WHAT IS FINANCAL PLANNING?

y The process of estimating the funds requirement of a

firm and determining the sources of funds is known as financial planning. y Financial Planning indicates a firm s growth, performance, investments and requirement of funds during a given period of time, usually three to five years. y It involves the preparation of projected profit and loss account, balance sheet and cash flow statement

FINANCIAL FORECASTING
y Financial forecasting is an integral part and basis of financial planning. y It uses past data to estimate the future financial requirements. y Forecast are merely estimates based on the past data. Historical performance may not occur in future. Planning means what a company would like to happen in the future and includes necessary action plans for realising the predetermined intentions. y A simple approach to financial forecasting is to relate the items of income statement and balance sheet to sales. This is called the percentage of sales method.

FINANCIAL FORECASTING
ySee sheets 1 - 3 on financial

forecasting for income statement, balance sheet and cash flow statement for Olufimo Nig. Ltd

CONTENTS OF FINANCIAL PLAN

y Projected balance sheet y Projected Income Statement y Projected cash flow statement y Description of planned capital expenditure y Description of amount needed and sources

TIME HORIZON
y LONG

TERM FINANCIAL PLANNING

3 to 5 years, typically 5 years

y SHORT TERM FINACIA PLANNING

12 months (i.e. a year)

STEPS INVOLVED IN FINANCIAL PLANNING

y Understanding the financial needs of the firm y Past performance: Analysis of the firm s past

performance to ascertain the relationship between variables and the firm s financial strengths and weaknesses y Operating characteristics : Analysis of the firm s operating characteristics-products, market, competition, production and marketing policies etc. To decide about its growth objective.

STEPS INVOLVED IN FINANCIAL PLANNING

y Investment needs: Determining the firm s

investment needs and choices, given its growth objectives

y Cash flow from operation: Forecasting the firm s

revenue and expenses and needs for funds based on its investment and dividend policies.

STEPS INVOLVED IN FINANCIAL PLANNING

y Financing alternatives: Analysing financial

alternatives within its financial policy and deciding the means of raising funds.
y Consequences of financial plans: Analysing the

consequences of its financial plans for the long term health and survival to firm.

WHAT IS FINANCIAL MODELLING?

y A financial model is designed to represent in mathematical

terms the relationships among variables of a financial problem so that it can be used to answer what if or make a projection. financial figures.

y A spreadsheet designed to facilitate analysis of a particular set of y It is important to know that different types of models serve

different purposes

y For this presentation, we are looking at:

FINANCIAL MODELLING
For this presentation, we are going to consider:
Financial Statement Model Business Valuation Model

FINANCIAL MODELLING
y Financial statement modelling involves modelling

all the three primary financial statements.

y These financial statements includes: the income

statement, the balance sheet and the statements of cash flows.

y Financial statement models always include a series

of financial indicators that can be used to make decisions

FINANCIAL MODELLING
y It is customary to prepare a number of sensitivity

tables to show how some of the projections (outputs of the model) will change with changes in the values of one or more inputs to the model, and a few scenarios to show what certain key financial indicators of the company may look under different circumstances in the future.

STEPS IN DEVELOPING FINANCIAL MODELS

y Understand the expected uses of the model and the

required outputs.

y Collect historical data y Understand the company s plan and develop

modelling assumptions around it.

y Build the model y Improve on the model based on feedback

SKILLS REQUIRED FOR FINANCIAL MODELING

Building a good model requires the combination of various skills: y Accounting y Corporate Finance y Industry knowledge y Excel y Attention to details

KEY FINANCIAL METRICS

y The ultimate purpose of the financial statement model

is to gain insight into a company s future performance by reasonably projecting important financial metrics and financial ratios.
y They include: sales, EBIT, net earnings (net profit),

net assets, net debt etc.

Example Modelling Financial Statement

y See sheet 1 -3 on financial statement

modelling

BUSINESS VALUATION
y Business valuation is the process which financial

analysts as well as other professionals use to arrive at the net worth of a business.
y It is important to note that different experts may arrive

at different values of the same because valuation depends heavily on assumptions made when professionals are applying basic methodologies.

VALUATION METHODS
There are three methods:
y The net asset basis y The earning or income basis (P/E ratio) y Discounted Cash-flow basis

THE NET ASSET BASIS OF VALUATION

y Some of its assumptions are as follows: y Value of a firm depends upon its ability to utilize its

resources both labour and capital in order to generate income or earnings. y The assets approach values a business at fair or open market value. y Fair value basis is regarded as the price at which an asset could be purchased in an arm s length transaction y A valuation on an open market value basis is the value of shares on the open market

EARNING/INCOME APPROACH
y The earning basis is pivoted on earnings Per share (EPS). y The method usually used is to take the last declared earning

figure before extraordinary items but after deducting tax, debenture interests and preference dividends to obtain the earnings attributable to ordinary shareholders from normal activities. out fluctuations in earnings.

y Sometimes, average earnings for five years may be used to even y The value of a firm is reflected in terms of the extent to which

the market capitalizes its earnings.

EARNING/INCOME APPROACH
y It is the price of each share as a multiple of the

earnings attributable to it.

y This relationship is known as the price earning (P/E)

ratio.
y It is calculated by dividing the current price of the

share by the company earnings per share

EARNING/INCOME APPROACH
y A high P/E ratio indicates that the market considers

that its earnings are likely to grow quickly

y A low P/E ratio indicates that earnings are expected to

stagnate in the future.

y The ratio represents the number of current years of

earnings (average earnings) it would take to earn the equivalent of its current price.

DISCOUNTED CASH-FLOW BASIS

y The Discounted Cash-flow

(DCF) method indicates the fair market value of a business based on the present value of the cash flows that the business can be expected to gene y rate.
y Such cash flows are discounted at a discount rate (cost of capital

or required rate of return) that reflects the time value of money.

y This method is based on estimating the free cash flows (FCF). y It is a valuation method used to estimate the attractiveness of an

investment opportunity from its potential to generate cash flows in the future.

DISCOUNTED CASH-FLOW BASIS

y Thus, discounted cash flow analysis uses future cash

flow for projections and discounts them to arrive at a present value. y The DCF value arrived at is then used to evaluate the potential for investment. y If the value arrived at through the DCF analysis is higher than the current cost of investment, the opportunity may be a good one.

DISCOUNTED CASH-FLOW BASIS

y See sheet 4 on Valuation of business

model using the discounted cash flow basis

THANK YOU