Financial Planing
Unit 4
Financial planning (like all planning) begins with the establishment of
goals and objectives. Next, planners must assign costs to these goals and
objectives. That is, they must determine how much money is needed to
accomplish each one. Finally, financial planners must identify available
sources of financing and decide which to use. In the process, they must
make sure that financing needs are realistic and that sufficient funding
is available to meet those needs.
THREE STEPS OF FINANCIAL PLANNING
1. Establishing Organizational Goals and Objectives. Establishing goals
and objectives is an important management task. A goal is an end state
that the organization wants to achieve. Objectives are specific statements
detailing what the organization intends to accomplish within a certain
period of time. If goals and objectives are not specific and measurable,
they cannot be translated into costs, and financial planning cannot
proceed. They must also be realistic. Otherwise, it may be impossible to
finance or achieve them.
2. Budgeting for Financial Needs. A budget is a financial statement that
projects income and/or expenditures over a specified future period of time.
Once planners know what the firm's goals and objectives are for a specific
period of time - say, the next calendar year- they can estimate the various
costs the firm will incur and the revenues it will receive. By combining
these items into a companywide budget, financial planners can determine
whether they must seek additional funding from sources outside the firm.
Usually the budgeting process begins with the construction of individual
budgets for sales and for each of the various types of expenses:
production, human resources, promotion, administration, and so on.
Budgeting accuracy is improved when budgets are first constructed for
individual departments and for shorter periods of time. These budgets can
easily be combined into a com-
panywide cash budget. In addition, departmental budgets can help managers
monitor and evaluate financial performance throughout the period covered by
the overall cash budget.
Most firms today use one of two approaches to budgeting. In the
traditional approach, each new budget is based on the dollar amounts
contained in the budget for the preceding year. These amounts are modified
to reflect any revised goals, and managers must justify only new
expenditures. The problem with this approach is that it leaves room for the
manipulation of budget items to protect the (sometimes selfish) interests
of the budgeter or his or her department.
This problem is essentially eliminated through zero-base budgeting.
Zero-base budgeting is a budgeting approach in which every expense must
be justified in every budget. It can dramatically reduce unnecessary
spending. However, some managers feel that zero-base budgeting requires too
much time-consuming paperwork.
3. Identifying Sources of Funds. The four primary sources of funds are
sales revenue, equity capital, debt capital, and the sale of assets. Future
sales generally provide the greatest part of a firm's financing.
Sales revenue is the first type of funding.
The second type of funding is equity capital, which is money received
from the sale of shares of ownership in the business. Equity capital is
used almost exclusively for long-term financing. Thus it might be used to
start a business and to fund expansions or mergers. It would not be
considered for short-term financing needs.
The third type of funding is debt capital, which is money obtained
through loans. Debt capital may be borrowed for either short- or long-term
use.
The fourth type of funding is the sale of assets. A firm generally
acquires assets because it needs them for its business operations.
Therefore, selling assets is a drastic step. However, it may
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be a reasonable last resort when neither equity capital nor debt
capital can be found. Assets may also be sold when they are no longer
needed.
MONITORING AND EVALUATING FINANCIAL PERFORMANCE
It is important to ensure that financial plans are being implemented
and to catch minor problems before they become major problems.
Accordingly, the financial manager should establish a means of
monitoring and evaluating financial performance. Interim budgets
(weekly, monthly, or quarterly) may be prepared for comparison purposes.
These comparisons point up areas that require additional or revised
planning.
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Exercises
I. Translate into Russian.
Basis of financial management; goal; objective; sources of fi
nancing; funding; step; important task; financial performance;
budgeting; expenditure; revenue; sales revenue; equity capital;
debt capital; specific period; profit; assets; short-term borrowing;
long-term borrowing; merger; companywide budget; cash budget;
zero-base budgeting; income; source; share of ownership; assign
a cost; justify; meet needs; obtain; implement; modify; establish;
reduce; determine; evaluate. !:
II. Find the English equivalents. \
Финансовый план; бюджет; составление бюджета; наличный бюджет; бюджет
всей компании; промежуточный бюджет; доход (годовой); доход; доход от
продаж; заемный капитал; работа фирмы; активы; бюджетная статья; расход;
источник денежных средств; доля собственности; акционерный капитал;
средство; последнее спасительное средство; радикальный шаг; финансовая
деятельность; определять стоимость; решать; оценивать; оправдывать;
осуществлять; удовлетворять потребности; нести издержки; финансировать;
занимать (брать в долг).
III. Fill in the blanks.
1. Financial planning begins with the establishment of ... and
2. A budget is a financial statement that projects ... and/or ... over a
specified future period of time.
3. Usually the budgeting process begins with the construction of individual
budgets for each of the various types of ... .
4. Budgeting accuracy is improved when budgets are first constructed for
individual ... for shorter periods of time.
5. Departmental budgets can help managers .. . and financial
performance throughout the period covered by the overall cash budget.
6. In the traditional approach, each new budget is based on the ...
contained in the budget for the .. . year.
7. This approach leaves room for the manipulation of ... ...
to protect the interests of separate departments.
8. Zero-base budgeting is a budgeting approach in which every ... must be
justified in every budget.
9. ... ... are the first type of funding.
10. The second type of funding is .......
11. The third type of funding is .......
12. The fourth type of funding is the ... of ....
13. Selling assets is a ... ... .
14. The financial manager should establish a ... of monitoring and ...
financial performance.
IV. Translate into English in a written form.
1. Финансовый план—это план получения и использования денег, необходимых
для осуществления целей организации.
2. Финансовое планирование начинается с установления конечных целей и
поэтапных целей.
3. Бюджет предусматривает доход и расходы за конкретный период времени.
4. Процесс составления бюджета (budgeting) начинается с составления
отдельных бюджетов по продажам и по каждому виду расходов.
5. Эти бюджеты легко объединяются в наличный бюджет всей компании.
6. Многие фирмы используют один из двух подходов к построению бюджетов.
7. При традиционном подходе новый бюджет основывается на бюджете за
предыдущий год и руководители обосновывают только новые расходы.
8. Это оставляет место для манипуляции бюджетными статьями.
9. Эта проблема в основном ликвидируется через бюдже
тирование нуля. -;••;
10. Четырьмя основными источниками финансирования являются: доход от
продаж, акционерный капитал, заемный капитал и продажа активов.
11. Продажа активов — это последнее спасительное средство.
12. Финансовый руководитель должен обеспечить (establish) средство
контроля и оценки финансовой деятельности.
V. Questions and assignments.
1. What is a plan?
2. What is a financial plan?
3. What does financial planning begin with?
4. State the difference between goals and objectives.
5. List the three steps involved in financial planning.
6. In what case financial planning cannot proceed?
7. State the meaning of the word "budget".
8. Give the examples of various types of expenses which must be considered
(учтены) in budgeting process?
9. How can budgeting accuracy be improved?
10. What is the peculiarity (особенность) of the traditional approach to
budgeting?
11. What is the problem with this approach?
12. What is the difference between the traditional budgeting approach and
zero-base budgeting?
13. What is the problem with zero-base budgeting?
14. List the four primary sources of funding.
15. For what purpose (цель) is equity capital used?
16. Is selling assets a normal step?
17. In what case selling assets may be a reasonable last resort?
18. For what purpose may interim budgets be prepared?
VI. Make up a written abstract (краткое изложение) of the text.
VII. Retell the prepared abstract.
Unit 5
Outside Sources of Financing
