Financial Planning111
Content
INTRODUCTION
In simple words, a financial plan is a path to help you achieve your life’s 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 planning expert 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 child’s education financially secure? How about for their wedding? Do you have enough money for your retirement?
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.
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 financial decisions. 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
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.
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. Financial planning 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. Financial planning 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.
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.
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.
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
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.
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
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 can utilized 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.
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
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.
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 : - short term 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 :
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
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
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
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 firm’s 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
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
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 and for fulfillment of twin objectives of liquidity and profitability. While inadequate amount of working capital impairs the firm’s 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
WORKING CAPITAL
BASIS OF CONCEPT Gross Working Capital Net Working Capital
BASIS OF TIME
Permanent / Fixed WC
Temporary / Variable WC
DETERMINANTS OF WORKING CAPITAL:
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
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 firm’s 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 trade credit, 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 firm’s working capital is called credit limit. Credit limit
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 company’s 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 current account. Here also a fixed limit is stipulated beyond which the company is not able to withdraw the amount. 4) Bills purchased / discounted
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, the importer 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 various committees 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.
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.
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
DEBTORS (RECEIVABLES)
CASH
FINISHED GOODS
RAW MATERIALS
WORK-IN-PROCESS
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
In simple words, a financial plan is a path to help you achieve your life’s 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 planning expert 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 child’s education financially secure? How about for their wedding? Do you have enough money for your retirement?
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.
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 financial decisions. 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
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.
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. Financial planning 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. Financial planning 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.
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.
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.
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
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.
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
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 can utilized 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.
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
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.
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 : - short term 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 :
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
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
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
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 firm’s 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
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
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 and for fulfillment of twin objectives of liquidity and profitability. While inadequate amount of working capital impairs the firm’s 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
WORKING CAPITAL
BASIS OF CONCEPT Gross Working Capital Net Working Capital
BASIS OF TIME
Permanent / Fixed WC
Temporary / Variable WC
DETERMINANTS OF WORKING CAPITAL:
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
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 firm’s 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 trade credit, 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 firm’s working capital is called credit limit. Credit limit
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 company’s 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 current account. Here also a fixed limit is stipulated beyond which the company is not able to withdraw the amount. 4) Bills purchased / discounted
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, the importer 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 various committees 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.
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.
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
DEBTORS (RECEIVABLES)
CASH
FINISHED GOODS
RAW MATERIALS
WORK-IN-PROCESS
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
