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The Characteristics of Financial Planning

Determine whether the following statements of financial planning are true and false. Justify your answers.

a. Financial planning should attempt to minimize risk.

b. The primary aim of financial planning is to obtain better forecasts of future cash flows and earnings.

c. Financial planning is necessary because financing and investment decisions interact and should not be made independently.

d. Firms' planning horizons rarely exceed 3 years.

e. Individual capital investment projects are not considered in a financial plan unless they are very large.

f. Financial planning requires accurate and consistent forecasting.

g. Financial planning models should include as much detail as possible.

Solution Preview

a. Financial planning should attempt to minimize risk. True.
Financial planning should attempt to minimize risk. The main purpose of financial plan is to attain maximum profit with minimum risk. It helps in having an entire financial picture today and plan for the future. Thus the risk that may face the company by choosing a particular plan shall be predicted before hand and the risk shall be reduced.

b. The primary aim of financial planning is to obtain better forecasts of future cash flows and earnings. True.
The basic aim of financial planning is to see to that the future cash flow is positive. They help in estimating the starting cost of the alternative projects chosen and the present value of future cash flow. Tools such as payback period, Net present value, and return on investment are helpful in determining the best alternative based on the future ...

Solution Summary

Various aspects of financial planning are explicated.

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