Analysis Of Data

# The data will tell the financial situation of the client.

# Relate the current situation to the financial goals.

# Prioritize the financial goals according to current ability and available

resources.

4. Recommendation Of Financial Plan

# The planner sets out and develops a set of recommendations to help the

client achieve financial goals.

# Once the client selects the most suitable and agreeable idea, funding will

be explored to help implement the financial plan.

5. Implementation Of Financial Plan

# The planner will help the client to take action through the most appropriate

financial tools.

# The client must be motivated to be responsible in going ahead with the

plan.

6. Monitoring Of Financial Plan

# The financial plan must be constantly reviewed.

# From time to time, comparisons must be made between the plan objectives


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and the original financial goals.

# The objectives and the actual performance of the plan might differ over

time, thus the planner and client must work hand in hand to ensure that the

financial goals are achieved as planned.


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The Financial Planning Flow Chart

Once financial goals have been set, certain aspects that must be considered are :

1. Expenditure Budgeting

Budgets are detailed projections of income and expenses over a specified

period of time. It requires a prediction of one's needs at various points. To

ensure a proper expenditure budgeting, ways of increasing income and

reducing unnecessary expenses must be identified


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2. Income

Income would refer to any amount of money earned.

3. Tax Planning

Taxes exert an enormous impact on one's personal finances. It reduces cash

flow, influences investment decisions made, affects the way borrowing is

done, the type of life insurance bought and the method of saving for

retirement. An effective tax planning would help one keep the money

earned. By taking maximum advantage of tax saving opportunities and by

adopting clearly-defined tax plans, will greatly increase the speed with

which financial goals are achieved.

From these 3 aspects, relevant information can be gathered and each data

can be individually analyzed before a proper financial plan is determined.

4. Saving

Based on the income earned, the amount for budgeting and taxation can be

determined and allocated accordingly. The amount left over from these

would be the saving. There are various savings and investment tools that canutilized in order to save, create and invest money so as to ultimately achieve

financial independence.

5. Cash and deposits

Refers to all liquid instruments that carry minimum risk that the principal

amounts invested can be lost.

1. Fixed income securities

Are a group of investment vehicles that offer a fixed periodical return. A

fixed income security is a security or certificate which shows that the

investor has lent money to the issuer (usually a company or a government) in

return for fixed interest income and repayment of principal at maturity.


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2. Shares

Shares are different from stock in that a shareholder is a part owner of the

company. A company is a separate legal person, which is owned by all of

its shareholders. The value of a share fluctuates according to the market's

view of the worth of the company. Others factors too can influence the

share prices, such as how the country's economy is doing, the general level

of interest rates, inflation rates, company earnings and currency

performance.

3. Unit trusts

These are useful vehicles for small private investors who do not have

sufficient funds or time to receive professional investment management

advice. Unit trust investments can generate income in the form of

dividends, interest and capital gains.

4. Investment trusts

An investment trust is a company registered under the Companies Act. An

investor is therefore purchasing shares in that company. The company

itself will invest in a wide range of equities and other investments. With a

unit trust however, the investor buys units in the trust itself and not shares

in the company.

5. Properties

There are 3 types of real estate investments : the agricultural property, the

domestic property and the commercial / industrial property. Properties can

provide good capital appreciation and a steady flow of income. They are

considered low risk investment.

6. Derivatives

Derivatives are financial instruments whose values are linked to the price

of underlying instruments in the cash markets. For example, a stock index

future is linked to the performance of a specified stock market. Stock


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options and financial futures are 2 popular derivative instruments for

investors.

7. Commodities

Commodities can be bought as physicals where the goods exist and are

delivered immediately or as futures, where the goods may not yet exist and

will only be delivered in the future. Commodity prices can be very volatile

as they depend on supply and demand as well as on the other variable factors

such as the weather or unexpected pest attacks. For example, a new pest may

reduce a crop, thus greatly increase prices for the crop to be harvested in a

few months time. Large profits can be made from commodity futures and

equally large losses can be incurred too if things go wrong.

8. Life insurance

Life insurance can be intimately connected with the national interest

because it is a means of reducing financial distress that death may bring. It

is also a method of saving and to a degree, of investing. In other words, life

insurance is like a pool of funds into which a large number of policy owners

jointly contribute in relation to their risk exposures, in order that a specified

sum of money will be paid from the pool on the death or other emergencies

dependent on human life. There are 4 basic forms of life insurance cover :

9. Annuities

Annuities are the opposite of insurance protection against death. It is a

contract where, for a cash consideration, the insurer agrees to pay the

named life annuitant, an agreed upon sum, called the annuity, on a

periodical basis during a fixed period of time or for the duration of the

survival of the designated life. This is done with the understanding that the

principal sum shall be considered liquidated immediately upon the death of

the annuitant.


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Unit Trusts

A unit trust is a pool of funds contributed by many investors kept in trust by a

trustee. Are useful vehicles for small private investors without sufficient funds and

time for professional investment management. Investments in unit trusts generate

income in the form of dividends, interest and capital gains. Advantages

spread of investments open to unit holder

lower risks and more consistent returns

professional investment services and research by fund managers

income from dividends can be reinvested

lower volatility and costs

Disadvantages

wide selection of funds which can be confusing

extra costs/charges to be paid when switching funds

Bonds, Debentures & Others

Bonds are effective financial instruments used by the government to borrow money

from the public. These bonds can be classified through maturity periods : - shortterm bonds (less than 5 years to maturity) - medium term bonds (5-10 years to

maturity) - long term bonds (more than 15 years to maturity)

Advantages

very safe and very marketable

income for future years are guaranteed

Disadvantages

capital can be eroded in times of high inflation

Companies can also issue bonds or loan stocks. There are 3 types of

corporate stocks :


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debenture stocks

loan stocks

convertible stocks

Advantages

higher return of corporate bonds

more marketable and can be sold for capital gains

Disadvantages

higher risk

not as secure as government bonds

Debentures are secured loans to a company. It is usually a fixed

charge on the company's property or some of its assets such as trading

stock.

THE DEFINITION OF ESTATE PLANNING


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Estate planning is a lifelong process in which you evaluate your situation and plan

for the future. It includes planning for your retirement, for the possibility of

disability, and for death. The estate planning process requires that you consider a

wide range of legal, financial, emotional, and logistical issues.

Estate planning can be a positive experience, since it involves reviewing your

situation and planning for your future. Although most people also find it

unpleasant to think about the possibility of disability or death, advance planning is

also a way to show your love and to reduce potential distress later.

In other words, estate planning is a process of assisting one in accumulating,

conserving, distributing and ensuring that the estate reaches the right person who

was designated as the beneficiary. More specifically, it is the process of making

proper preparations for the protection, conservation and distribution of one's assets

for the benefit of the loved ones. An estate plan ultimately, depends on the size of

your estate and how comprehensive your needs are.

INSURANCE PLANNING


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Insurance planning is a process that will ensure proper coverage and reduce the

risk of losing as an individual or as a business owner. It is a contract that reduces

risk of loss and requires one party to pay a specified sum to another if a previously

identified event occurs.

WORKING CAPITAL MANAGEMENT


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Working capital management is concerned with the problems arise in attempting to

manage the current assets, the current liabilities and the inter relationship that exist

between them. The term current assets refers to those assets which in ordinary

course of business can be, or, will be, turned in to cash within one year without

undergoing a diminution in value and without disrupting the operation of the firm.

The major current assets are cash, marketable securities, account receivable and

inventory. Current liabilities ware those liabilities which intended at their inception

to be paid in ordinary course of business, within a year, out of the current assets or

earnings of the concern. The basic current liabilities are account payable, bill

payable, bank over-draft, and outstanding expenses. The goal of working capital

management is to manage the firms current assets and current liabilities in such

way that the satisfactory level of working capital is mentioned. The current should

be large enough to cover its current liabilities in order to ensure a reasonable

margin of the safety.

NEED OF WORKING CAPITAL MANAGEMENT


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The need for working capital gross or current assets cannot be over emphasized.

As already observed, the objective of financial decision making is to maximize the

to shareholders wealth. Achieve this, it is necessary to generate sufficient profits

can be earned will naturally depend upon the magnitude of the sales among other

things but sales cannot convert into cash. There is a need for working capital in the

form of current assets to deal with the problem arising out of lack of immediate

realization of cash against goods sold. Therefore sufficient working capital is

necessary to sustain sales activity. Technically this is refers to operating or cash

cycle. If the company has certain amount of cash, it will be required for purchasing

the raw material may be available on credit basis. Then the company has to spend

some amount for labor and factory overhead to convert the raw material in work in

progress, and ultimately finished goods. These finished goods convert in to sales

on credit basis in the form of sundry debtors. Sundry debtors are converting into

cash after expiry of credit period. Thus some amount of cash is blocked in raw

materials, WIP, finished goods, and sundry debtors and day to day cash

requirements. However some part of current assets may be financed by the current

liabilities also. The amount required to be invested in this current assets is always

higher than the funds available from current liabilities. This is the precise reason

why the needs for working capital arise

MEANING OF WORKING CAPITAL MANAGEMENT


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Decisions relating to working capital and short term financing are referred to as

working capital management. These involve managing the relationship between a

firm's short-termassets and its short-term liabilities.

The goal of working capital management is to ensure that the firm is able to

continue its operations and that it has sufficient cash flow to satisfy both maturing

short-term debt and upcoming operational expenses.

Efficient management of working capital is one of the pre-conditions for the

success of an enterprise. Efficient management of working capital means

management of various components of working capital in such a way that an

adequate amount of working capital is maintained for smooth running of a firm andfor fulfillment of twin objectives of liquidity and profitability. While inadequate

amount of working capital impairs the firms liquidity. Holding of excess working

capital results in the reduction of profitability. But the proper estimation of

working capital actually required, is a difficult task for the management because

the amount of working capital varies across firms over the periods depending upon

the nature of business, production cycle, credit policy, availability of raw material,

etc. Thus efficient management of working capital is an important indicator of

sound health of an organization which requires reduction of unnecessary blocking

of capital in order to bring down the cost of financing.

TYPES OF WORKING CAPITAL
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DETERMINANTS OF WORKING CAPITAL:

WORKING CAPITAL

BASIS OF

CONCEPT

BASIS OF TIME

Gross

Working

Capital

Net

Working

Capital

Permanent

/ Fixed WC

Temporary

/ Variable


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The amount of working capital is depends upon a following factors-

1. Nature of business

2. Length of production cycle

3. Size and growth of business

4. Business/ Trade cycle

5. Terms of purchase and sales

6. Profitability

7. Operating efficiency

SOURCES OF WORKING CAPITAL FINANCE


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1) Trade credit

2) Bank Finance

3) Letter of credit

1) Trade credit

Trade credit refers to the credit that a customer gets from suppliers of goods in the

normal course of business. The buying firms do not have to pay cash immediately

for the purchase made. This deferral of payments is a short term financing called

trade credit. It is major source of financing for firm. Particularly small firms are

heavily depend on trade credit as a source of finance since they find it difficult to

raised funds from banks or other sources in the capital market. Trade credit is

mostly an informal arrangement, and it granted on an open account basis. A

supplier sends goods to the buyers accept, and thus, in effect, agrees to pay the

amount due as per sales terms in the invoice. Trade credit may take the form of

bills payable. Credit terms refer to the condition under which the supplier sells on

credit to the buyer, and the buyer required to repay the credit. Trade credit is the

spontaneous source of the financing. As the volume of the firms purchase increase

trade credit also expand. It appears to be cost free since it does not involve explicit

interest charges, but in practice, it involves implicit cost. The cost of credit may be

transferred to the buyer via the increased price of goods supplied by him.

2) Bank finance for working capital

Banks are main institutional source of working capital finance in India. After tradecredit, bank credit is the most important source of financing working capital in

India. A banks considers a firms sales and production plane and desirable levels of

current assets in determining its working capital requirements. The amount

approved by bank for the firms working capital is called credit limit. Credit limit


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is the maximum funds which a firm can obtain from the banking system. In

practice banks do not lend 100% credit limit; they deduct margin money.

Forms of bank finance:-

1. Term Loan

2. Overdraft

3. Cash credit

4. Purchase or discounting of bills

1) Term Loan

In this case, the entire amount of assistance is disbursed at one time only, either in

cash or the companys account. The loan may be paid repaid in installments will

charged on outstanding balance.

2) Overdraft

In this case, the company is allowed to withdraw in excess of the balance standing

in its Bank account. However, a fixed limit is stipulated by the Bank beyond which

the company will not able to overdraw the account. Legally, overdraft is a demand

assistance given by the bank i.e. bank can ask repayment at any point of time.

3) Cash credit

In practice, the operations in cash credit facility are similar to those of those of

overdraft facility except the fact that the company need not have a formal currentaccount. Here also a fixed limit is stipulated beyond which the company is not able

to withdraw the amount.

4) Bills purchased / discounted


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This form of assistance is comparatively of recent origin. This facility enables the

company to get the immediate payment against the credit bills / invoice raised by

the company. The banks hold the bills as a security till the payment is made by the

customer. The entire amount of bill is not paid to the company. The company gets

only the present worth of amount of bill from of discount charges. On maturity,

bank collects the full amount of bill from the customer.

3) Letter of credit

In this case the exporter and the importer are unknown to each other. Under these

circumstances, exporter is worried about getting the payment from the importer

and importer is worried as to whether he will get goods or not. In this case, theimporter applies to his bank in his country to open a letter of credit in favor of the

exporter whereby the importers bank undertakes to pay the exporter or accept the

bills or draft drawn by the exporter on the exporter fulfilling the terms and

conditions specified in the letter of credit.

Banks have been certain norms in granting working capital finance to companies.

These norms have been greatly influenced by the recommendation of variouscommittees appointed by the Reserve Bank of India from time to time. The norms

of working capital finance followed by bank since mid-70were mainly based on

the recommendations of the Tondan committee. The Chore committee made

further recommendations to strengthen the procedure and norms for working

capital finance by banks.


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VARIOUS CONSTITUENTS OF WORKING CAPITAL

The two constituents of working capital are as follows :

current assets

current liabilities

Current assets : these are the assets, which can be converted onto cash with in an

accounting year or are held for short period of time.

The major components of current assets include

inventories

cash and bank balance

accounts receivables

loans and advances

short term investment

Current liabilities : there are short term debates and obligations due to outside

parties. The major components of current liabilities includes

trade credit

bank loans overdrafts and cash

short term loans from FI tax payment due.


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OPERATING CYCLE OF WORKING CAPITAL

The need of working capital arrived because of time gap between production of

goods and their actual realization after sale. This time gap is called Operating

Cycle or Working Capital Cycle . The operating cycle of a company consist of

time period between procurement of inventory and he collection of cash from

receivables. The operating cycle is the length of time between the company's

outlay on raw materials, wages and other expanses and inflow of cash from sales

of goods. Operating cycle is an important concept in management of cash and

management of cash working capital. The operating cycle reveals the time that

elapses between outlays of cash and inflow of cash. Quicker the operating cycle

less amount of investment in working capital is needed

and it improves profitability. The duration of the operating cycle depends on

nature of industries and efficiency in working capital management.

In manufacturing concern ,the working capital cycle/operating cycle starts

with the purchase of raw material and ends with the realization of cash from the

sale of finished products. This cycle involves purchase of raw material and stores,

its conversion through into stocks of finished goods through work-in-progress with

progressive increment of labor and service costs, conversion of finished stock into

sales, debtors and receivables and ultimately realization of cash and this cycle

continues again from cash to purchase


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WORKING CAPITAL CYCLE/OPERATING CYCLE

The speed with which the working capital completes one cycle determines the

requirements of working capital-longer the period of the cycle larger is the

requirement of working capital

DEBTORS

FINISHED GOODSCASH

RAW MATERIALS WORK-IN-PROCESS

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