The Effect of Financial Planning on the Financial Performance of Automobile Firms in Kenya

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 purpose of financial planning is to determine where the firm has been, where it is now, and where it is going. It also determines deviations from the most likely outcome. Finance is concerned with the study of the problems involved in acquisition and use of funds by a business enterprise. Financial planning involves analyzing financial flows of a firm as a whole, forecasting the consequences of various investment, financing and dividend decisions and weighting the effects of various alternatives. Financial planning is the core of financial management. It helps management to avoid waste by furnishing policies and procedures which make possible a closer coordination between the various functions of the business. The design of the study is descriptive research method. In addition both qualitative and quantitative methods were applied in data collection and analysis. The descriptive design is found to be suitable because it addresses major objectives and research questions proposed in the study adequately. The study gathered primary data. Primary data was obtained through questionnaires to randomly selected employees from the selected companies. The use of questionnaires was recommended since it guaranteed confidentiality to the respondents thus they acted without any fear or embarrassment. The aim of this study was to find out whether financial planning has an impact on the financial performance of the firms in the automobile industry in Kenya. The results of the study indicated that the financial planning measures such as earnings before interest and tax and the capital employed which comprises of fixed assets and working capital had an impact on the financial performance of the firm measured by return on capital employed(ROCE). This implies that a percentage change in the financial planning measures will have an effect on the financial performance of a firm. This study showed that there is strong relationship between financial planning and financial performance of a firm. The success of any business depends on the manner the financial plans are formulated. Therefore, it can be concluded that financial planning has an effect on the financial performance of automobile companies in Kenya.