Financial planning
By
now, you should have begun to understand how costing systems and techniques are
applied in a typical engineering company. This next topic introduces you to
some important aspects of financial planning and control.
Adequate
financial planning is essential if a business is to achieve its objectives and
profit targets. The basic procedure required to formulate a financial plan is
as follows:
(a) Formulate
company policy, profit targets and long-term plans.
(b) Prepare
forecasts for sales, production, stocks, costs, capital expenditure and cash.
(c) Compile
these separate forecasts into a master forecast.
(d) Consider
all the alternatives available and select the plan that gives the best results,
for example, in terms of profit and long-term financial stability.
(e) Review
limiting factors and the principal budget factor. This process takes place
concurrently with (d) and enables work to begin on the framing of the budgets
in (f).
(f) Prepare individual budgets and finally the
master budget, which includes a forecasted profit and loss account and balance
sheet. This process is illustrated.
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