FINANCIAL PLANNING

A QUOTE
You have got to be careful if you dont know where you are going, because you might not get there - Yogi Berra

Of Mission , Goals etc.,

Mission Statement Strategic Plan Corporate Objectives Corporate Strategies Operating Plans Financial Plan

What is FINANCIAL PLANNING?

A Process of : -analysing the financing and investment choices
open to the firm -Projecting the future consequences of present decisions -deciding which alternatives to undertake -measuring performance against the goals set in the Financial plan

What is

(continued)

Van Horne : FP involves analysing financial flows of a company .It includes forecasting the consequences of various investment, financing and dividend decisions and weighting the effects of various alternatives

. continued
Ross, Westerfield and Jaffe : FP establishes guidelines for change Guidelines include: 1. identification of Fin. Goals 2. Differences between goals and current financial status 3. statement of actions needed

Contents of a Financial Plan

Pro forma Balance sheet Pro forma Income Statement Pro forma Statement of Sources and Uses of Cash Description of planned Capital expenditure Description of why these amounts are needed and strategies to be used

Time Horizon
Long Term FP 3 to 5 years, but typically 5 years Could vary across companies Short Term FP Next 12 months

Why do we need FP ?
1.Help

FM to avoid surprises Help Fm to handle those surprises that cant be avoided 2. Integration Effect 3. Evaluation of alternatives :INV. & FIN 4. Feasibility

ELEMENTS OF
1. 2. 3. 4. 5. 6. Sales Forecast Economic Assumptions Pro forma Statements Asset Requirements Financial Requirements Plug

FP

Steps in FP process
1 Project the Financial Statements 2 Determine the Funds Needed 3 Forecast the Fund Availability 4 Establish System of Controls 5 Feed Back Loop- A Procedure to adjust the basic plan 6 Performance Based Mgt. Compensation System

Balance Sheet Model Helps

Liabilities SF LT Loan Funds CL & P Assets FA CA -

Sales Increase

affects Therefore any asset side increase must be met through either a. equity increase , Or b.LT Debt increase , Or c. A combination of both PLUG

Forecasting Methods
-Percentage of Sales Method -Simple linear regression -Curvilinear regression -Multiple regression -Other methods: Baumol, EOQ, Payments pattern approach, capital budgeting

External Funds Needed

1
2

3 4

The FIVE factors Projected Sales Growth Initial FA utilisation or Excess capacity situation Capital Intensity Profit Margin Dividend Policy

USES OF PROFORMA STATEMENTS

- Assess : anticipated Performance Vs General targets - estimate the effect of proposed operating changes, what if analyses - Forecast firms future financing needs - Estimate future FCF which determines the companys overall value

Uses
- used by existing and prospective lenders - enables preparation of Pro forma Cash flow statement - adjustments in planned operations, credit policy etc., Weaknesses -Past vs. Future - Variables are forced to take Desired values

Problems of Percent of Sales Method

Assumption of Constant Ratios does not work in three situations : -economies of scale -Lumpy assets -Cyclical or seasonal changes