The Impact of Financial Planning
The Impact of Financial Planning
The Impact of Financial Planning
Research Paper
MulukalapallySusruth
Research scholar, Kakatiya University, Warangal, Telangana (India)
ABSTRACT
Financial planning is an integral part of financial management which deals with the management of a firm’s
funds with a view to maximizing profit and the wealth of shareholders. The main aim of this study is to examine
the impact of financial planning on financial performance. The sample used in this study are 5 companies of
pharmaceutical industry which listed in National stock exchange and secondary data collected for period 2011-
2020.Regression analysis were employed to analyze the relationship between the dependent variable and
independent variables. Findings show that there is a significant relationship between Financial planning and
the financial performance with the R2 of 43%,30%,45%,36% and38%. Overall, the financial performance of
Alkem laboratories Ltd. is highest with comparison of other companies and lowest is cadila Healthcare Ltd. The
study findings indicated that Financial planning had positive impact on the financial performance. The study
recommended the pharma companies should invest optimum amount infunding decisions, investment decisions
and implementing financial policies with maintaining minimum level of profit as it had positive impact on the
financial performance, the least variation to the expected results and that leads to highest contribution to
operating profit.The study therefore concludes that sound financial planning by the pharma companies lead to a
better financial performance as accountability was enhanced through all levels of decision making.
KEYWORDS: Financial planning,Financialperformance, pharma companies, Linear regression
Received 12 May, 2021; Revised: 23 May, 2021; Accepted 25 May, 2021 © The author(s) 2021.
Published with open access at www.questjournals.org
I. INTRODUCTION
Financial Planning is the process of estimating the capital required and determining its composition. It
is the process of framing financial policies in relation to procurement, investment and administration of funds of
an enterprise. The quantum of funds needed will depend upon the asset‟s requirements of the business. The
time at which funds will be needed should be carefully decided so that finances are raised at a time when these
are needed. The next aspect of a financial plan is to determine the pattern of financing. There are a number of
ways for raising funds. The selection of various securities should be done carefully. The funds may be raised by
issuing of capital and debentures, rising of loans, etc. Which source of finance should be raised and up to what
amount these should be raised is very important. Once a pattern of financing is selected then it becomes very
difficult to modify it a financial plan also spells out the policies to be pursed for the floatation of various
corporate securities, particular regarding the time of their floatation.
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.
Research Hypotheses
To study the impact of Financial planning, the following hypotheses have been proposed:
H0: Financial planning has no significant impact on financial performance.
H1: Financial planning hassignificant impact on financial performance.
Variable’s measurement
Financial planning (FP)- Financial planning in the pharmaceutical companies was mainly measured by earnings
before interest and tax and the capital employed which comprises of fixed assets plus working capital in a
particular period.
Return on Assets (ROA) - The Return on Assets is estimated based on Net profit divided by the total assets
obtained from the balance sheet.
Return on Equity (ROE) – The Return on Equity is estimated based on Net profit items divided by total equity
items obtained from the balance sheet.
Earnings per share (EPS)- Earnings per share is estimated based on total net profit divided by aggregate quantity
of outstanding shares.
P/E Ratio-The P/E ratio is calculatedby dividing the market value price per share by the company's earnings per
share.
Tobin‟s Q -Tobin‟s Q is an instrument which measures the ratio between the market value of a
physical assets and the value of its replacement. The Tobin‟s Q ratio is mostly used to measure the assets of a
firm in connection to the market value of the firm‟s assets. High value of Tobin‟s Q motivates firms to inject
more funds into the business since its indicated that the fundsinvested yield much return compared to the cost
paid in relation to capital acquired.
Techniques of Analysis
Ratio analysis is a technique adopted to analysis and interpret general financial statements to assess the
Financial performance. Further a comprehensive analysis is carried by applying statistical techniques namely
mean, standard deviation, co-efficient of variance, correlation and Linear regression
Conceptual Framework
Table 1 reveals the ROA of selected Pharmaceutical Companies in India from 2010-2011 to 2019-
2020. This Return on Assets shows a fluctuating trend during the study period. The Divi‟s Laboratories Ltd. has
the highest average ROA of 19.05 per cent and the Torrentpharmaceuticals Ltd. has the lowest average
ROA9.77 per cent.
The Sun Pharmaceutical Industries Ltd. has the highest standard deviation of ROA of 5.76 percent. The
Alkem Laboratories Ltd. with lowest standard deviation of ROA of 2.40 percentand it is found to be stable in
ROA. The Sun Pharmaceutical Industries Ltd. has the highest co-efficient of variance of ROA of 46.64 percent.
The Divi‟s Laboratories Ltd. has the lowest co-efficient variance of ROA of 16.59 percent and it is found that
there is a consistency in ROA than the other Pharmaceutical Companies.
Table 2 reveals the ROE of selected Pharmaceutical Companies in India from 2010-2011 to 2019-2020.
This ROE shows a fluctuating trend during the study period. The cadila Healthcare Ltd. has the highest average
ROE of 25.48 per cent and the Sun pharmaceuticals Industries Ltd. has the lowest average ROE of 16.13
percent.
The Torrent Pharmaceuticals Ltd. has the highest standard deviation of ROE of 13.80 per cent. The
Alkem Laboratories Ltd. with lowest standard deviation of ROE of 2.40 per cent and it is found to be stable in
ROE. The Torrent Pharmaceuticals Ltd has the highest co-efficient of variance of ROE of 47.70 percent.
TheAlkem Laboratories Ltd has the lowest co-efficient variance of ROE of 20.17 percent and it is found that
there is a consistency in ROE than the other Pharmaceutical Companies.
Table 3 reveals the EPS of selected Pharmaceutical Companies in India from 2010-2011 to 2019-2020.
This EPS shows a fluctuating trend during the study period. The Torrent Pharmaceuticals Ltd. has the highest
average EPS of 35.27 per cent and the cadila Healthcare Ltd has the lowest average EPS of 8.86 percent.
The Torrent Pharmaceuticals Ltd. has the highest standard deviation of EPS of 21.83 percent. The
cadila Healthcare Ltd. with lowest standard deviation of EPS of 3.80 per cent and it is found to be stable in EPS.
The Torrent Pharmaceuticals Ltd has the highest co-efficient of variance of EPS of 61.89 percent. The Sun
Pharmaceutical Industries Ltd.has the lowest co-efficientvariance of EPS of 35.45 percent and it is found that
there is a consistency in EPS than the other Pharmaceutical Companies.
Table 4 reveals the P/E ratio of selected Pharmaceutical Companies in India from 2010-2011 to 2019-
2020. This P/E ratio shows a fluctuating trend during the study period. The sun Pharmaceuticals Industries Ltd.
has the highest average P/E ratio of 34.91 per cent and the cadila Healthcare Ltd has the lowest average P/E
ratio of 26.12 percent.
The Torrent Pharmaceuticals Ltd. has the highest standard deviation of P/E ratio of 14.38 percent. The
AlkemLaboratories Ltd. with lowest standard deviation of P/E ratio of 4.11 per cent and it is found to be stable
in P/E ratio. The Torrent Pharmaceuticals Ltd has the highest co-efficient of variance of P/E ratio of 54.82
percent. The Sun Pharmaceutical Industries Ltd. has the lowest co-efficient variance of P/E ratio of 14.20
percent and it is found that there is a consistency in P/E ratio than the other Pharmaceutical Companies.
Table 5 reveals the Tobin‟Q ratio of selected Pharmaceutical Companies in India from 2010-2011 to
2019-2020. This Tobin‟Q ratio shows a fluctuating trend during the study period. The Alkem Laboratories Ltd.
has the highest average Tobin‟Q ratio of 43.46 per cent and the Torrent Pharmaceuticals Ltd has the lowest
average Tobin‟Q ratio of 2.05 percent. High value of Tobin‟s Q motivates firms to inject more funds into the
business since its indicated that the funds invested yield much return compared to the cost paid in relation to
capital acquired.
TheAlkem Laboratories Ltd. has the highest standard deviation of Tobin‟Q ratio of 17.56 percent. The
torrent pharmaceutical Ltd. with lowest standard deviation of Tobin‟Q ratio of 0.43 per cent and it is found to be
stable in Tobin‟Q ratio. The cadila Healthcare Ltd has the highest co-efficient of variance of Tobin‟Q ratio of
131.06 percent. The Torrent Pharmaceutical Ltd. has the lowest co-efficient variance of Tobin‟Q ratio of 20.97
percent and it is found that there is a consistency in Tobin‟Q ratio than the other Pharmaceutical Companies.
Table.6: 10 years compounded Annual Growth rate (CAGR) for period 2010-11 to 2019-20
Company ROA ROE EPS P/E ratio Tobin’s Q
CAGR CAGR CAGR CAGR CAGR
Alkem Laboratories Ltd. 0.15% -0.97% 14.61% -1.38% -9.6%
Cadila Healthcare Ltd -10.4% -10.06% 8.30% -1.22% -30.16
Divi's Laboratories Ltd -1.2% -2.11 13.5% 5.85% 3.16%
Sun Pharmaceutical Industries Ltd. -8.06% -7.61% 7.8% -1.7% -10.72%
Torrent Pharmaceuticals Ltd. -3.6% -8.05% 13.21% 13.78% 0.74%
Table 6 explains financial performance variables compounded annual growth rate (CAGR) for the
period of 10 years. In case of 10 years ROA CAGR, Alkem Laboratories Ltd. ROA growth rate is more than
that of other companies and cadila Healthcare Ltd. ROA CAGR is very low because during the period return on
assets declines. For 10 years ROE CAGR, Alkem labs Ltd. is registered less negative growth rate with
comparison of other companies and Cadila Healthcare Ltd is registered more negative growth rate. The 10
yearsEPS CAGR of Alkem labs Ltd. is highest with comparison of other companies and lowest is cadila Health
Ltd. results in achievable growth rate. The 10 years P/E ratio CAGR of Divi‟s Laboratories Ltd. is highest with
comparison of other companies and lowest is sun Pharmaceutical industries Ltd. results in achievable growth
rate. The 10 years Tobin‟s Q ratio CAGR of Divi‟s Laboratories Ltd. is highest with comparison of other
companies and lowest is cadila Healthcare Ltd. results in achievable growth rate. Overall, the financial
performance of Alkem laboratories Ltd. is highest with comparison of other companies and lowest is cadila
Healthcare Ltd.
Table 7 represents the results of descriptive statistics of the dependent variable and independent
variables employed in the present study. The descriptive statistics revealed by minimum, maximum, mean,
standard deviation, Skewness and Kurtosis. Owing to high variability in the values, variables such as financial
planning variable, EPS,P/E ratio and ROE have high mean and standard deviation values.
Table 8 depicts results of correlation analysis of select pharma companies. The Financialplanning
Variable shows a significant positive relationship withROE(0.301),ROE(0.452), EPS(0.351), P/E ratio(0.353)
and Tobin‟s Q ratio(0.325). This demonstrates that an increase in effectiveness of Financial planning would
increasein overall Financial performance of the pharmaceutical companies and vice-verse.
Table -9: Regression analysis results of Financial planning and Financial performance
Dependent & Independent variable R- coefficient std.error t-value p-value
squared
ROA FP 0.432 0.301 0.01 -2.189 0.034*
ROEFP 0.302 0.452 0.02 -3.509 0.001*
EPSFP 0.452 0.251 0.03 -1.794 0.043*
P/E ratioFP 0.365 0.353 0.04 2.616 0.012*
Tobin's Q ratio FP 0.384 0.323 0.08 -2.368 0.022*
The study showed the statistical significance of the relationships between the dependent and the
independent variables which was measured at a confidence interval of 95%. The hypothesis is to determine the
impact of financial planning on financial performance. If the P value of the model was less than the level of
significance (0.05) then the independent variables would be taken as having an effect on the dependent variable.
The table.9 above shows the impact of financial planning on financial performance. Animprove in Financial
planning strategies like funding decisions, investment decisions and financial policies willmaximize the
financial performance. This shows the positiveimpactof financial planning on ROA of pharma companies. Also,
a unit increase in funding decisions will be improve ROA. This also shows the positiveimpact of financial
planning on ROE of pharma companies. A unit increase in financial policies decisions will be will improve EPS.
This indicates that there is the positive impact of financial planning on EPS of pharma companies. The P/E ratio
and Tobin‟s Q ratio also shows the positive impact of financial planning on Financial performance of pharma
companies. If the Funding decisions and investment decisions increases, then financial performance will be
increase. Even an existing concern may require Funding decisions, Investment decisions and implementing
Financial policies for making improvements or expanding the business and managing day to day affairs.
Given the coefficient of determination (R2) of the regression models are 43%,30%,45%,36% and38%, it
presumes that the independent variables incorporated into this model have been able to explain the variation of
financial performance. The study showed that Financial planning had a significant effect on financial
performance.
V. CONCLUSION
An essential purpose of financial planning is to assess the financial resources that will be required to
implement the programmes and activities to achieve the goals and targets of the plan, to ensure that funding is
available as and when needed, and to monitor the efficient use of resources and of progress towards reaching the
goals and targets. The processes employed in the allocation of resources serve as a means for dealing with
complex, competing objectives in a manner that ensures organizational success and growth. Prior to financial
planning and even during implementation there is need for management to acquire appropriate information on
the risk area and their nature so as to reliably assess levels of risk with full understanding of the organization
and its internal and external environment. The study therefore concludes that sound financial planning by the
pharma companies will lead to abetter financial performance as accountability is enhanced through all levels of
decision making. Financialplanning is an integral part of financial management which deals with the
management of a firm‟s funds with aview to maximizing profit and the wealth of shareholders.Overall, the
financial performance of Alkem laboratories Ltd. is highest with comparison of other companies and lowest is
cadila Healthcare Ltd.The analysis practically reveals that Financial planning have significant effect on the
ROA, ROE, EPS, P/E ratio, and Tobin‟s Q ratio of the selected pharmaceutical companies during the study
period.The study concluded that financial planning had a significant positive effect on financial performance.
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