Financial planning

Contents • Introduction to financial planning • Meaning of financial planning • Definition

of financial planning • Meaning of Financial Plan • Objectives of financial planning •
Essentials/Characteristics of a sound financial plan • Considerations in formulating
financial plan • Steps in financial planning • Limitations of financial planning

. •Introduction:

1. • Every business unit whether it is an industrial establishment, a trading concern or a

construction company needs funds for carrying on its activities successfully. • It requires
funds to acquire fixed assets like machines, equipment, furniture etc. and to purchase raw
materials or finished goods, to pay its creditors, to meet its day-to-day expenses, and so on.
In fact, availability of adequate finance is one of the most important factors for success in
any business. • However, the requirement of finance, now-a-days, is so large that no
individual is in a position to provide the whole amount from his personal sources. • So the
businessman has to depend on other sources and use various ways to raise the necessary
amount of funds. • Every businessman has to be very careful not only in assessing the
firm’s requirement of finance but also in deciding on the forms in which funds are raised
and utilized.
2. . Meaning of Financial Planning:

Planning is a systematic way of deciding about and doing things in a purposeful manner. When
this approach is applied exclusively for financial matter, it is termed as financial planning. • In
other words, In connection with any business enterprise, it refers to the process of estimating a
firm’s financial requirements and determining pattern of financing. It includes deterring the
objectives, policies, procedures and programmes to deal with financial activities. • Thus,
financial planning involves: 1. Estimating the amount of capital to be raised; 2. Determining the
pattern of financing i.e., deciding on the form and proportion of capital to be raised; 3.
Formulating the financial policies and procedures for procurement, allocation and effective
utilization of funds.

Definition of financial planning:

In simple words Financial Planning can be defined as “the process of estimating the capital
required and determining it’s composition. It is the process of framing financial policies in
relation to procurement, investment and administration of funds of an enterprise.” • According to
Cohen and Robbins Financial planning should: Determine the financial resources require to meet
the company’s operating programme. Forecast the extent to which these requirements will be
met by internal generation of funds and the extent to which they will be met from external
sources. Develop the best plans to obtain the required external funds. Establish and maintain a
system of financial control governing the allocation and use of funds. Formulate programmes to
provide the most effective profit-volume-cost relationship. Analyze the financial results of
operations Report facts to the top management and make recommendations on future operations
of the firm.

Meaning of Financial Plan: • A financial plan is a statement estimating the amount of

capital requirements and determining its composition. It emphasizes on the following aspects-
How much fund is require? When the fund is require? How the fund should be raised? How to
use the funds?

Objectives of Financial Planning:

. Determining capital requirements- This will depend upon factors like cost of current and fixed
assets, promotional expenses and long- range planning. Capital requirements have to be looked
with both aspects: short- term and long- term requirements. 2. Determining capital structure- The
capital structure is the composition of capital, i.e., the relative kind and proportion of capital
required in the business. This includes decisions of debt- equity ratio- both short-term and long-
term. 3. Framing financial policies with regards to cash control, lending, borrowings, etc. 4. A
finance manager ensures that the scarce financial resources are maximally utilized in the best
possible manner at least cost in order to get maximum returns on investment.

•Importance of Financial Planning: •

Financial Planning is process of framing objectives, policies, procedures, programmes and

budgets regarding the financial activities of a concern. This ensures effective and adequate
financial and investment policies. The importance can be outlined as- 1. Adequate funds have to
be ensured. 2. Financial Planning helps in ensuring a reasonable balance between outflow and
inflow of funds so that stability is maintained. 3. Financial Planning ensures that the suppliers of
funds are easily investing in companies which exercise financial planning. 4. Financial Planning
helps in making growth and expansion programmes which helps in long-run survival of the
company. 5. Financial Planning reduces uncertainties with regards to changing market trends
which can be faced easily through enough funds. 6. Financial Planning helps in reducing the
uncertainties which can be a hindrance to growth of the company. This helps in ensuring stability
an d profitability in concern.

ESSENTIALS/ CHARACTERISTICS OF A SOUND FINANCIAL PLAN •

While preparing a financial plan for any business unit, the following aspects should be kept in
view so as to ensure the success of such exercise in meeting the organisational objectives. (a)
The plan must be simple. Now-a-days you have a large variety of securities that can be issued to
raise capital from the market. But it is considered better to confine to equity shares and simple
fixed interest debentures. (b) It must take a long term view. While estimating the capital needs of
a firm and raising the required funds, a long-term view is necessary. It ensures that the plan fully
provides for meeting the capital requirement on long term basis and takes care of the changes in
capital requirement from year to year. (c) It must be flexible. While the financial plan is based on
long term view, one may not be able to properly visualise the possible developments in future.
Not only that, the firm may also change its plans of expansion for various reasons. Hence, it is
very necessary that the financial plan is capable of being adjusted and revised without any
difficulty and delay so as to meet the requirements of the changed circumstances.

It must ensure optimal use of funds. The plan should provide for raising reasonable amount of
funds. As stated earlier, the business should neither be starved of funds nor have surplus funds. It
must be strictly need based and every rupee raised should be effectively utilised. There should be
no idle funds. (e) The cost of funds raised should be fully taken into account and kept at the
lowest possible level. It must be ensured that the cost of funds raised is reasonable. The plan
should provide for a financial mix (combination of debt and equity) that is most economical in
terms of cost of capital, otherwise it will adversely affect the return on shareholders’ funds. (f)
Adequate liquidity must be ensured. Liquidity refers to the ability of a firm to make available the
necessary amount of cash as and when required. It has to be ensured in order to avoid any
embarrassment to the management and the loss of goodwill among the investors. In other words,
the investment of funds should be so planned that some of these can be converted into cash to
meet all possible eventualities.

Steps in Financial Planning Whether the business is big or small, existing or a new business,
this function has to be performed. At the time of promotion, this function is performed by the
promoter. 1. Establishing objectives : • Business enterprise operate in a dynamic society and in
order to take advantage of the changed economic conditions, financial planning should establish
both short- term and long run objectives. • Financial objective of any business enterprise is to
employ capital in whatever proportion necessary to increase the productivity of remaining factors
of production over the long run. • The long run goal of any firm is to use capital in correct
proportion. The financial objective should be clearly defined. • The concern should take
advantage of prevailing economic situation.

2. Formulating financial policies : • Financial policies are guides to all action which deals with
procuring, administrating and distributing the funds of business firms. These policies may be
classified into several broad categories: (a) Policies governing the amount of capital required by
the firm to achieve their financial objectives. (b) Policies to achieve and determine control by the
parties who furnish the capital. (c) Policies which act as a guide in the use of debt or equity
capital. (d) Policies which guide management in the selection of sources of funds. (e) Policies
which govern credit and collection activities of an enterprise. These should be clear cut plans of
raising the required funds and their possible uses. The current and future needs for funds should
be considered in the financial plans.

3) Forecasting : • A fundamental requisite is the collection of facts. • However, where financial

plans concern the future and facts are not available, financial management is required to forecast
the future in order to predict the variability of factors influencing the type of policies the
enterprise formulates. • This involves a thorough study of the company's past performance to
identify trends. • These trends are projected into the future and modified taking into account
events or trends expected to occur in the future.

4. . Formulation of Procedures : •Financial planning are broad guides which to be executed

properly, must be translated into detailed procedures. •If a policy is to raise short-term
funds from banks, then a procedure should be laid to approach the lenders and the persons
 authorized to initiate such action. •Financial planning is the work of top management.
•Financial planning is a part of a larger planning process in an organization.

5. Providing for flexibility : • The financial planning should ensure proper flexibility in
objectives, policies and procedures to adjust according to the changing economic situations.
• The changing economic environment may offer new opportunities. • The business should
be able to make use of such situations for the benefits of the concern. • A rigid financial
planning will not let the business use new opportunities.

6)Financial Planning Process: •The financial planning process is a logical, six-step

procedure: Step 1: Determine Current Financial Situation Step 2: Develop Financial Goals
Step 3: Identify Alternative Courses of Action Step 4: Evaluate Alternatives Step 5: Create
and Implement a Financial Action Plan Step 6: Reevaluate and Revise Plan

Basic Considerations:

Every concern had to formulate a financial plan that would suit the specific circumstances in
which it is operating. A concern should bear in mind certain considerations or principles while
formulating or devising its financial plan : 1. Simplicity of purpose : Financial plan should be
drafted in terms of the purpose for which the enterprise is organized. It should contain a simple
financial structure that can be implemented and managed easily and understood clearly by all. In
short the number of securities should be the minimum possible. 2. Optimum use or intensive
use : A wasteful use of capital is almost as bad as inadequate capital. A financial plan should be
such that it will provide for an intensive use of funds. Funds should not remain idle nor should
there be any paucity of it. The financial planners should keep in view the proper utilization of
funds in the context of overall objective of maximization of wealth. Again they should see that
there is a proper balance in maintenance between long-term and short-term funds, since the
surplus of one will not be able to offset the shortage of the other.

3. 18. 3. Based on clear-cut objectives : Financial planning should be done by keeping in

view the overall objectives of the company. It should aim to procure funds at the lowest
cost so that profitability of the business is improved. 4. Long-term view : Financial
planning should be formulated keeping in view the long-term requirements and not just the
immediate or short- term requirements of the concern. This is because financial planning
originally formulated would continue to operate for a long time after the formation of the
concern. 5. Flexibility : The financial planning should be such that it can be modified or
changed according to the changing needs of the business with minimum possible delay.
There may be scope for raising additional funds if fresh opportunities occur. Flexibility in a
plan will be helpful in coping with the demands of the future. Management should be ready
to revise or completely change the firm's short-run objectives, policies and procedures in
order to take advantage of changing conditions.
4. 19. 6. Planning foresight : Foresight is essential for any plan of business operations so that
capital requirements may be assessed as accurately as possible. Accurate forecasts are
required to be made regarding the future scope of operations of the concern, technological
developments, etc. The making of accurate forecasts require foresight on the part of
financial planners. A financial plan visualized without foresight may fail to meet the
 present as well as the future requirements of funds and bring disaster to the concern. 7.
Financial contingencies : The financial planning should make adequate provisions of
funds for meeting the contingencies likely to arise in the future. This principle does not
mean that large amount of funds should be kept idle as reserves for unforeseen
contingencies. It simply means that while formulating the financial plans, the financial
planners should make proper forecasts of the contingencies likely to arise in the future and
make adequate provisions for funds for meeting the future contingencies.
5. 8. Solvency Liquidity : The plan should take proper care of solvency because many of the
companies have failed by reason of insolvency. There should be adequate liquidity in the
financial plans. Liquidity means the availability of cash for the concern whenever required,
for making payments on dates when they are due. This will ensure credit worthiness and
goodwill to the concern and funds become available to it on very reasonable terms. It acts
as a shock absorber in the event of business operations deviating from the normal course. It
gives the financial plan a certain degree of flexibility. Above all, it will help in avoiding
embarrassment to the management and a loss of reputation of the concern in the eyes of the
public. Proper forecasting of future payments will be helpful in planning liquidity. 9.
Profitability : A financial plan should maintain the required proportion between fixed
charge obligations and the liabilities in such a manner that the profitability or the
organization is not adversely affected. The most crucial factor in financial planning is the
forecast of sale, for sales almost invariably represent the primary source of income and
cash receipts. Besides, the operations of a business are geared to the anticipated volume of
sales.
6. . 10. Economy : The financial plan should also ensure economy. It should ensure that the
cost of raising funds is minimum. This is possible by having a proper debt-equity mix in
the capital structure. The cost of capital is an important element in the formulation of a
financial plan. An excessive burden of fixed charges on its earnings might inflate its cost of
capital. 11. Conservative : A financial plan should be conservative, in the sense that the
debt capacity of the plan should not be exceeded. 12. Varying risks : The financial plan
should provide for ventures with varying degrees of risks so that it might enable a company
to achieve substantial earnings from risky ventures. 13. Practical : A plan should be such
that it should serve a practical purpose. It should be realistic and capable of being put to
use.
7. 22. 14. Availability : The source of finance which a corporation may select, may be
available at a given point of time. If certain sources are not available, the corporation may
even prefer to violate the principle of suitability. Availability sometimes bears no relation
to cost. A corporation cannot always choose its source of funds. Availability of different
kinds of funds often plays an important part in a firm's decision to use a debt or equity.
This aspect may be considered while formulating a plan. 15. Investor's preference or
temperament : Preferences of investors are different. Some who are bold and venturesome
prefer equity shares. Some investors who are cautious go for debentures. As such, the
financial plan should keep in mind the temperament or the preference of investors, i.e. the
financial plan should be formulated in accordance with preferences of investors. 16.
Timing : A sound financial planning involves effective timing in the acquisition of funds.
The key to effective timing is correct forecasting. This would depend upon the
understanding of the management as to how business cycles behave during different phases
of business operations.
8. 23. 17. Communication : With outside parties including investors and other suppliers of
funds, communication is an essential prerequisite. The outside parties would then know
that the management is trying to control its business effectively and what it is doing. 18.
Implementation : A firm should see to it that plans are actually carried out. The data
should be available at any level in detail and in certain frequency. This would enable a firm
to take timely and corrective action whenever necessary. 19. Control : The capital structure
of a firm may be such as to ensure that control does not pass in the hands of outsiders. For
this purpose the use of debt financing may be encouraged. However stock should be
broadly distributed to facilitate the maintenance of control.
9. 20. Less dependence on outside sources : Long-term financial planning should aim to
reduce dependence on outside sources. This can be possible by retaining a part of profits
for ploughing back. The generation of own funds is the best way of financing operations. In
the beginning, outside funds may be a necessity but financial planning should be such that
dependence on such funds may be reduced in due course of time. 21. Nature of industry :
The needs for funds are different for various industries. The asset structure, element of
seasonality, stability of earnings, are not common factors for all industries. These variables
will influence or determine the size and structure of financial requirements. 22. Standing
of the concern : This will influence a decision about the financial plan. The goodwill of the
concern, credit rating in the market, past performances, attitude of the management are
some of the factors which will be considered in formulating a financial plan.
10. 23. General economic conditions : The prevailing economic conditions at the national
level and international level will influence a decision about financial plan. These conditions
should be considered before taking any decisions about sources of funds. A favourable
economic environment will help in raising funds without any difficulty. On the other hand,
uncertain economic conditions may make it difficult for even a good concern to raise
sufficient funds. 24. Government control : The government policies regarding issue of
shares and debentures, payment of dividend and interest rates, entering into foreign
collaborations, etc. will influence a financial plan. The legislative restrictions on using
certain sources, limit of dividends, etc. will make it difficult to raise funds. So Government
controls should be properly considered while selecting a financial plan.

•Limitations of Financial Planning

1. Difficulties in forecasting : Plans are decisions and decisions require facts about the
future. Financial plans are prepared by taking into account the expected situations in the
future, which is always uncertain. Since future conditions cannot be forecasted accurately,
the adaptability of planning is seriously limited. One way to offset the limitation is to
improve forecasting techniques. Another way to overcome this limitation is to revise plans
periodically. The development of variable plans, which take changing conditions into
consideration, will go a long way in eliminating this limitation. 2. Difficulty in change :
Another serious difficulty in planning is the reluctance or inability of the management to
change a plan once it has been made, for several reasons. Assets may have to be purchased
again, raw materials and cost may have to be incurred.

11. 27. 3. Rapid change : The growing mechanism of industry is bringing rapid changes in
industrial processes. The methods of production, marketing devices, consumer preferences,
 create new demand every time. The incorporation of new changes require a change in
financial plan every time. Once investments are made in fixed assets, then these decisions
cannot be reversed. It becomes very difficult to adjust the financial plan for incorporating
fast changing solutions. Unless a financial plan helps the adoption of new techniques, its
utility becomes limited. 4. Problem of coordination : Financial functions is the most
important of all functions. Other functions also influence a decision about financial plan.
While estimating financial means, production policy, personnel requirements, marketing
possibilities are all taken into account. Unless there is proper coordination among all the
functions, preparing of financial plan becomes difficult. Often there is a lack of
coordination among different functions. Even indecision among personnel disturbs the
process of financial planning.

Personal Financial Statement

What is a Personal Financial Statement?

A personal financial statement is a document or spreadsheet outlining an individual's financial

position at a given point in time. A personal financial statement will typically include general
information about the individual, such as name and address, along with a breakdown of total
assets and liabilities.

The statement is useful for tracking goals and wealth. It is also often required when applying for
credit.

Key Takeaways

 The personal financial statement lists all assets and liabilities of an individual or couple.
 Subtract liabilities from assets to see the net worth. A positive net worth shows that the person
has more assets than liabilities.
 Net worth can fluctuate over time as asset and liability values change.
 Personal financial statements are helpful for tracking wealth and goals, as well as applying for
credit.
 Income and expenses can be included, but ideally, these are placed on a separate sheet called
the income statement.

Understanding the Personal Financial Statement

A financial statement can be prepared for either a business or an individual. The statement shows
the financial health of the entity named in the statement. An individual’s financial statement is
referred to as a personal financial statement and it is a simpler version of the corporate
statements.
An individual’s financial statement shows their net worth, which is assets minus liabilities. Net
worth reflects what an individual will have in cash if they sold off all their assets and paid off all
their debts.

If liabilities are greater than assets on the personal financial statement, then the individual has a
negative net worth. If the individual has more assets than liabilities, they have a positive net
worth.

Personal financial statements are most often used when an individual is applying for credit, such
as loans or a mortgage. The financial statement allows credit officers to easily gain perspective
into the applicant's financial situation in order to make an informed credit decision. In many
cases, the individual or couple may be asked to provide a personal guarantee for part of the loan,
or may have to pledge some of the personal assets as collateral to guarantee the loan.

By comparing personal financial statements over time, an individual can track how their
financial health is improving or deteriorating.

What's Included and Excluded From a Personal Financial Statement?

The personal financial statement is broken down into assets and liabilities. Assets include the
value of securities and funds held in checking or savings accounts, retirement account balances,
trading accounts, and real estate.

Liabilities include the individual’s personal loans, such as credit card balances, student loans,
unpaid taxes, and mortgages. Also include debts which are owned jointly with someone else, for
example, if you cosigned on a loan.

A married couple may create a joint personal financial statement that shows all the assets owned
and the debt incurred.

Business-related assets and liabilities are not generally included in a personal financial statement
unless the person is directly and personally responsible. For example, the individual personally
guaranteed a loan for their business. This is similar to cosigning, so this would be included on
the personal financial statement.

Anything rented is not included on personal financial statements because the asset isn't owned by
the individual. Although, if you own the property and are renting it out to someone else, the
value of that property is included in your asset list because it is owned.

Personal property, such as furniture and household goods, is typically not included as assets on a
personal balance sheet because these items can’t easily be sold off to pay a loan. However,
personal property with significant value, such as jewelry and antiques, can be included if the
value can be verified with an appraisal.

If using the statement to attain credit or show overall financial position, income and expenses are
also generally included. This can be tracked on a separate sheet, called the income statement.
This includes all forms of income and all expenses, typically expressed in the form of monthly or
yearly amounts.

Example of a Personal Financial Statement

Assume that Henry wants to track his net worth as he moves toward retirement. He has been
paying off debts, saving money, investing, and is getting closer to owning his home. Each year,
he updates the statement to see the progress he has made.

Assume that Henry has assets of $20,000 for a car, $200,000 for his house, $300,000 in
investments, and $50,000 in cash and equivalents. He also owns some highly collectible stamps
and art valued at $20,000. His total assets are $590,000.

As for liabilities, Henry owes $5,000 on the car and $50,000 on his house. He pays for things
with a credit card, but pays the balance off each month, so there is no balance owing. Henry
cosigned a loan for his daughter and there is $10,000 remaining on that. Even though it is not
Henry's loan, he is still responsible for it so it is included on the statement. Henry's liabilities are
$65,000.

Subtracting liabilities from the assets, Henry's net worth is $525,000.

Financial Planner Responsibilities:

Include:

 Prepare sound financial plans to ensure clients meet their goals

 Advise clients on current financial issues and make recommendations
 Generate new business and build relationships

Job brief

We are looking for a Financial Planner to help clients manage their finances. You will be our
clients’ trusted advisor in areas including investments, cash flow, savings and debt management.

Our financial planner should be an effective communicator with experience in financial planning
and business development. If you’re analytical, meticulous and customer-oriented, we’d like to
meet you.

Your goal will be to ensure clients make wise and profitable decisions to meet their financial
goals.

Responsibilities

 Analyze clients’ financial statuses (e.g. income, expenses and liabilities)

 Examine and suggest financial opportunities (e.g. insurance plans, investments)
  Develop sound plans and budgets for clients
 Customize financial plans according to clients’ changing needs
 Help clients implement their plans and carry out transactions
 Present and sell suitable financial products and services
 Find and approach prospective clients
 Build strong relationships to retain existing clients
 Maintain updated knowledge of regulations, practices and financial products

Requirements

 Proven experience as financial planner or similar role; experience in sales or customer service is
an asset
 Ability to analyze financial information and comply with regulations
 Proficiency in MS Office and CRM systems
 Attention to detail and strong math skills
 Strong ethics, with a customer-oriented attitude
 Outstanding communication skills, with the ability to foster long-term relationships
 Valid professional license (e.g. Series 7 & 66)
 BSc/BA in accounting, finance, business administration or relevant field; professional
certification (e.g. CFP) is a plus

THE FINANCIAL PLANNING PROCESS

Most people want to handle their finances so that they get full satisfaction from each available
dollar. Typical financial goals include such things as a new car, a larger home, advanced career
training, extended travel, and self-sufficiency during working and retirement years.

To achieve these and other goals, people need to identify and set priorities. Financial and
personal satisfaction are the result of an organized process that is commonly referred to as
personal money management or personal financial planning.

Personal financial planning is the process of managing your money to achieve personal
economic satisfaction. This planning process allows you to control your financial situation.
Every person, family, or household has a unique financial position, and any financial activity
therefore must also be carefully planned to meet specific needs and goals.

A comprehensive financial plan can enhance the quality of your life and increase your
satisfaction by reducing uncertainty about your future needs and resources. The specific
advantages of personal financial planning include

 Increased effectiveness in obtaining, using, and protecting your financial resources

throughout your lifetime.
 Increased control of your financial affairs by avoiding excessive debt, bankruptcy, and
 dependence on others for economic security.
 Improved personal relationships resulting from well-planned and effectively
communicated financial decisions.
 A sense of freedom from financial worries obtained by looking to the future, anticipating
expenses, and achieving your personal economic goals.

 We all make hundreds of decisions each day. Most of these decisions are quite simple and
have few consequences. Some are complex and have long-term effects on our personal and
financial situations. The financial planning process is a logical, six-step procedure:

 (1) determining your current financial situation

 (2) developing financial goals
 (3) identifying alternative courses of action
 (4) evaluating alternatives
 (5) creating and implementing a financial action plan, and
 (6) reevaluating and revising the plan.

 Step 1: Determine Your Current Financial Situation

 In this first step of the financial planning process, you will determine your current
financial situation with regard to income, savings, living expenses, and debts. Preparing a
list of current asset and debt balances and amounts spent for various items gives you a
foundation for financial planning activities.

 Step 2: Develop Financial Goals

 You should periodically analyze your financial values and goals. This involves
identifying how you feel about money and why you feel that way. The purpose of this
analysis is to differentiate your needs from your wants.
 Specific financial goals are vital to financial planning. Others can suggest financial goals
for you; however, you must decide which goals to pursue. Your financial goals can range
from spending all of your current income to developing an extensive savings and
investment program for your future financial security.

 Step 3: Identify Alternative Courses of Action

 Developing alternatives is crucial for making good decisions. Although many factors will
influence the available alternatives, possible courses of action usually fall into these
categories: 
 Continue the same course of action.
 Expand the current situation.
 Change the current situation.
 Take a new course of action.

 Not all of these categories will apply to every decision situation; however, they do
 represent possible courses of action.
 Creativity in decision making is vital to effective choices. Considering all of the possible
alternatives will help you make more effective and satisfying decisions.

 Step 4: Evaluate Alternatives

 You need to evaluate possible courses of action, taking into consideration your life
situation, personal values, and current economic conditions.
 Consequences of Choices.  Every decision closes off alternatives. For example, a
decision to invest in stock may mean you cannot take a vacation. A decision to go to
school full time may mean you cannot work full time. Opportunity cost is what you give
up by making a choice. This cost, commonly referred to as the trade-off of a decision,
cannot always be measured in dollars.
 Decision making will be an ongoing part of your personal and financial situation. Thus,
you will need to consider the lost opportunities that will result from your decisions.

 Evaluating Risk  

 Uncertainty is a part of every decision. Selecting a college major and choosing a career
field involve risk. What if you don’t like working in this field or cannot obtain
employment in it?
 Other decisions involve a very low degree of risk, such as putting money in a savings
account or purchasing items that cost only a few dollars. Your chances of losing
something of great value are low in these situations.
 In many financial decisions, identifying and evaluating risk is difficult. The best way to
consider risk is to gather information based on your experience and the experiences of
others and to use financial planning information sources.

 Financial Planning Information Sources

 Relevant information is required at each stage of the decision-making process. Changing

personal, social, and economic conditions will require that you continually supplement
and update your knowledge.

 Step 5: Create and Implement a Financial Action Plan

 In this step of the financial planning process, you develop an action plan. This requires
choosing ways to achieve your goals. As you achieve your immediate or short-term
goals, the goals next in priority will come into focus.
 To implement your financial action plan, you may need assistance from others. For
example, you may use the services of an insurance agent to purchase property insurance
or the services of an investment broker to purchase stocks, bonds, or mutual funds.

 Step 6: Reevaluate and Revise Your Plan

  Financial planning is a dynamic process that does not end when you take a particular
action. You need to regularly assess your financial decisions. Changing personal, social,
and economic factors may require more frequent assessments.
 When life events affect your financial needs, this financial planning process will provide
a vehicle for adapting to those changes. Regularly reviewing this decision-making
process will help you make priority adjustments that will bring your financial goals and
activities in line with your current life situation.

Time Value of Money ( TVM ) – Definition, Formula & Example

A bird in hand is worth two in the bush’ – this adage applies to financial transactions too. Say,
someone borrowed a certain amount from you and it is due. Just as you are expecting the
money to be credited to your account, you get a call from the borrower saying that he will pay
you after 3 months. You are not happy about this. This is because you are aware of time value of
money or TVM, albeit subconsciously. In this article, we will discuss the concept of time value of
money, also called as present value through the following topics.

1. What is Time Value of Money – Definition

2. TVM with an example
3. Present Value and Future Value
4. Basic TVM Formula
5. TVM and Compounding Periods

1.What is Time Value of Money – Definition

There is no reason for any rational person to delay taking an amount owed to him or her. More
than financial principles, this is basic instinct. The money you have in hand at the moment is
worth more than the same amount you ‘may’ get in future. One reason for this is inflation and
another is possible earning capacity. The fundamental code of finance maintains that, given
money can generate interest, the value of a certain sum is more if you receive it sooner. This is
why it is called as the present value.

Basically, the time value of money validates that it is more beneficial to have cash now than
later. Say, if you invest a Rs. 100 today – the returns will be more compared to the same
investment made 2 months from now. Moreover, there is always a risk that the borrower might
delay even more or not pay at all in the future.

2. TVM with an example

The relevance of TVM depends on how much returns you can generate from the capital
available. Money has immense growth potential and the more you delay employing this
potential, the more you lose the chance to earn on it. For instance, if a friend or lender gives you
two options – to take Rs. 10,000 today or to take Rs, 10,500 next year.
Now, even if this promise is from someone or an entity you trust implicitly, chances are more
that the second option is a raw deal. With more and more schemes ranging from low-risk to high-
risk – tax-saving FDs, ELSS et. – there is a high chance that you can make at least 7% on this
sum, which is Rs. 10,700. But if the interest rate offered is less than 5%, then you may consider
taking the money next year. So, it depends on the possible returns as per the RBI guidelines or
the market.

3. Present Value and Future Value

Present Value is the same as Time Value as elaborated above. It is the money you have currently
that is equal to a future one-time disbursal or several part-payments – discounted by a suitable
rate of interest.

Future Value is the sum of money that any saving scheme with a compounded interest will build
to by a pre-decided future date. It applies to both lumpsum as well as recurring investments like
SIP.

4. Basic TVM Formula

Based on your financial circumstances at the time, the TVM formula can vary to some extent.
Example, in the case of annuity (income) or perpetuity (until death) pension payments, the
general formula can have more components. But as a whole, the basic TVM formula is as shown
in the image.

FV = PV x [ 1 + (I/ N) ] (N*T)
Where,
FV is Future value of money,
PV is Present value of money,
I is the interest rate,
N is the number of compounding periods annually and
T is the number of years in the tenure.

For instance, if you invest Rs. 1 lakh for 5 years at 10% interest, the future value of this one lakh
will be Rs. 161,051 as per the formula. This formula can help you to analyze different
investments over different time periods, enabling you to make optimal and informed financial
decisions.

5. TVM and Compounding Periods

How often the invested amount compounds too has a huge impact on future value. See how
increasing the compounding frequency in the above example make a difference to the earnings.

Monthly: Rs. 164530.89

Quarterly: Rs. 163,861.64
Semi-annually: Rs. 162889.46
Annually: Rs. 161,051

This is where the power of compounding works. It proves that TVM is dependent on interest
rate, tenure as well as the number of compounding periods per financial year.

Aadhaar authentication and e-KYC Services

Aadhaar Authentication is a process by which Aadhaar number along with Aadhaar holder’s
personal information (biometric/demographic) is submitted to UIDAI and UIDAI responds only
with a “Yes/No”. The purpose of authentication is to enable Residents to provide their identity
and for the service providers to supply services and give access to the benefits.NSDL e-Gov also
provides e-KYC services of UIDAI to entities whereby the KYC details of a Resident like
Name, Address, Date of Birth, Gender, Photograph, Mobile No., e-mail ID (if
available) are provided by UIDAI in a secured manner to the end user.

Aadhaar authentication and e-KYC services are available to different sectors of the industry
ranging from Banks, Insurance companies, Government Organizations, Passport Offices,
Airports, Depository Participants, Payment Gateway Provider, etc

 What is Aadhaar

Aadhaar is a verifiable 12-digit identification number issued by UIDAI to the resident of India
for free of cost

 Aadhaar Mythbusters
 The Aadhaar Act

 Aadhaar Ecosystem

Aadhaar ecosystem comprises of core infrastructures with the objective of providing enrolment,
update & authentication services.

Difference Between Aadhar And Pan Card

The government issued a notice which made the linking of PAN and Aadhaar compulsory
through the Finance Act, 2017. The linking of the two documents was supposed to be done by
the 1st of July. This decision was made to make an individual's Aadhaar mandatory when filing
their taxes. Most individuals are not aware about the necessity and benefits of owning a PAN and
Aadhaar Card.

Now, what is PAN?

Permanent Account Number (PAN) is a number which is issued to an individual who pays their
taxes. It is a 10-digit alphanumeric number that plays a vital role in a majority of various
transactions which are made by an individual on a regular basis.

What is Aadhaar?

A 12-digit unique identifier Aadhaar is an ID system which is used by Indian residents and is
based on their demographic and biometric data. This personal data of an individual is collected
and stored in the databases of the Unique Identification Authority of India (UIDAI).

The government had issued an order which made it mandatory for every taxpaying citizen of
India to link their PAN with their Aadhaar Card. This linkage was expected to be done by every
individual by the 1st of July.

PAN VS Aadhaar:

The main purpose of a Permanent Account Number is to track and identify every financial
transaction that an individual makes. It is issued by the Income Tax Department under the careful
supervision of the CBDT or the Central Board for Direct Taxes. The most important job of a
PAN is to ensure that every citizen does their duty of paying their taxes.

An Aadhaar Card is a unique identification number of UID which has been issued by a central
government agency operating in India called the Unique Identification Authority of India
(UIDAI). The government intends on keeping a database containing information about every
registered citizen of India. In addition to a person's personal information, it also collects their
photograph, fingerprints and iris scans. With this system of information, it becomes very easy to
identify an individual by simply cross-referencing their data with the data in the system.

The main confusion that a lot of people face arises from the fact that both documents are used as
Proof of Identity which leads people into thinking that this is their primary use. In fact, both
documents are completely different from each other and serve a far more important purpose in an
individual's life. With this in mind, let us take a look at some of the differences which are listed
below:

arameters Aadhaar Card PAN Card

 Unique Identification (UID)
 Unique Identification
Stands For Permanent Account Number
Authority of India (UIDAI)

Also Known UID number, UIDAI Number,

PAN Number
As AADHAR number, UIDAI card
Country of
India India
Usage
Authorizing Unique Identification Authority of Indian Income Tax Department
Department India (UIDAI)
Terms of Use Voluntary Mandatory for Financial Transactions
Number of 10 (With a combination of both numbers
12
Digits and alphabets)
Biometric type:

 Photographs  Account Number

 Iris scans  Name
 Ten fingerprints  Date of Birth
Collected Data
 Name  Address
 Date of Birth  Signature
 Address
 Signature

To identify and document every To prevent tax evasion and to help in

Primary
Indian citizen to prevent identity identifying every financial transaction that
Purpose
crimes and fraud is made
Identification for the Income Tax
Identification needed for welfare
Main Function Department as well as identify every
schemes and plans
financial transaction made
A PAN Card can be issued to individuals
Issued to residents and Indian
Residency who are not Indian citizens but who
citizens only
conduct any type of business in India
In summary, PAN and Aadhaar Card are two valuable documents that every individual should
possess to carry out various activities smoothly in day to day life. With efforts underway to
ensure that every individual residing in India links their PAN and Aadhaar Cards, the
government is keen to make the lives of the people of India a lot simpler. With this linking, an
individual can register for a PAN Card by using their Aadhaar Card. 
Some of the benefits of Aadhaar authentication and e-KYC:

 Promotes paperless environment

 No risk of forged documents
 Authorization of Resident thereby protecting Resident privacy
 Compliant with latest standards notified in IT, Amendment Rules 2011
 Real time and instantaneous results
 Elimination of paper verification, movement and storage