CHAPTER 4 -

LAGUNA, SWEETBABES
PLAZA, KIM ERIKA T.
SOTEROL, SHARRIZ R.
4-1 Strategic Planning
Key Elements of Strategic Planning
Mission Statement - a condensed version of a firm's
strategic plan.
Corporate Scope - defines a firm's lines of business and
geographic areas of operation.
Statement of Corporate Objectives - set forth specific goals
to guide management.
Key Elements of Strategic Planning
• Corporate Strategies - broad approaches developed for
achieving a firm's goals.
• Operating Plan - provides management with detailed
implementation guidance based on the corporate strategy
to help meet the corporate objectives.
• Financial Plan - the document that includes assumptions,
projected financial statements, and projected ratios and
ties the entire planning process together.
4 Steps of Financial Planning
1. Assumptions are made about the future levels of sales,
costs, and interest rates for use in the forecast.
2. A set of financial statements is developed.
3. Projected ratios are calculated and analyzed.
4. The entire plan is re-examined, the assumptions are
reviewed, and the management team considers how
additional changes in operations might improve results.
4-2 The Sales Forecast
Sales forecasting is the process of estimating future sales.
4-3 The AFN Equation
Firms Primary Capital Resources
• Spontaneous Increases in Accounts Payable and
Accruals
• Addition to Retained Earnings
• AFN: Additional Funds Needed
4-3 The AFN Equation
• The AFN equation ( Additional Funds Needed) it is the
amount of external capital (interest-bearing debt and
preferred and common stock) needed to acquire the
needed assets.
• The AFN Equation shows the relationship of external
funds needed by a firm to its projected increase in assets,
the spontaneous increase in liabilities and its increase in
retained earnings.
4-3 The AFN Equation
• Additional funds needed or AFN =Projected Increase in
assets - Spontaneous increase in liabilities - Increase in
retained earnings
Excess Capacity Adjustments
• The AFN equation includes capital intensity ration. Capital
intensity ration is the assets required per dollar of sales.
• Excess capacity Adjustments - changes made to the
existing asset forecast because the firm is not operating
at full capacity.
• Forecasted Financial Statements- Financial statements
that project the company's financial position and
performance over a period of years.
Formulas
• Full capacity sales= actuals sales/ percentage of capacity
at which fixed assets were operated
• Target fixed assets /sales= Actual sales/Full capacity
sales
• Required level of fixed assets= (Target
Sales/Sales)(Projected sales)
Forecasting Financial Statements
- is a critical component of a company's predictive
accounting system.
- it involves forecasting the future financial performance of
the company.
Pro-forma Statement
- a type of financial document used to forecast a company's
future financial performance.
Percent of sales method
• Percent of sales method
• a basic method used to forecast financial statement.
• estimate sales for the upcoming year by analyzing the
growth in sales over the previous years.
• Fluctuation in sales for a company may depend on the
season, the current state of the economy, or the specific
industry.
 Example
• Changing trends
• Monthly Fluctuations
• Cyclical Industry
• Forecast retained earnings that represent a cumulative
account that increases annually by way of net income and
decreases by way of dividends paid. Your retained
earnings reflect your company’s profitability and dividend
policy (how dividends will be distributed) in relation to net
income.
• Fixed asset accounts that typically do not vary directly
with sales and may remain at a constant amount but can
change during some years unrelated to sales volume.
 Regression Analysis for Forecast
Improvement
• Regression Analysis is a causal / econometric forecasting
method that is widely used for prediction and forecasting
improvement.
• Some forecasting methods are based on the assumption
that it is possible to identify underlying factors that might
influence a variable that is being forecast.
4-6 Analyzing the effects of Changing Ratios
Modifying Accounts Receivable
In Table 4-2, Allied's DSO is projected to be 40.15 days
versus an industry average 36 days. Its sales per day are
projected to be $3,300/365 = $9.04 million. If allied could
operate at the industry-average DSO, its receivables would
reduce by
Receivables at 40.15 days = 40.15($9.04) = $363M
Receivables at 36.00 days = 36.00($9.04) = $325.5M
Receivables reduction = Additional 2009 FCF = $ 37.5m
Modifying Inventories
• Inventories can be analyzed in a similar manner. First,
note that Allied's forecast inventory turnover is 5.26 times
versus 10.9 times for the industry. Moreover, in Table 4-2,
Allied's forecasted 2009 inventory is $627 million versus
$3,300 million of sales. Given this information, we can find
Allied's inventories if Allied is able to achieve the industry-
average inventory turnover.