What is Financial Planning?

Financial planning is the process of meeting your life goals through proper management of
your finances. Life goals can include buying a home, saving for your children's education or planning for
retirement. It is a process that consists of specific steps that help you to take a big-picture look at where
you are financially. Using these steps you can work out where you are now, what you may need in the
future and what you must do to reach your goals.

What Does A Financial Planner Do?

A financial planner is someone who uses the financial planning process to help you figure out
how to meet your life goals.

STEPS IN FINANCIAL PLANNING

Budgeting
At the very basic level of personal finance you are dealing with a budget; you make money and
then you spend that money. Even if you havent created a detailed and written budget you continue to
budget on a daily basis. When you are faced with spending money on something you think about it and
realize that by spending that money you will not be able to spend that same money on something else.

Cutting Expenses
After you have created a budget you can begin to see where expenses may need to be reduced in
order to meet your goals. For some people this means eating out less and for others it could mean getting
rid of that extra vehicle. Whatever the case may be, everyone has an area or two where money can be
saved by reducing some basic expenses.

Getting Out of Debt

Even after creating a sound budget and cutting unnecessary expenses you may
still find yourself with lingering debt to get rid of. Financial leverage, or using credit and
taking on debt by itself isnt necessarily a bad thing.

Saving for Retirement

Retirement savings needs to become a priority instead of an afterthought.
The Internal Revenue Service has made saving for retirement even more attractive
with special tax-advantaged accounts such as employer 401(k) plans, individual
retirement accounts and special retirement accounts for the self-employed. These
allow for tax deductions, credits and even tax free earnings on retirement savings.

Insurance

Insurance is important because you have worked hard to build a solid financial footing
for you and your family so it needs to be protected. Accidents and disasters can and do happen
and if you arent adequately insured it could leave you in financial ruin.

INTRODUCTION TO BUDGETING
A budget is a financial plan for the future concerning the revenues and costs of a business.
However, a budget is about much more than just financial numbers.
Budgets provided a mechanism for dealing with both known and anticipated financial problems in an
organized manner. Even before adopting full accrual accountingwhich measures revenues when earned
(rather than when cash is collected) and expenses when incurred (rather than when paid)budgets proved
valuable in eliminating the uncertainty that comes with pure cash accounting. Given that needs always
exceeded resources, the relatively recent advent of planning and budgeting helped institutions set
priorities.
A budget is a map, expressed in financial terms, guiding an institution on a journey as it carries out its
mission. A budget is not a plan; it is a product of the planning process. Budgeting is also a form of
resource allocation. Effective institutions integrate resource allocation with planning and assessment.
Plans determine what will be done, while budgets dictate the level of resources to be deployed in
executing the plans.
There are many management uses for budgets. For example, budgets are used to:

Control income and expenditure (the traditional use)

Establish priorities and set targets in numerical terms

Provide direction and co-ordination, so that business objectives can be turned into practical
reality

Assign responsibilities to budget holders (managers) and allocate resources

Communicate targets from management to employees

Motivate staff

Improve efficiency

Monitor performance

While there are many uses of budgets, there are a set of guiding principles for good budgetary control in a
business.
In an effective budget system:

Managerial responsibilities are clearly defined in particular the responsibility to adhere to their
budgets

Individual budgets lay down a plan of action

Performance is monitored against the budget

Corrective action is taken if results differ significantly from the budget

Departures from budgets are permitted only after approval from senior management

Unaccounted for variances are investigated

Financial Tools and Techniques

Accountants and bookkeepers compile and record the financial data of an organization in a
comprehensive way for management, investors and other third parties to review. The key element is using
the prepared financial statement to understand what happened to the company throughout the year.
Financial analysis involves a thorough assessment of a company's performance, viability, growth, weak
points and strengths. The key is to get beyond what the top line revenue and bottom line net profit are.

Sales Margins

Know if it is worth continuing a product line.

Know how much profit each of your products or services generates in a given period. Calculate the sales
margins by taking the total revenue and subtracting the cost of goods sold. The cost of goods sold is the
variable costs you incur, such as inventory purchases, allocated overhead and the conversion costs in
transporting the inventory for distribution to make your product available to your customers. This key
analysis helps management determine whether a product or service line should continue as a going
concern.
Liquidity Ratios

Know how much cash you have to meet your obligations.

Liquidity ratios demonstrate the extent to which a company can meet its short-term financial obligations.
The most common financial obligations are the company's payable and accrued expenses. These shortterm obligations are most easily paid off by short-term assets, namely cash and accounts receivables. The

most basic liquidity ratio is the current ratio which is calculated by taking a company's current assets and
dividing them by its current liabilities. The higher the ratio, the better; however, a good benchmark is 1.50
or more.

Debt Service Coverage

Do you have what it takes to pay it all back?

For companies with long-term debt obligations, the future performance of these obligations is often
monitored by certain financial covenants. These financial obligations are useful in measuring the
company's ability to pay off its obligations with the company's financial resources. Debt service coverage
is an example of one of these covenants. The debt service coverage is calculated by taking a company's
net income and adding back its non-cash expenses, such as depreciation and amortization, then adding
interest expenses to arrive at the company's cash available to service debt and dividing that total by the
company's short-term debt obligations and interest expenses. The higher the ratio, the better; however, a
good benchmark is 1.25 or more.

Spreadsheets

Keep accurate records.

Determine the key ratios that are important to your business. These ratios should tell a story about the
company's performance. Management should be able to use the data to determine where the company
needs improvement and what is working well. Use simple spreadsheet software to record and analyze
these important ratios. Use the same spreadsheet to compare year over year or month over month
performance to better manage the needs of the company.

CONCEPT OF CAPITAL
1. Introduction
I believe it is useful to accept a
Convention, when talking about economic systems, in which we identify a variety of
Kinds of capital five, to be precise. I will talk a little about the familiar concept of

Financial capital, and more about the less familiar concepts of natural, produced,
human,
and social capital. There are several reasons why I believe it is useful to adopt this
verbal
Convention.

One has to do with the close association, in economics, between the concepts
of

Capital and the concept of a stock when the word stock is understood in one of its
Meanings, as the opposite of a flow.

Another reason might be called political. There are aspects of economic

systems

Whose importance has been neglected by many of the people who have the power
to
Shape our economic future. These aspects are more readily brought to the attention
Of people used to thinking in economic terms when they are given familiar
economic
Labels. Environmental conservation and womens rights, for example, may be given
Greater weight by economic policy makers if they are discussed in the context of
Natural and human capital. This political reason is backed up by the first one, since
there is an internal logic to calling something capital if it can be understood as a
particular kind of stock namely, a stock of a productive resource.

A final reason has to do with sustainable development. I am a co-author of a

textbook called Microeconomics in Context, in which we argue that the commonly

accepted trio of essential economic activities production, distribution (or
exchange), and consumption must be complemented by a fourth: resource
maintenance.

2. Thinking about capital stocks

A stock is a quantity identified at a particular point in time. Examples, on which I will

elaborate, could include, at this moment of this day, the balance in your checking
account, the water in a pool at the base of a waterfall, the computer-driven sewing
machines purchased by a clothing manufacturer, the houses in your neighborhood,
your
proficiency in learning new computer software, or the trusting relationships you
count on
when you urge a group of friends to join you in a project.

2.a. Financial capital

Money can be regarded as a capital stock if it will be invested in some activity that
produces something at the very least if it will produce, for its owner, more money.
In
that case we would refer to it as financial capital. It is in the nature of most
production
processes that you have to pay for inputs before you can profit from outputs. Before
it
can make its first sale, a start-up business needs to buy or rent a building and
equipment,
hire staff, and lay in inventories of materials and supplies. Students need to pay for
textbooks well in advance of receiving any increase in salary that their education
might
eventually gain for them. Local governments often take on a big project like building
a
major bridge before collecting the tolls that will pay for it. Financial capital is what
allows all these productive activities to get going, in a money economy, in advance
of the
returns that will flow from them.

2.b. Natural capital

Returning to our original list of examples, a pool of water and, indeed, all of the
water
at any given moment in a particular ecological system may be called a capital
stock if it
plays a role in some economically productive process. If this discussion were coming
out
of a different discipline say, ecology our decision to call it a capital stock could
depend upon its playing a role in some ecologically productive process. There can
be
some convergence of the economic and the ecological points of view as we look
beyond
the most narrow and short-term view of the economy, noting that the ability of a
pool to
support various kinds of animal and plant life is a component of a productive
ecological
system, and that the economic system is, ultimately, a subset of the ecological
system.
It was from a largely homocentric point of view that economists first began to label
stocks of clean water and air, as well as forests, fisheries, and the ever evolving
systems
that support them and us as natural capital. While the term was originally used
only
for those aspects of nature that humans were actually using and especially the
parts that
they were depleting, such as fertile topsoil growing awareness of the intricacy and
delicate balance of the relationship between the natural environment and human
economies is encouraging many to think of our total natural environment as
precious
natural capital.
It was from a largely homocentric point of view that economists first began to label

stocks of clean water and air, as well as forests, fisheries, and the ever evolving
systems
that support them and us as natural capital. While the term was originally used
only
for those aspects of nature that humans were actually using and especially the
parts that
they were depleting, such as fertile topsoil growing awareness of the intricacy and
delicate balance of the relationship between the natural environment and human
economies is encouraging many to think of our total natural environment as
precious
natural capital.
I referred, earlier, to the fear of a reductionist effect from associating the word
capital
with nature, humans and society. It may be that the reason this fear surfaces in this
context is that the most well-known use of the term capital is, as just suggested, in
reference to produced physical objects. When we think of a factory, a sewing
machine, a
hand-loom, a computer, or other objects which have been produced for the purpose
of
making other, economically desirable things, reductionism does not seem too
inappropriate. The factory might be more than just productive capital it could have
aesthetic or historic or community-related meanings nevertheless there is not a
high
likelihood of creating offense if we say "that factory is nothing more or less than a
capital
input to production.

2.c. Human capital

With the introduction given in the previous section, let us now extrapolate from our

discussion of the various kinds of physical capital, to think of human capital as a

stock of
capabilities, which can yield a flow of services. Your ability to work with computers is
one of your individual productive capabilities. These capabilities depend not only on
your knowledge, education, training, and skills; they also include useful behavioral
habits
as well as your level of energy and your physical and mental health. All of these
aspects
of human capital have some component of inherited characteristics, but they must
also be
created and enhanced through nurturance, education, and other aspects of life
experience.

2. d. Social capital
The fifth kind of capital social capital is even harder to measure, and has sparked
even more controversy. Let me start by talking about it in terms of stocks and flows.
Auditors and appraisers, who are always pleased to find something new that they
can be
paid to measure, have taken enthusiastically to assigning dollar values to the
good-will
that is now commonly accepted as a part of the capital stock of a company when it
is
sold. In spite of measurement difficulties, I have no doubt that good-will is a real
thing,
and that a companys value can rise following a dramatic incident, such as Johnson
and
Johnsons recall of Tylenol when some bottles had been tampered with. There can
also
be an outflow of good-will if it becomes widely known that a company is mistreating
its
workers or cheating its stockholders.

3. A brief historical overview

The field of economic studies has existed for about two and a half centuries. For the
first
200 years of this time it seemed obvious after Adam Smith and others pointed it
out
that it was produced capital that made the difference between more and less
productive
systems. When early economists defined productive inputs under the three
headings,
land, labor and capital, the word capital meant, simply, produced capital. The
term
land could cover any parts of natural capital, but for the most part only land itself
was
seen as in limited supply: the rest of nature was assumed to be limitless, and was
largely
taken for granted.

4. The role of technology

Usually when we think of using technology to increase productivity, we think of
technology that is embodied in produced capital; for example, each generation of
sewing
machines has embodied some improvements that allow the users to accomplish
what they
want more quickly, or with less waste of material inputs, or to produce a higher
quality of
output.
On the other hand, technology can be disembodied, potentially enhancing the
productivity of many different inputs used in production. Such intangible
technologies

may consist of shared understandings and procedures; for instance, some farming
communities possess traditions that tell all farmers, in general terms, what to do to
prevent soil exhaustion.

5. Sustaining capital stocks

The terms we have been using are helpful for understanding sustainable
development.
Development may be defined as improvement in the conditions and experience of
life.
This requires continued in some cases increased production of the goods and
services
that contribute positively to the quality of life. Sustainable development can only
occur if
this production occurs in ways that maintain or increase all of the necessary capital
stocks. A sustainable socioeconomic system creates a flow of desirable goods and
services by using its renewable capital stocks without depleting them. Although
some
portion of some (especially nonrenewable) capital stocks may be used up in the
process
of production, the overall quality and quantity of the resource base for sustaining
life and
well-being must be preserved.

Types of capital
1. Financial capital: The pool of funds that is available to an organization for use in the
production
of goods or the provision of services obtained through financing or generated
through operations or
Investments.
Debt

 Equity
Grants
2. Manufactured capital: Manufactured physical objects that are available to an
organization for use in
the production of goods or the provision of services.
Buildings
Production equipment and tools
Infrastructure (such as roads, ports, bridges and waste and water treatment
plants)
3. Intellectual capital: Organizational, knowledge-based intangibles
Intellectual property, e.g. patents, copyrights, software, rights and licenses
Organizational capital, e.g. tacit knowledge, systems, procedures and protocols
Intangibles associated with the brand and reputation that an organization has
developed
4. Human capital: Peoples competencies, capabilities and experience, and their
motivations to
innovate.
Alignment with and support for an organizations governance framework and risk
management
approach, and ethical values such as recognition of human rights
Ability to understand, develop and implement an organizations strategy
Loyalties and motivations for improving processes, goods and services, including
their ability to lead,
manage and collaborate
Related aspects include: employee turnover, labor/management relations,
occupational health and
safety, training and education, diversity and equal opportunity

5. Social and relationship capital: The institutions and relationships established within
and between
each community, group of stakeholders and other networks (and an ability to share
information) to
enhance individual and collective well-being
Shared norms, and common values and behaviors
Key relationships, and the trust and willingness to engage that an organization has
developed
and strives to build and protect with customers, suppliers, business partners, and
other external
stakeholders
An organizations social license to operate
Community
Related aspects include: corruption; anti-competitive behavior; customer health,
safety and privacy;
human rights such as non-discrimination, freedom of association, and indigenous
rights
6. Natural capital: All renewable and non-renewable environmental stocks that
provide goods and
services that support the current and future prosperity of an organization.
Air, water, land, forests, materials, minerals, energy
Biodiversity and ecosystem health.
Related aspects include: Emissions, effluents, and waste

TIME VALUEOF MONEY

A time value of money calculation is one which solves for one of several variables in
a financial problem. In a typical case, the variables might be: a balance (the real or
nominal value of a debt or a financial asset in terms of monetary units); a periodic
rate of interest; the number of periods; and a series of cash flows (in the case of a
debt, these are payments against principal and interest; in the case of a financial
asset, these are contributions to or withdrawals from the balance). More generally,

the cash flows may not be periodic but may be specified individually. Any of the
variables may be the independent variable (the sought-for answer) in a given
problem. For example, one may know that: the interest is 0.5% per period (per
month, say); the number of periods is 60 (months); the initial balance (of the debt,
in this case) is 25,000 units; and the final balance is 0 units. The unknown variable
may be the monthly payment that the borrower will need to pay.
REFERENCES