Question

Question 7 After completing your MBA, three friends who knew ds who knew you did a course in financial planning came to you with some issues as follows: 2. The first of them, Jones Kugblenu. He told you he had been billed for a jo for the position of a financial planner. He wants you to explain the following to nie d you he had been billed for a job interview him prepare: i. The relevance of financial planning The functions of a financial planner ii. The short, medium and long term modes of financial planning iv. The financial questions to ask before undertaking an investing v. The qualities of a good financial information. The second friend, Kwesi Koomson, is in Ghana, married to Djifa and they have one whild They are living in a three-bed-room apartment. He told you he is facing financial challenges. When you went through his diary, you found the following: . Rent in arrears for three months - (Ghc2,000) per month; • Loan from GCB, Ghc100,000 - Ghc1,250 to be paid per month (2 months defaulted) • Loan from the office Credit Union Ghc20,000 - Ghc1,000 deducted monthly Unpaid fees for the first term - Ghc5,200 Debt on various gadgets bought on credit by Djifa, Ghc6,000 Suggest any FOUR areas you would touch to help Kwesi Koomson come out of financial pressure

Answer 1

7a(i)

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.

(ii) A financial advisor can help individuals or companies meet their financial objectives, as follows.

Individuals

In the case of an individual, a financial advisor can provide insight into how they can save more and build their wealth. This is often done by constructing a portfolio of investments that are well suited to the client’s risk attitude. Some clients are more willing to take on risk if the prospect of a potential greater reward is more compelling to them than the prospect of potentially losing money.

Conversely, there are also clients who are more risk-averse, and that would like a lower-risk portfolio, even if it means potentially lower returns.

Determining an individual’s risk attitude may be difficult since an individual’s risk attitude can depend on a great number of factors. Thus, a financial advisor may ask about things like the individual’s age, income, marital status, indebtedness, or savings in order to gather a solid understanding of their client.

Companies

In the case of companies, financial advisors can help provide a second, neutral perspective on corporate development projects. For instance, if a company is considering expanding its operations by building a new factory, financial advisors can help assess the profitability of the project independently.

Once the advisor’s assessment is concluded, they can present their findings to the company’s management with the goal that their analysis will provide the company’s leadership with a valuable second opinion.

(iii)There are three modes of financial plans, viz.,

Short-term financial plan is prepared for maximum one year. This plan looks after the working capital needs of the company.

Medium-term financial plan is prepared for a period of one to five years. This plan looks after replacement and maintenance of assets, research and development, etc.

Long-term financial plan is prepared for a period of more than five years. It looks after the long-term financial objectives of the company, its capital structure, expansion activities, etc.

(iv)

1. What is my investment goal?

The most important question to consider before making any investment is, “What am I trying to accomplish?” Your investments will differ vastly if, for example, you are trying to save money for retirement versus trying to save money for a down payment on a house. So, ask yourself, “Is this investment likely to help me meet my goal?”

2. What is my risk tolerance?

If your investment goal is to make as much money as possible and you can tolerate any risk, then you should “invest” in the Spanish Christmas Lottery. Investing in lotteries, however, almost guarantees you will not reach your investment goal. There are investments for every level of risk tolerance.

3. What happens if this investment goes to zero?

Of the original stocks in the Dow Jones index in 1896, only General Electric is still a going concern–something to think about if you’re a long-term “buy and hold” investor. The other eleven firms in the original index have either gone bankrupt or have been swallowed up. There is a real possibility that any investment you make could go to zero while you own it. Ask yourself, “Will I be financially devastated if this investment goes to zero?” If the answer is yes, don’t make that investment.

4. What is my investment time frame?

In general, the longer your investment time frame, the more risk you can accept in your investment portfolio because you have more time to recover from a mistake. Also, if you’re saving for retirement and you’re decades away from retiring, investing in something illiquid (like a rental property) may make sense. But if you may need the money within the next couple of years, your investment should be liquid (stocks, bonds, CDs). Ask yourself, “Does this investment make sense from a timing point of view?”

5. When and why will I sell this investment?

If you know why you are investing in something, you should have a pretty good idea of when you are going to sell it. If you bought a stock because you were expecting 20 percent revenue growth per year, you should plan on selling the stock if revenue growth doesn’t meet your expectations. If you bought a stock because you liked the dividend yield, sell the stock if the dividend yield falls.

6. Who am I investing with?

It is very difficult to judge the character and ability of anyone based on a two-paragraph description available in a company’s annual report or a mutual fund prospectus. No one looked better on paper than Bernard Madoff (of the $50 billion Ponzi scheme). But you should at least know with whom you are trusting your money. Things to look for are long successful track records and compensation schemes that reward investors.

7. Am I diversified?

Most people should have diversified investments. For example, buying ten different high-technology companies does not constitute diversification. In addition, your largest asset (unless you are close to retirement) is probably not your house, but the present value of your future paychecks. It is unwise to have investments that will likely drop at the same time that your salary is disappearing. Consider this: “If I am unemployed next year, where will this investment be?”

8. Do I have special knowledge?

Peter Lynch, famous for managing the Fidelity Magellan Fund, thinks that ordinary people have a huge advantage over investment professionals in fields where they work because no investment professional will ever know more about an industry than someone who works in it. Ask yourself, “Am I investing in something I know something about, or am I investing in something that two college professors at Yale know something about?”

9. Why do I still own that investment?

It is a good idea to periodically look through your investment portfolio to make sure you still want to own your investments. Selling an investment for a loss or selling a big winner is very difficult. But the biggest difference between amateur and professional investors is that professional investors don’t have emotional entanglements with their investments and can divest themselves of an investment without kicking themselves if the investment continues to gain value.

10. Should I be managing my own investments?

(v)  qualities of good financial information:

Comparability – it should be possible to compare an entity over time and with similar information about other entities.

Verifiability – if information can be verified (e.g. through an audit) this provides assurance to the users that it is both credible and reliable.

Timeliness – information should be provided to users within a timescale suitable for their decision making purposes.

Understandability – information should be understandable to those that might want to review and use it. This can be facilitated through appropriate classification, characterisation and presentation of information.