FINANCIAL PLANNING

A QUOTE
• You have got to be careful if you don’t
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
can’t be avoided
2. Integration Effect

3. Evaluation of alternatives :INV. & FIN

4. Feasibility
 ELEMENTS OF FP
1. Sales Forecast
2. Economic Assumptions
3. Pro forma Statements
4. Asset Requirements
5. Financial Requirements
6. “Plug”
 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 Assets
SF FA
LT Loan Funds CA
CL & P -

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
• The FIVE factors
1 Projected Sales Growth
2 Initial FA utilisation or Excess
capacity situation
3 Capital Intensity
4 Profit Margin
5 Dividend Policy
 USES OF PROFORMA
STATEMENTS
- Assess : anticipated Performance Vs
General targets
- estimate the effect of proposed operating
changes, ‘what if’ analyses
- Forecast firm’s future financing needs
- Estimate future FCF which determines the
company’s 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