Developing the financial plan

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Establishing organizational goals and objectives is an important management task. A goal is an end state that the organization wants to achieve. Objectives are specificstatements detailing what the organization intends to accomplish within a certain period of time. If goals and objectives are measurable and realistic it will be possible to finance and achieve them.

Budgeting for Financial Needs. A budgetis 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 will 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 companywide cash budget. In addition, departmental budgets can help managers monitor and evaluate financial performance throughout the period covered by the overall cash budget.

Available Sources of Financing. Sales revenueis the first type of funding. The second type 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. It might be used to start a business and to fund expansions or mergers. 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 needs assets for its business

opera­tions, therefore, selling assets is a drastic step. It may be a reasonable last resort when neither equity capital nor debt capital can be found.