Question

'S' Ltd. is manufacturing steel at its plant in India. It is enjoying a buoyant demand for its products as economic growth is at about 7-8% and the demand for steel is growing. It is planning to set-up a new steel plant to capitalise on the increased demand. It is estimated that it will require about Rs 5000 crores to set-up and about Rs 500 crores of working capital to start the new plant. Explain the importance of having a financial plan for this company. Give an imaginary plan to support your answer.

Answer 1

Importance of financial plan for the company is highlighted by the points below:

(i) It helps to forecast what might happen in future. Thus, it prepares a company to face uncertainty.

(ii) It ensures the provision of adequate funds to meet working capital requirements.

(iii) It brings about a balance between inflow and outflow of funds and ensures liquidity throughout the year.

(iv) It solves the problems of shortage and surplus of funds and ensures the proper and optimum utilisation of available resources.

(v) It ensures increased profitability through cost-benefit analysis and by avoiding wasteful operations.

(vi) It seeks to eliminate wastage of funds and provides better financial control.

(vii) It seeks to avail the benefits of trading on equity.

Financial Plan of S Ltd

An imaginary financial plan for steel plant (in the form of the anticipated balance sheet)

$\begin{array}{cc}\text{Particulars}& \text{Amount}\\ & \text{(Rs crore)}\\ \text{Equity and Liabilities}& \\ 1.\text{Shareholders Funds}& \\ \text{(a) Share Capital}& 600\\ \text{(b) Reserves and Surplus}& 400\\ 2.\text{Non-current Liabilities}& \\ \text{(a) Secured Loans}& 2000\\ \text{(b) Unsecured Loans}& 2000\\ 3.\text{Current Liabilities}& \\ \text{(a) Trade Payables}& 400\\ \text{(b) Provisions}& 100\\ \text{Total}& 5500\\ \text{Assets}& \\ 1.\text{Non-current Assets}& \\ \text{(a) Fixed Assets}& 3000\\ \text{(b) Non-current Investments}& 1000\\ 2.\text{Current Assets}& \\ \text{(a) Short-term Loans and Advances}& 1000\\ \text{(b) Miscellaneous Expenditure}& 300\\ \text{(c) Profit \& loss A/c (Debit Balance)}& 200\\ \text{Total}& 5500\end{array}$