Question

What is the objective of financial planning?

• A. To ensure availability of funds
• B. To ensure that the firm does not raise resources unnecessarily
• C. To see that idle funds are not left in the business
• D. All of these

Hint:

The essence of financial planning is balance. It's about avoiding the two extremes: a shortage of funds (which threatens solvency) and a surplus of idle funds (which hurts profitability).

Answer 1

The Correct Option is D

Step 1: Understanding the Question:
The question asks about the primary objectives of undertaking financial planning in a business.
Step 2: Key Concept:
The core purpose of financial planning is to ensure that the right amount of funds is available at the right time, sourced from the right places, and at the right cost. This is often referred to as ensuring both liquidity and profitability.
Step 3: Detailed Explanation:
The objectives of financial planning can be summarized by the "twin objectives":
1. To ensure availability of funds whenever required: This involves forecasting the firm's financial needs so that adequate funds are available to meet commitments and seize opportunities. This prevents situations where the business is short of cash. This matches option (A).
2. To see that the firm does not raise resources unnecessarily: This means avoiding the accumulation of excess or idle funds. Idle funds do not earn any return and only increase the cost of capital, thereby reducing profitability. This matches options (B) and (C).
Therefore, sound financial planning aims to strike a perfect balance between liquidity (having enough funds) and profitability (not having idle funds). All the given options are key objectives that contribute to this balance.
Step 4: Final Answer
The objectives of financial planning include ensuring the availability of funds, avoiding unnecessary fundraising, and preventing idle funds in the business.