Financial Concepts for Loans and Real Estates

Financial planning is a process by which funds required for each course of action is decided. It must consider expected business scenario and develop appropriate course of action. A financial plan has to consider capital structure, capital expenditure and cash flow.

Steps in financial planning:

1) Establish corporate objectives: Corporate objectives could be grouped into qualitative and quantitative. For example, a company’s mission statement may specify “create economic value added”. But this qualitative statement has to be stated in quantitative terms such as a 25% ROE or a 12% earnings growth rates. Since business enterprises operate in a dynamic environment, there is a need to formulate both short run and long run objectives.

2) Next stage is formulation of strategies for attaining the objectives set. In this condition connection corporate develops operating plans. Operating plans are framed with a time horizon. It could be a five year plan or a ten year plan.

3) Once the plans are formulated, responsibility for achieving sales target, operating targets, and cost management bench marks, profit targets, etc. is fixed a respective executives.

4) Forecast the various financial variables such as sales, assets required, flow of funds, cost to be incurred and then translate the same into financial statements. Such forecasts help the finance manager to monitor the deviations of actual from the forecasts and take effective remedial measure to ensure that targets set are achieved without any time overrun and cost overrun.

5) Develop a detailed plan for funds required for the plan period under various heads of expenditure.

6) From the funds required plan, develop a forecast of funds that can be obtained from internal as well as external sources during the time horizon for which plans are developed. In this connection legal constrains in obtaining funds on the basis of covenants of borrowing should be given due weight age. There is also a need to collaborate the firm’s business risk with risk implications of a particular source of funds.

7) Develop a control mechanism for allocation of funds and their effective use.

At the time of formulating the plans certain assumptions need to be made about the economic environment. But when plans are implemented economic environment may change. To manage such situations, there is a need to incorporate an inbuilt mechanism which would scales up or scale down operations accordingly.

The fund flow occurs in a business when a transaction results in a change in the amount of fund. We can say it is a technical device which designed to highlight the changes in the financial condition of a business enterprise between two balance sheets.

Objectives of Funds Flow Analysis

Meaning of fund flow statement

Objectives of Fund Flow statement

Compute Fund from Operations

Here we will take a definition from Robert Anthony about fund flow, “the Fund Flow Statement describes the sources from which additional funds were derived and the uses to which these funds were put.”

Fund Flow Statement known as different names also:

Fund Statement

A Statement of sources and uses of fund

A statement of sources and application of fund

Where got and where gone statement

Inflow and outflow of fund statement

Main objectives of fund flow statements are:

Helping to understand the changes in assets and asset sources which are not readily evident in the income statement or financial statement

To inform as to how the loans to the business have been used

To Point out the financial strength and weaknesses of the business

In the steps of fund flow statement preparation, involves:

Changes in working capital (taking current items only)

Adjustment of profit and loss account

Preparation of accounts for no-current items

At last we can say it was easy methods of Funds Flow Analysis after having study the chapter of Financial Statement analysis. I will further discuss it with some examples also in the financial blog.