Planning

Planning starts with the mission statement of firm. Mission statement of Dr. Reddy’s
laboratories is “Providing affordable and innovative medicine for innovative life.”

After deciding on the mission statement set goals which are defined in quantitative
terms.

Form strategy which is a plan to gain competitive edge over rival firms.

To support the strategy policies and budgets are developed in various areas:

• Research and Development

• Production

• Marketing

• Personnel

• Finance

These get translated into financial plan

Financial Planning

Blueprint of what firm proposes to do in the future. Commonly a span period of five
years is taken.

Elements of Financial Planning

• Economic Assumption – Done to deal with uncertainty.

• Sales Forecast

• Pro Forma Statements

• Asset Requirements – To grow a firm needs to invest in plant and equipment

and working capital. With a financial plan the projected capital investments
and working capital requirements can be known over time.

• Financial Planning – Sources of financing for supporting the investment in

capital expenditure and working capital.

Various Types of Financial Planning

• Capital Budgeting Decision

• Working Capital Decision

 • Capital Structure Decision

• Dividend Decision

Advantages of Financial Planning

• Identifies the advance actions to be taken in various areas

• Seeks to develop a number of options in various areas that can be exercised

under different conditions.

• Facilitates a systematic exploration of interaction between investment and

financing decisions

• Clarifies the links between present and future decisions

• Forecasts what is likely to happen and hence avoid surprises.

• Ensures that the strategic plan of the firm is financially viable.

• Provides benchmarks against which future performance maybe measured.

Financial Forecasting

Financial manager prepares pro forma or projected financial statements.

Sales Forecast

Although the financial manager may be a part of the process of developing the
sales forecast but the primary responsibility is for the marketing department or the
planning group.

Types of Sales Forecast

• Sales forecast for 3-5 years is mainly to aid investment planning

• Sales forecast for 1-2 years for financial forecasting

• Sales forecast for short durations like 6 months, 3 months is for facilitating
working capital planning and cash budgeting

Methods of Sales Forecasting

• Quantitative techniques – Rely essentially on the judgment of experts to

translate qualitative information to quantitative estimates.

• Time Series Projection Method – Forecasts on the basis of past behavior of

sales in a time series.
 • Casual Methods – Forecast based on cause-effect relationships expressed in
an explicit and quantitative manner.

Pro Forma Profit and Loss Account

• Percent of Sales method

• Budgeted Expense Method – Estimates the value of each item on the basis of
expected development in the future period. This method requires greater
effort because the management has to define the likely developments
properly.

Pro Forma Balance Sheet

• Employ percent of sales method except on ‘investment’ and ‘miscellaneous

expenditure and losses’

• If any specific information is given for ‘investment’ and ‘miscellaneous

expenditure and losses’ then use it to estimate the values of ‘investment’
and ‘miscellaneous expenditure and losses’

• Use percent of sales method to derive the projected values of current

liabilities and provisions.

• The projected value of reserve and surplus is the addition of projected

retained earnings to the reserves and surplus figure of previous year

• Equity and preference capital are tentatively equal to their previous values.

• Compare the total assets with the total liabilities. If the total assets increase
the total liabilities then it represents the external funds required. If the total
liabilities increase the total assets then it represents surplus funds available.

Problem with preparing Pro Forma Statements

• Circularity Problem – This problem arises because balance sheet and profit
and loss account are interrelated. The pro forma balance sheet cannot be
 prepared unless pro forma profit and loss account is not prepared because
the amount of retained earnings from pro forma profit and loss account is to
be carried to the balance sheet. Again without the balance sheet we cannot
determine the interest expense associated with the amount of external
financing which is required by pro forma profit and loss account.

External Fund Raising Formula

Forecasting Errors and Excess Assets