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Principles of financial planning


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Principles of financial planning

Financial planning is the important part of every business.

Following principles lay in the basis of financial planning:


• The correspondence principle is that the financing of current assets should be planned mostly because of the short-term sources of. At the same time long-term sources of funding should be used for fixed assets in the purpose of modernization.
• The principle of constant need of working capital is reduced to that of the planned balance sheet total current assets exceed the amount of short-term debt, i.e. not be planned “low liquidity” balance. A certain part of working capital must be financed from long-term sources (loans and equity). In this case the company has less risk to experience shortage of working capital.
• The principle of excess funds requires a planning process to have some reserve funds to ensure reliable payment discipline in the case where any of the contributors has delayed compared with the plan of your payment. When the amount of money of the company gets too large (above some threshold), the company may resort to the purchase of marketable securities.
• The principle of return of investment – for capital investment is necessary to choose low-cost ways of financing (financial leasing, investment loan). It is rather profitable to attract borrowed capital if it increases the return on equity. In this case we can see the positive effect of financial leverage.
• Principle of balance of risks – particularly risky of long-term investments must be fund by their own expense.
• The principle of adaptation to the needs of the market – for the company it is important to take into account market conditions and its dependence on credit
• The principle of limiting the profitability – it is expedient to choose those investments that offer maximum (marginal) profitability.
Ensuring the principles of financial planning, which are interrelated, at the time of the organization of financial planning involves:
• Continuity of planned actions, the continuity of current and long-term targets and plans, their coordination in time and space (the planning of individual areas of activity, combined into a single financial plan – the section of the company’s business plan)
• Adjustment of financial plans to the specific economic situation based on existing conditions and proposed tasks in this period, the priorities
At the stage of financial planning are established sequence of management actions for the development of real plans.

 
 

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