Q.Aval Ltd. is engaged in the business of export of canvas goods and bags. In the past, the performance of the company had been upto the expectations. In line with the latest demand in the market, the company decided to venture into leather goods for which it required specialised machinery. For this, the Finance Manager Prabhu prepared a financial blueprint of the organisation's future operations to estimate the amount of funds required and the timings with the objective to ensure that enough funds are available at right time. He also collected the relevant data about the profit estimates in the coming years. By doing this, he wanted to be sure about the availability of funds from the internal sources of the business. For the remaining funds, he is trying to find out alternative sources from outside.

a. The financial concept discussed in the paragraph is Financial Planning. It is the preparation of a financial blueprint of an organisation's future operations -- estimating the amount of funds required and their timing so that enough funds are available at the right time, which is exactly what the Finance Manager Prabhu is doing. Its twin objectives are:

• To ensure the availability of funds whenever required -- estimating the funds needed (for the specialised machinery and for day-to-day expenses), estimating when they are needed, and identifying the sources, so the firm can honour its commitments.
• To see that the firm does not raise resources unnecessarily -- avoiding idle surplus funds that add to cost, by matching the funds raised to the funds actually required. …

a. Identifying the financial concept and its objectives

Look at what Prabhu, the Finance Manager, actually does: he prepares a financial blueprint of the organisation's future operations, estimates the amount of funds required and the timing, and works out how much can come from internal sources and how much must be arranged from outside. This is the very description of Financial Planning -- which is, in the chapter's words, essentially the preparation of a financial blueprint of an organisation's future operations, with the objective of ensuring that enough funds are available at the right time.

Financial planning strives to achieve two twin objectives:

• To ensure availability of funds whenever required. This means properly estimating the funds needed for different purposes -- long-term assets such as the specialised machinery for leather goods, as well as day-to-day expenses -- estimating when those funds will be needed, and identifying the possible sources. If adequate funds are not available, the firm cannot honour its commitments or carry out its plans.
• To see that the firm does not raise resources unnecessarily. Excess funding is almost as bad as inadequate funding: idle surplus funds add to cost and can encourage wasteful expenditure. Good financial planning matches the funds raised to the funds actually required, and puts any surplus to the best possible use.

In short, financial planning seeks a proper matching of the firm's fund requirements with their availability -- neither a shortage that stalls operations nor an excess that wastes money.

b. "There is no restriction on payment of dividend by a company." Comment.

This statement is incorrect. The payment of dividend is subject to real restrictions, of two kinds that the chapter lists among the factors affecting the dividend decision: …