FINANCIAL FORECASTING FOR STRATEGIC GROWTH

Long-range planning is a means of systematically thinking about the future and anticipating possible
problems before they occur. Financial planning formulates the way in which financial goals are to be
achieved. It establishes guidelines for change and growth in a firm.

First dimension of the planning process: Planning Horizon

For planning purposes, it is often useful to think of the future as having a short run and a long-run. The
short-run planning, in practice, usually covers the coming 12 months while financial planning over the
long-run takes to be the coming two to five years.
Second dimension of the planning process: Level of Aggregation
Aggregation involves the determination of all of the individual projects together with the investment
required that the firm will undertake and adding up these investment proposals to determine the total
needed investment which is treated as one big project.

BENEFITS OF FINANCIAL PLANNING

1. It provides a rational way to develop, analyze and compare many different business scenarios;
various investment and financing options can be explored, and their impact on the firm's
shareholders can be evaluated.
2. It enables the proponents to show explicitly the linkages between investment proposals for the
different operating activities of the firm and its available financing choices.
3. Possible problems related to the proposal projects are identified actions to address them are
studied. Thus, one objective of financial planning is to avoid surprises and develop contingency
plans.
4. It verifies that the goals and plans made for specific areas of a firm's operations are feasible and
internally consistent. It also imposes a unified structure for reconciling goals and objectives
5. Directions that the firm would take are established, risks are calculated and educated
alternative courses of action are considered thoroughly.

FINANCIAL PLANNING MODELS

1. Economic Environment Assumption. The plan will have to state explicitly the economic
environment in which the firm expects to reside over the life of the plan, such as inflation rates,
level of interest rates and the firm's tax rate.
2. Sales Forecast. Planning will focus on projected future sales and the assets and financing
needed to support those sales, usually given as the growth rate in sales. Determinants of growth
rates are profit margin, dividend policy, financial policy, and total asset turnover.
3. Pro forma Statements. Planning makes projection of future statements: financial position,
income, cash flows, and stockholders’ equity.
4. Asset Requirement. The financial plan will describe projected capital spending.
5. Financial Requirements. The financial plan will include a section about the necessary financing
arrangements: dividend policy and debt policy.
6. Additional Funds Needed (AFN). The financial plan should determine the funds to be raised for
the expansion of its business.
AFN = Required increase in assets – spontaneous increase in liabilities – increase in retained earnings
Where: required increase in assets = change in sales x (present CA/present sales)
Spontaneous increase in liabilities = change in sales x (present CL/present sales)
Increase in retained earnings = earnings after taxes – dividend payment