A company is making its financial plan for the next five years. It has prepared its sales forecast and the financial statements, and has then estimated its expected profits for the period. What is its next step?
Answer & explanation
Correct answer: option 2
The correct answer is Option (2) → Estimate the requirement for funds from external sources.
Option (1) Make cash budgets that take in the sources of external funds. — Incorrect. Cash budgets are the last step. They are made only after the external fund need and its sources are known.
Option (2) Estimate the requirement for funds from external sources. — Correct. The profit estimate shows how much of the fund need can be met internally, through retained earnings. The rest gives the requirement for external funds, which is estimated next.
Option (3) Identify the sources from which external funds can be raised. — Incorrect. Sources of external funds can be identified only after the amount needed is known. So this step comes after the estimate.
Option (4) Estimate the funds needed for fixed capital and working capital. — Incorrect. Funds for fixed and working capital are kept in mind while preparing the financial statements. That step comes before the profit estimate.
NCERT (2026-27 Edition): “Financial Planning … Financial planning usually begins with the preparation of a sales forecast. Let us suppose a company is making a financial plan for the next five years. It will start with an estimate of the sales which are likely to happen in the next five years. Based on these, the financial statements are prepared keeping in mind the requirement of funds for investment in the fixed capital and working capital. Then the expected profits during the period are estimated so that an idea can be made of how much of the fund requirements can be met internally i.e., through retained earnings (after dividend payouts). This results in an estimation of the requirement for external funds. Further, the sources from which the external funds requirement can be met are identified and cash budgets are made, incorporating these factors.” |