Financial Planning & Management - Week 11

Financial Planning & Management - Week 11

• Financial planning is a continuous process that directs and allocates financial resources to business activities aiming to meet strategic goals.
• The primary output of financial planning is activity budgets, most commonly budgeted financial statements.
• Detailed budgets form the basis of budgeted financial statements and include factors like sales forecasts, production forecasts.
• Financial planning encompasses operational and financial planning. Operational planning focuses on aspects like production and sales, while financial planners focus on funding these operations.
• Financial planning helps businesses anticipate challenges by understanding possible long-term impacts of current decisions. Without proper planning, a firm can be perceived as 'black box' not transparent.
• Financial planning sets objectives, providing benchmarks for evaluating managerial performance (efficiency).
• Financial managers tackle three key decisions: investment (asset allocation), financing (funds sources), and dividends, which, when combined correctly, maximize firm value for stakeholders.
• Financial management deals with the acquisition, financing, and management of assets. Investment decisions determine the appropriate level of assets, while financial decisions relate to the makeup of the right-hand side of the balance sheet (financing mix).
• Key aspects of financial management include the efficient and effective determination of the firm's asset structure and optimal financing methods.
• It includes ensuring payments to lenders/creditors align with agreed terms, and that risk-takers are rewarded commensurately with individual preferences to support organizational long-term goals.
• Budgeting involves acquiring and using financial resources efficiently over a set period. Budgeting is crucial to guide the financial direction of a firm.
• Company's cash needs depend on everyday expenses, such as wages and rent. Short-term investments (like stock of goods) can cover daily expenses, while longer-term, more substantial investments, such as plant or buildings, will remain invested with a delayed return.
• Factors influencing the choice of finance include physical risks, technical risks, economic downturns, and political factors (e.g. government policies). Management decisions also play an important role impacting a firm's access to financing.
• Main internal sources of finance include retained profits (allowing undistributed profits to remain tax-free), provisions for depreciation (reducing profits without immediate cash outflow), and provisions for taxation (setting aside funds to meet future tax obligations).
• Internal financing advantages include reduced costs, no interest payments, and no repayment needs.
• External financing sources include financial institutions (banks, Non-Bank Financial Institutions (NBFIs)), Co-operative Societies (SACCOs), Development Banks, Building Societies, Pension & Provident funds, National Social Security Fund (NSSF), Post Office Savings banks, stock exchanges such as Nairobi Stock Exchange (NSE).
• Equity financing is generally preferred as it does not lead to debt obligations, and dividends are paid after all debt obligations are met from revenues.
• Debt financing is used when equity financing is insufficient, is carried by a fixed payment, and requires repayments regardless of profitability.
• The finance manager's job leverages equity and debt to promote liquidity and solvency. Tools for estimating financial health include solvency/liquidity ratios, activity ratios (utilization of assets), and profitability & gearing ratios.
• Budgeting involves a detailed plan for acquiring and using resources over a period, and is vital for communication of management plans and encouraging forward-thinking.
• Budgetary control is a system using budgets to effectively plan and control all aspects of a firm’s activities or those of individual departments. Ideally, it helps in managing the entire organization by integrating departments' goals.
• By comparing actual results to budgeted data, a firm can identify areas requiring correction in the budget or correcting the cause of deviation. This aids efficient allocation of resources, uncovers potential bottlenecks, and keeps all departments coordinated towards common goals.
• Budgetary control leads to maximizing resource utilization, improving returns, and enhancing overall managerial planning and coordination.
• Types of budgets include sales budgets (projected sales by product and timeframe), production budgets (linked to sales budget to estimate the necessary production requirements), and cash budgets (detailed plan for acquiring and using cash).
• The master budget interrelationships demonstrate the interconnectedness of different budgets and their role in shaping the overall financial plan. Separate budgets support specific areas like cash flow, sales, production, and administrative expenses.

Profit & Loss Statement (2023-2025)

Profit & Loss data, (including Sales, Cost of Goods Sold, Gross Profit, Operating Expenses, and Net Profit) was presented for three financial years – 2023, 2024, and 2025

Balance Sheet (December 31st, 2023)

The balance sheet included Fixed Assets (like land, buildings, machinery etc.), Current Assets (like stock, debtors/accounts receivable, prepaid expenses, cash on hand), and an appropriate breakdown of Liabilities (creditors, bills payable, accruals, bank overdrafts) & Capital. The data was presented in Kenyan Shillings (KSh).