Question

Gasex Fertilisers Ltd expected a growth of 10% in the sales in the previous quarter. However, due to the prevailing economic situation around the world, the actual growth in sales was only 5%. The company’s Finance Manager was called for an urgent meeting, by the senior management of the company, in which he clarified that he was already prepared for the situation, as he had made a financial blueprint for the future operations. He also reassured the management that he knew how to control the expenses, in case the sales were lower than the expectation.

a) Identify the concept that enabled the Finance manager to tackle the situation discussed above.

b) State any five points highlighting how the concept discussed above can help in smooth functioning of the organisation.

Answer 1

(a) Concept identified is Financial Planning.

(b) Significance of Financial Planning

(i) It helps in forecasting what may happen in the future under different business situations. By doing so, it helps the firms to face the eventual situation in a better way. In other words, it makes the firm better prepared to face the future.

(ii) It helps in avoiding business shocks and surprises and helps the company in preparing for the future.

(iii) If helps in coordinating various business functions, e.g., sales and production functions, by providing clear policies and procedures.

(iv) Detailed plans of action prepared under financial planning reduce waste, duplication of efforts, and gaps in planning.

(v) It tries to link the present with the future.

(vi) It provides a link between investment and financing decisions on a continuous basis.

(vii) By spelling out detailed objectives for various business segments, it makes the evaluation of actual performance easier.