Requisites of a Sound Capital Plan

This article throws light upon the eight important requisites of a sound capital plan. The requisites are: 1. Estimates of Financial Needs 2. Flexibility 3. Optimum Use of Funds 4. Liquidity 5. Mode of Finance 6. Simplicity 7. Planning Foresight 8. External Influences.

Sound Capital Plan: Requisite # 1. Estimates of Financial Needs:

Promoters must have accurate estimates of financial needs of various components of the capital plan and the estimates of capital expenditure for launching an Enterprise. Capital plan must provide adequate fixed capital as well as working capital.

Sound Capital Plan: Requisite # 2. Flexibility:

A financial plan must have element of flexibility or elasticity. Promoters must provide adequate amount for contingencies to meet unforeseen events boldly. In the initial capital plan separate provision is required for contingencies, whereas in the capital plan for expansion we can have provision for liberal depreciation, liberal ploughing back of capital, secret reserves, conservative dividend policy and so on.

Under inflationary conditions, we have to take into consideration the rising costs and provide for such unforeseen additional costs.

Sound Capital Plan: Requisite # 3. Optimum Use of Funds:

The financial manager of the business enterprise must evolve necessary measures to secure intensive and optimum utilisation of available financial resources and he should ensure scientific management of fixed assets as well as working capitals Wise financial management will ensure maximum profitability.

In the capital plan of a corporation, we should have proper balance between fixed capital and working capital as well as between owned capital and borrowed capital. Under normal circumstances owned capital should be at least 50 to 60 per cent of the total capital requirements indicated by the capital plan.

Sound Capital Plan: Requisite # 4. Liquidity:

The capital plan of a corporation must provide necessary financial liquidity and this is possible only when we have adequate net working capital which is represented usually by share capital, reserves and long-term loans.

There must be judicious compromise between profitability and liquidity and liquidity cannot be sacrificed for the sake of profitability. The cardinal principle for successful financial planning dictates that the capital be obtained as cheaply as possible, but consistent with safety.

Sound Capital Plan: Requisite # 5. Mode of Finance:

The pattern of capital structure is also determined under capital plan. The promoters will have to decide the pattern of capital structure. We may have only one class of securities such as equity shares. We may have two classes of securities such as equity shares and preference shares.

We may also have a combination of share capital and loan capital in our capital structure. Normal proportion in the initial capital plan is: equity share capital 60 per cent preference share capital 20 per cent, loan capital for a new company 20 per cent.

Normal proportion in the capital structure of an established business enterprise while preparing capital plan for growth or expansion is: equity share capital 30 per cent, free reserves 20 per cent, preference share capital 20 per cent, bonds and loans 30 per cent.

An established concern should have normally 50 per cent risk capital and 50 per cent rentier capital on which a corporation is required to pay fixed interest or fixed dividend.

Sound Capital Plan: Requisite # 6. Simplicity:

A good capital plan should preferably provide simple financial structure so that it is easy to manage and we may not have unnecessary varieties in the types of securities.

Sound Capital Plan: Requisite # 7. Planning Foresight:

The management must demonstrate vision and foresight for scope and scale of operations of a company. Similarly, we should have intelligent forecasting of various contingencies and we have essential liquidity which is usually reflected in the current ratio, i.e., ratio between current assets and current liabilities. Normally current ratio is 2: 1.

Sound Capital Plan: Requisite # 8. External Influences:

External influences will have to be given due recognition while preparing the capital plan either for a new corporation or for an existing business concern for further expansion.

These external influences are:

(a) Money market conditions:

These will determine the choice or type of company securities, their issue price and the timing of the public issue of capital,

(b) State of trade:

Business cycle.

(c) Attitude of investment market:

Sometimes investors may be preferring debentures; sometimes investors may be preferring equity shares or preference shares,

(d) Government taxation policy.

(e) General level of interest rates:

When interest rates are rising, loan finance is undesirable because it involves heavy burden of interest charges.