Financial Planning and Forecasting

          A financial plan is a statement of what is to be done in the future. Many decisions

took too long to implement. This requires that decisions be made far in advance of their
implementation.

To develop an explicit financial plan, managers must establish certain basic elements of
the firm's financial policy:
1. The firm's needed investment in new assets - this is a result of the firm's capital
budgeting decisions as discussed in Module 1 Lesson 1.
2. The degree of financial leverage the firm chooses to employ - this is the firm's
capital structure policy.  Some firms prefer to be unlevered (0% debt, 100% equity) and
some firms  choose to be levered (with debt) to gain more access to funds. Firms
decide on the degree of financial leverage (e.g. it may be 20% debt and 80% equity, or
50% debt and 50% equity, etc.) and this decision will of course, affect the firm's financial
policy.
3.  The amount of cash the firm this is necessary to pay shareholders - this is the
firm's dividend policy
 4. The amount of liquidity and working capital the firm needs on an ongoing
basis - this is the firm's net working capital decision
The decisions a firm makes in these four areas will directly affect its future profitability,
need for external financing and opportunities for growth. Thus, a firm's investment and
financing decisions interact and cannot be considered in isolation from one another.