ASSESSMENT OF FINANCIAL PLANNING ON FIRM’S PROFITABILITY

290

ASSESSMENT OF FINANCIAL PLANNING ON FIRM’S PROFITABILITY

ABSTRACT

The study assessed the application of financial planning and its influence on the profitability of Nigerian Breweries Plc, Ama, Enugu State.  The overall objective of the study was to assess whether the application of financial planning has helped to boost the profitability of the company.  Financial planning was evaluated based on the application of short-term and medium term financial planning.  Two objectives and two hypotheses were formulated and tested in the study.  The researcher adopted the survey design and structured questionnaire was administered to selected respondents in the company. Because of the large size of the population, a multi-stage sampling technique was employed. The first stage involves the random selection of all the accountants and management staff in the company who are involved in financial planning policy and procedures. The second stage was the random selection of 10 management staff and 11 accountants. Altogether, 21 respondents were selected as sample for the study.  Descriptive and inferential statistics were used to present the data while the Chi-Square statistical technique was used to analyze the hypotheses. Findings from the study showed that short-term financial plans do not influence the profitability of Nigeria Breweries, Ama, Enugu.  This result was supported by the test statistic (X2<t0.025, 5.4<t* = 5.9, p=0.000<0.05). Medium-term financial plans influence the profitability of Nigeria Breweries, Ama, Enugu.  This result was also supported by the test statistic (X2>t0.025, 9.95>t* = 5.9, p=0.000<0.05).  Based on the findings of the study, the researcher recommended as follows: that the management of Nigerian Breweries Plc, Ama, Enugu State should adopt a medium to long term financial planning and place less emphasis on short-term financial planning as it has been shown that short-term financial planning has no influence on the profitability of the company. The management of the Nigerian Breweries Plc, Ama, Enugu State should also ensure that those who are involved in financial planning are well trained and are up-to-date with financial and econometric modeling required for medium to long-term financial planning.

 

CHAPTER ONE

INTRODUCTION

1.1Background to the Study

Financial planning involves analyzing financial flows of a firm as a whole, forecasting the consequences of various investments, financing and dividend decisions and weighting the effects of various alternatives. Financial planning is the core of financial management. The complex nature of business demands that management should place greater emphasis upon financial planning to secure and employ capital resources in the amount and proportion necessary to increase the efficiency of remaining factors of production. Financial planning is needed both in dynamic and perfect economic conditions. It helps management to avoid waste by furnishing policies and procedures which make possible a closer co-ordination between the various functions of business (Oye, 2006).

Financial planning must however be complemented by control in order to achieve the basic aim of planning. The actual results must be measured concurrently against projections. Control is the financial management function which must be exercised by executive personnel of the business enterprise to achieve the goals established by the planning function. It deals with testing the degree of management performance in the attainment of the set objectives. It is also a check to deviations from the planning function, and once the causes for the difference between the actual and expected performance have been identified, a corrective action should be initiated. Financial planning can be defined as the process which assures that financial resources are obtained economically and used efficiently and effectively in the accomplishment of desired goals. It covers the entire process of monitoring actions emanating from the decisions. Seen as an integral part of financial management, it also forms part of budgeting, accounting, reporting and review. The budget is then put in practice and results expected. Budgetary control system forms a good basis of controlling plans. Definitely, actual activities are monitored and their results measured and then compared with plan. Then significant deviations from plan are identified and reported upon. The last step is to investigate the deviations accordingly and take corrective measures (Samuel, 1980).

The success of any business depends on the manner the production and distribution functions are coordinated. An important function of financial planning is the coordination of the various decisions taken within a company so that they are mutually consistent, having regard for financial aims and constraints. The exercise of this function is perhaps most clearly seen in formulating financial plans which involves merging of estimates of each department into a budget for the whole firm. In this process the financial manager holds a strategic position. Without coordination, individuals and departments would lose sight of their roles within the organization. They would begin to pursue their own specialized interests, often at the expense of the large organizational goals. Also, the point to be emphasized is that the activities of all departments must mesh. It is through budgeting that the activities of various departments are coordinated and unnecessary wastage of resources and efforts is stopped. Budgeting requires each manager to establish a proper rapport between the activities of his department and that of other departments. Any imbalance in the relationship between the departmental activities should be identified and corrective measure taken (Brockington, 1987).

1.2       Statement of the Problem

Financial planning is a guide to a particular set of financial goals or attainment and it is obvious that without a guide to a particular set of goals it will be very difficult to achieve that particular set of goals economically.

However, many organizations today do not make good financial plans about the operations of their organizations and where they do; they do not control their performances alongside their financial plan very well to control the controllable factors in their plans to enable them to achieve their financial goals.

Financial planning, which is one of the tools that could be used by business organizations to achieve their profit plan, unfortunately is not being used properly by many business organizations. In essence, many business organizations have failed in their profit plan due to lack of financial planning in their organization.

In other words, if a study like this is not carried out or this study not taken seriously by organizations, then the inevitable problems that will occur is that organizations will not be able to minimize expenditure or cost and also will not be able to maximize productivity, in other words, not maximizing profitability.

  • Objectives of the Study

The main purpose of this study is to evaluate the application of financial planning to firm’s profitability with emphasis on Nigerian Breweries, Ama, Enugu. Specific objectives of the study are as follows:

  1. To assess the influence of short-term financial plans on the profitability of Nigerian Breweries, Ama, Enugu.
  2. To evaluate the influence of medium-term planning on the profitability of Nigerian Breweries, Ama Enugu.

1.4    Research Questions

The following questions were formulated for the study:

  1. To what extent does short-term financial plan influence the profitability of Nigerian Breweries, Ama, Enugu?

ii      To what extent doesmedium-term financial plan influence the profitability of Nigerian Breweries, Ama, Enugu?

1.5  Research Hypothesis

The following hypotheses were formulated and tested in the study.

Ho1:      Short term financial plans do not influence the profitability of Nigerian Breweries, Ama, Enugu

HA1:     Short term financial plans influence the profitability of Nigerian Breweries, Ama, Enugu.

Ho2:      Medium term financial plans do not influence the profitability of Nigerian Breweries, Ama, Enugu

HA2:     Medium term financial plans influence the profitability of Nigerian Breweries, Ama, Enugu.

1.6       Significance of the Study

The study is very essential as well as beneficial to individuals and organizations. First and foremost, this study will serve as important financial objective reference to top executives of organizations who want to achieve efficiency and effectiveness in production, and as well maximize profit.

Secondly, it will also be significant to students who want to carry out further research on this area of study.

Finally, the findings of this study will be useful to the organization and other similar organizations, as well as the general public in this field as it depicts the nature of problem associated with financial planning in this part of the country.

1.7        Scope of the Study

The study focuses on the application of financial planning as an effective tool for increasing profitability in Nigerian Breweries-Ama Enugu State, from 2003-2013. The study narrows its focus down to the influence of medium-term and short-term financial plans on the profitability of Nigerian Breweries-Ama Plc.

1.8       Limitations of the Study

Like any other research project, this study is not without limitations. Some of the difficulties encountered in carrying the study included:

  1. Inability of the researcher to obtain adequate and relevant data from the organization, especially on sensitive economic issues that organizations are secretive about.
  2. Financial constraint is another limitation. Inadequacy of finance helped to restrict the study to only Nigerian Breweries whereas the researcher would have loved to go beyond that.
  3. The uncompromising nature of most respondents especially to questionnaires and verbal questions was another difficulty encountered bythe researcher.
  4. Lack of time to carryout out the personal observations of the enterprise operations properly, as well as attend to other academic activities was a major hindrance.

1.9       Definition of Terms

  • Financial plan: A financial plan is also called capital plan. It is an estimate of the total capital requirements of the company. Financial plan gives a total picture of the future financial activities of the company.
  • Short-term financial plan: This plan is prepared for maximum period of one (1) year. This plan looks after the working capital needs of the company.
  • Medium-term financial plan: This plan is prepared for a period of one (1) to five (5) years. This plan looks after replacements and maintenance of assets, research and development, etc.
  • Long-term financial plan: This is prepared for a period of more than five (5) years. This plan looks after the long-term financial objectives of the company, its capital structure, expansion activities, etc.
  • Financial planning: This means to prepare a financial plan. It is the mathematical sum of the following parameters (functions). Financial Resources (FR) + Financial Techniques (FT) = Financial Planning (FP).
  • Planning: Planning can be defined as the establishment of activities and the formulation, evaluation and election of the policies strategies, tactics and action required to achieve these objectives.
  • Strategic Planning: The formulation, evaluation and selection of strategies for the purpose of preparing a long term plan to attain objectives.
  • Tactical Planning: Is the process of preparing detailed short term (usually one year) plans for the functions, activities and department of the organization thus converting the long term corporation plan into action.
  • Control: Control is concern with the different use of resources to achieve a previously, determine objective or set of objective within a plan productivity (total factor basis).
  • Profitability: Profitability is the ability of a business to earn a profit. A profit is what is left of the revenue a business generates after it pays all expenses directly related to the generation of the revenue such as producing a product, and other expenses related to the conduct of the business activities.
  • Programme Planning and Budgeting System (PPBS): Is a radical approach to budgeting based programmes which are group of activities with common objectives.
______________________________________