CHAPTER 3

Financial Statements Analysis and Financial Models

1/ Financial Statements Analysis

The goal is to expand your understanding of the uses of financial statement information. The
accountant has to report financial information to the user in a form useful for decision making.
A. An internal and external financial analysis
 Purpose of internal financial analysis :
o Evaluate the performance of employees to determine pay raises and bonuses.
o Compare the performance of different divisions.
o Prepare financial projections (e.g. for the launch of a new product).
o Evaluate the firm’s financial performance in light of its competitors’ performance and
determine how to improve the firm’s own operations.
 External financial analysis is done by :
o Banks and other lenders decide to lend money.
o Suppliers deciding to grant credit.
o Credit-rating agencies determining credit worthiness.
o Professional analysts who work for investment companies deciding to invest in the company
o Individual investors deciding to invest in the company.
B. Standardizing statements
A problem of comparing company’s financial statement to those of similar companies is :
differences in size and currency.
To start making comparisons, one thing can try to do is to standardize the financial statements. The
“common-size statements” is one of the common ways of doing and it is to work with percentages
instead of total dollars.
C. Common-size statements
 Common-size balance sheets
+ Compute all accounts as a percent of total assets and total liabilities and owners’ equity
+ The total change has to be zero because the beginning and ending numbers must add up to 100%
+ We can know how good liquidity is by measuring current assets compared to current liabilities.
Profit
+ Return = Asset
+ Preparing a common-size balance sheet: divide each entry in the balance sheet by total assets.
 Common-size income statements
+ Compute all items as a percent of sales.
+ We can know what happens to each dollar in sales
+ In compar, a company’s main competitors can see how the company stacks up in terms of cost
control.
+ Preparing a common-size income statement: divide each entry in the income statement by sales.
D. 2 Types of common-size analysis
 Vertical common-size analysis: Compisonute all account as a percent of total assets or sales as
the respective every year and the total is the same 100% for all years.
 Horizontal common-size analysis: Using one year as the base year
 E. Some commonly used measures of earnings in the income statement
 Net Income is a total revenue minus total expenses. It reflects differences in a firm’s capital
structure and taxes as well as operating income. → Shareholders will look at net income because
dividend payout and retained earnings are closely linked to net income
 EPS = Net income / The number of shares outstanding (Earnings Per Share). It expresses net
income on a per share basis.
 EBIT = Earnings Before Interest expense and Taxes ( income from operations) : is income
before unusual items, discontinued operations or extraordinary items. → Analysts like EBIT
because it abstracts from differences in earnings from a firm’s capital structure(interest expense)
and taxes
 EBITDA is Earnings Before Interest expense, Taxes, Depreciation and Amortization.
EBITDA = EBIT + Depreciation and amortization. It adds back noncash expenses and does not
include taxes or interest expense
Amortization refers to a noncash expense and it applies to an intangible asset’s cost but it does not
refer to the payment of debt. → Analysts use EBITDA because it adds back two noncash items
(depreciation and amortization) to EBIT and thus is a better measure of before-tax operating cash
flow
NOTE: Sometimes these measures of earnings are preceded by the letters LTM ( Last Twelve
Months). LTM is the same as TTM, meaning Trailing Twelve Months.

2/ Financial ratios
A. The use of financial ratios is compare and investigate the relationships between different
pieces of financial information on the income statement and balance sheet
− Calculating and comparing financial ratios is another way of avoiding the problems in
comparing companies of different sizes.
− One problem with ratios is that different people and sources frequently don’t compute them
in exactly the same way. This leads to much confusion.
− If you are using ratios as tools for analysis, you should be careful to document how you
calculate each one and if you are comparing your numbers to those of another source, be sure you
know how their numbers are computed.
B. A given ratio is generally compared to:
1. Ratios from previous years.
2. Ratios of other firms in the same industry
C. 5 Categories financial ratio
 Short-term solvency or liquidity measures
− It provides information about a firm’s liquidity. The primary concern is the firm’s ability to pay
its short-run bills on time.
− These ratios focus on current assets and current liabilities
− One advantage of looking at the ratios is that book values and market values of current assets
and liabilities are likely to be similar. Often, these assets and liabilities just don’t live long enough
for the two to get seriously out of step. Current assets and liabilities can and do change fairly
rapidly, so today’s amounts may not be a reliable guide to the future.
− Short-term creditors are interested in liquidity ratios
 Current assets
 Current ratio = Current liabilities ( a measure of short-term liquidity )
→ Having “current ratio” in current assets to pay every $1 current liabilities

+ Current ratio < 1 : Net Working Capital is negative.

+ Current ratio ≥ 1 : Net Working Capital is positive
Low current ratio may not be a bad sign for a company if it has a large reserve of untapped
borrowing power.
Current assets – Inventory
 Quick Ratio = Current liabilities
(further evaluating liquidity)
→ Having “quick ratio” in current assets without inventory to pay every $1 in current liabilities
- Inventory is often the least liquid current asset. This is reason why the book values are least
reliable as measures of market value because the quality of the inventory isn’t considered . Some
of the inventory may later turn out to be damaged, obsolete, or lost.
- Relatively large inventories are often a sign of short-term trouble. The firm may have
overestimated sales and overbought or overproduced as a result.
Cash
 Cash Ratio = Current liabilities (the most liquid evaluating)
→ Having “cash ratio” in current assets to pay every $1 in current liabilities for a very short-term creditor
 Long-term solvency / financial leverage ratios / capital structure
Leverage ratios address the firm’s long-run ability to meet its obligations and financial leverage.
They measure of long-term solvency.
These ratios refers to the way a firm finances its assets, using a combination of debt and equity.
Total assets−Total equity Total debt
 Total Debt Ratio = Total assets = Total assets
→ Having “total debt ratio” in debt for every $1 in assets
- The total debt ratio takes into account all debts of all maturities to all creditors.
- It depends on whether capital structure matters
- Coverage Ratios: measures the firm’s financial leverage (the ability to service its debt or repay
the interest on debt).
- Two useful variations on the total debt ratio:
 Debt–equity ratio = Total debt/Total equity
 Equity multiplier = Total assets/Total equity = 1+ Debt–equity ratio
- With given any one of these three ratios, you can immediately calculate the other two, so they all
say exactly the same thing.
EBIT
 Times Interest Earned = Interest (Interest Coverage Ratio)
→ With every $1 from EBIT, a company will have “time interest earned” dola to cover interest
This ratio measures how well a company has its interest obligations covered.
EBIT + Depreciation∧amortization EBITDA
 Cash Coverage = Interest = Interest
→ With every $1 from EBITDA, a company will have “cash coverage” dola cash to cover interest
- This is really a measure of cash available to pay interest. Because interest is most definitely a
cash outflow to creditors.
- It is a basic measure of the firm’s ability to generate cash from operations and it is frequently
used as a measure of cash flow available to meet financial obligations.
- Another long-term solvency measure in financial statement analysis is: Interest bearing debt /
EBITDA
 Asset management efficiency ratios or turnover measures
Asset management efficiency ratios measure a firm’s effectiveness in utilizing its assets to
generate sales.
They are referred to as turnover ratios as they reflect the number of times a particular asset account
balance turns over during a year.
1. Inventory
Cost of goods sold
 Inventory Turnover = Inventory
(How efficient a company manage inventory)
→ A company sold off or turned over the entire inventory “inventory turnover” times during the year
As long as we are not running out of stock and thereby forgoing sales, the higher this ratio is the
more efficiently we are managing inventory.
365 days
 Days’ sales in inventory = Inventory turnover
(How long it took company to turn inventory over on average)
→ Inventory after buying sits “days” sales in inventory” days on average before it is sold
2. Receivables
Sales
 Receivables Turnover = Accounts receivable (How fast we can sell products)
→ Collecting our outstanding credit accounts and lent the money again “receivables turnover” times
during the year
365 days
 Days’ sales in receivables = Receivables turnover (How fast we collect on those sales)
→ Receiving credit sales or revenue after “days” sales in receivables” days from the date of sale
- It is frequently called the average collection period (ACP)
- We can also say that we have these days’ worth of sales currently uncollected
3. Total Asset Turnover represents the amount of sales generated per dollar invested in firm’s
assets
Total asset turnover is a measure of the firm’s asset use efficiency (how well it manages its assets )
Sales
Total asset turnover = Total assets
→ For every dollar in assets, a company generate “total asset turnover” in sales
4. Capital intensity ratio represents the number of assets that need to be invested in the firm to
generate 1 dollar in sales
Total assets
Capital intensity = Sales
It tells us the amount of assets needed to generate $1 in sales
 Profitability ratios
The three types of measures in this section are probably the best-known and most widely used of
all financial ratios.
Profitability ratios address a question: Has the firm earned adequate returns on its investments?
They measure 2 things:
+ The firm’s profit margins to predict the ability to control expenses
+ The firm’s rate of return on investments
  Profit Margin
Margins are very different for different industries.
Profit margin is a measure of the firm’s operating efficiency ( how well it controls costs )
Net income
 Profit Margin = Sales
→ Generating ≤ “profit margin” dollar in net income for every dollar in sales.
It measures how much income is generated from each dollar of sales after adjusting for all
expenses (refering how well a company controll debt)
 EBITDA Margin = EBITDA / Sales
The EBITDA margin is more directly at operating cash flows than does net income and does not
include the effect of capital structure or taxes
A relatively high margin is obviously desirable. This situation corresponds to low expense ratios
relative to sales
Lowering our sales price will usually increase unit volume but will normally cause margins to
shrink. Total profit operating cash flow may go up or down, so the fact that margins are smaller
isn’t necessarily bad.
 Gross Profit Margin = (Sales – COGS) / Sales
Measuring how well the firm’s management controls its expenses to generate profits.
 Operating Profit Margin = EBIT / Sales
Measuring how much profit is generated from each dollar of sales after accounting for both costs
of goods sold and operating expenses.
Net Income
 Return on Assets (ROA) = Total Assets
→ With every dola in asset, a company will create “ROA” in income
ROA is a measure of profit per dollar of assets
Net Income
 Return on Equity (ROE) = Total Equity (return on net worth)
→ With every dola in equity, a company will create “ROE” in income
ROE is a measure of profit per dollar of equity (considering how the stockholders fared during the
year)
NOTE:
-ROA and ROE are such commonly cited numbers so we they are accounting rates of return. These
measures should properly be called return on book assets and return on book equity.
-ROE exceeds ROA reflects company’s use of financial leverage
 Market value ratios
Market value measures which relate the market price per share of the stock, is based in part on
information not necessarily contained in financial statements.
These measures can be calculated directly only for publicly traded companies.
Price per share
 Price–Earnings Ratio (PE ratio) = Earnings per share
→ Company shares sell for “PE ratio” times earnings
- PE ratio measures how much investors are willing to pay per dollar of current earnings
- Higher PE ratio is often taken to mean that the firm has significant prospects for future growth.
However when a firm has no or almost no earnings, its PE would probably be quite large so care is
needed in interpreting this ratio.
 Market value per share
 Market-to-Book Ratio = Book value per share
The market-to-book ratio compares the market value of the firm’s investments to their cost.
A value less than 1 could mean that the firm has not been successful overall in creating value for
its stockholders and vice versa.
Market value per share is the price fluctuating in the market.
Book value per share is total equity divided by the number of shares outstanding. That reflects
historical costs
 Market Capitalization = Market price per share × shares outstanding
→ A buyer of all of the outstanding shares of the firm (in a merger or acquisition) would need to come
up with at least “Market Capitalization” plus a premium
 Enterprise Value (EV) = Market capitalization + Market value of interest-bearing debt −
Cash
- EV measures the firm value that is closely related to market capitalization.
- We know the market capitalization of the firm and we can also know the market value of its
outstanding interest-bearing debt by using the book value of outstanding interest-bearing debt less
cash on hand as an approximation.
- The purpose of the EV measure is to better estimate how much it would take to buy all of the
outstanding stock of a firm and also to pay off the debt.
- The adjustment for cash is to recognize that the cash could be used immediately to buy back debt
or pay a dividend.
EV
 Enterprise Value Multiples = EBITDA (EV multiples or valuation multiples)
- Financial analysts use valuation multiples based on a firm’s enterprise value when the goal is to
estimate the value of the firm’s total business rather than just focusing on the value of its equity.
- It makes comparison of one firm with another when there are differences in interest expense,
taxes and capital spending. The multiple is not directly affected by these differences.
- The higher EV multiples is the higher the growth opportunities a firm has.
D. Using financial statements
Ratios are not very helpful by themselves. They need to be compared to something
 Time-Trend Analysis: Used to see how the firm’s performance is changing through time
 Peer Group Analysis: Compare to similar companies or within industries

3/ The DuPont Identity

The DuPont identity illustrate the relationship between ROA and ROE measures by investigating a
famous way of decomposing ROE into its component parts .
A. A closer look at ROE
 The relationship between ROE and ROA
ROE = ROA × Equity multiplier = ROA × (1 + Debt-equity ratio)
 DuPont identity:
ROE = Profit margin × Total asset turnover × Equity multiplier
Net income Sales Assets
= Sales
× Assets
× Total equity
 ROE is affected by three things:
 Operating efficiency (as measured by profit margin).
 Asset use efficiency (as measured by total asset turnover).
 Financial leverage (as measured by the equity multiplier).
 The changes of ROE
+ Weakness in operating or asset use efficiency or both will show up in a diminished return on
assets, which will translate into a lower ROE.
+ ROE could be leveraged up by increasing the amount of debt in the firm. However, increasing
debt also increases interest expense, which reduces profit margins and lead to reduce ROE.
+ The use of debt financing has many effects and the amount of leverage a firm uses is governed
by its capital structure policy.
+ The big difference in ROE between the two firms can be attributed to the difference in profit
margins. Operating efficiencies can come from higher volumes, higher prices, and lower costs
B. Potential problems with financial statement analysis
 There is no underlying theory to easily identify which quantities to look at and to guide us in
establishing benchmarks, so there is no way to know which ratios are most relevant. Because little
guidance in making judgments about value and risk with financial statements
 Benchmarking is difficult for diversified firms.
- Diversified firms are conglomerates owning more or less unrelated lines of business. The consolidated
financial statements for such firms don’t really fit any neat industry category
- The firms are strictly in the same line of business, the industry is competitive, and there is only one way
of operating.
 Globalization and international competition makes comparison more difficult because of
differences in accounting regulations.
 Firms around the globe use varying accounting procedures. That makes it difficult to
compare financial statements across national border
 Profitability is strongly affected by the regulatory environment and operating activities, so
utilities in different locations can be similar but show different profits.
- Level and nature of competition (monopolies, oligopoly,…)
- Many have stockholders and many are organized as cooperatives with no stockholders
- There are several different ways of operating business activities and variety of rules in many locations
 Firms have different fiscal years.
 Extraordinary, transient and unexpected events may affect financial performance

4/ Financial Models
Financial planning is another important use of financial statements.
In the meaning of “pro forma”, financial statements are the form we use to summarize the projected future
financial status of a company
Financial Model depends on an investment decision
A. The 4 most important factors in finance
 Investment in new assets – determined by capital budgeting decisions
 Degree of financial leverage – determined by capital structure decisions
 Cash paid to shareholders – determined by dividend policy decisions
 Liquidity requirements – determined by net working capital decisions
B. Financial Planning Ingredients
− Sales Forecast : many cash flows depend directly on the level of sales (often estimate sales
growth rate)
− Pro Forma Statements : setting up the plan as projected (pro forma) financial statements
allows for consistency and ease of interpretation 
− Asset Requirements : the additional assets that will be required to meet sales projections
− Financial Requirements : the amount of financing needed to pay for the required assets
− Plug Variable – determined by management decisions about what type of financing will be
used (makes the balance sheet balance)
− Economic Assumptions are assumptions about the coming economic environment
C. A simple financial planning model
 The relationship between sales and the components of the financial statements
Variables of the financial planning tied directly to sales. Relationships between them are optimal.
All items that is propositional to sales will grow at exactly the same rate as sales.
(example: sales increase by 20 percent, planners would then forecast a 20 percent increase in costs and
all variables will grow by 20 percent in the pro forma balance sheet)
 Factors that cause a change in the income statement and balance sheet
Sales change → Cost change → Projected = Original ×(1+ Increase%)
As sales increase, so do total assets. This occurs because the firm must invest in net working
capital and fixed assets to support higher sales levels. When assets are growing, total liabilities
and equity, will grow as well.
The way liabilities and owners’ equity change depends on the financing policy and dividend
policy.
The growth in assets requires that the firm decide on how to finance that growth. This is strictly a
managerial decision → The firm needed no outside funds.
EXAMPLE:
The interaction between sales growth and financial policy
In this case, debt is the plug variable used to balance projected total assets and liabilities.

D. The percentage of sales approach

 An extended version of our simple model
Some items in the income statement and balance sheet vary directly with sales, others do not.
The financial planning model is based on the percentage of sales approach.
Our goal is to develop a quick and practical way of generating pro forma statements.
 The Income Statement
The profit margin :
+ If costs vary directly with sales, the profit margin will be constant
+ If depreciation and interest expense may not vary directly with sales, the profit margin is not
constant
Dividends do not vary directly with sales because they are a management decision. This affects
additions to retained earnings:
+ A company has a policy of paying out a fraction of net income in the form of a cash dividend.
That totally depends on dividend policy decisions, not sales.
+ Dividend payout ratio and retention ratio are constant.
Dividend payout ratio = Cash dividends / Net income
Retention ratio (Plowback ratio) = Addition to retained earnings / Net income = 1 – Dividend payout ratio

EXAMPLE
Assuming that the payout ratio is constant, the projected dividends and addition to retained earnings:

 The Balance Sheet

On the asset side
- All assets are vary directly with sales
- Capital intensity ratio (Assets / Sales) shows how many times the amount increase in assets is
compared to the increase in sales because it is unchanged
- Percentage of Sales is constant
On the liability and equity side
- The account varies with sales :
+ Accounts payable , the reason is that we expect to place more orders with our suppliers as sales
volume increases (Payables will change “spontaneously” with sales)
+ Retained earnings , will vary with sales, but it won’t be a simple percentage of sales. The
change in the retained earnings portion of equity will come from the dividend decision and it will
be calculated based on our projected net income and dividends.
- The accounts do not vary with sales ( because they depend on management decisions about
capital structure) :
 + Short-term debt , it represents Notes payable such as bank borrowing and it will vary if we take
specific actions to change the amount.
+ Long-term debt , because it won’t automatically change with sales
+ Common stock and paid-in surplus , the same reason with long-term debt

EXAMPLE:
  Percent of sales and EFN
External Financing Needed (EFN): The difference between the forecasted increase in assets and
the forecasted increase in liabilities and equity. It refers to the amount of money a company needs
to increase sales following pro forma statements.
We took a growth rate as given and then we determined the amount of external financing needed
to support that growth.

Assets Spontaneous liabilities

EFN = Sales × Δsales − Sales
× ΔSales – PM × Projected sales × (1 − d )

The projected increase The spontaneous increase in liabilities The product of profit margin and
in sales projected sales
( The projected addition to retained
earnings are projected net income
multiplied by the retention ratio )
∆Sales are the projected change in sales
Spontaneous liabilities are liabilities that naturally move up and down with sales
PM: profit margin d: dividend payout ratios
 A Particular Scenario is the situation company has a goal of not borrowing any additional
funds as well as not selling any new equity and the company can somehow raise EFN in new
financing
- This is a good example of how the planning process can point out problems and potential
conflicts
- If a company takes the need for EFN in new financing as given, it has three possible sources:
short-term borrowing, long-term borrowing and new equity. The choice of some combination
among these three is up to management.

5/ External Financing and Growth

A. The relationship between external financing and growth
 All other things staying the same, the higher the rate of growth in sales or assets, the greater
will be the need for external financing
 We will take the firm’s financial policy as given and then examine the relationship between
that financial policy and the firm’s ability to finance new investments and thereby grow
 Growth is simply a convenient means of examining the interactions between investment and
financing decisions
 In effect, we assume that the use of growth as a basis for planning is just a reflection of the very
high level of aggregation used in the planning proces
 Examining the relationship between growth and external financing required is a useful tool in
financial planning.
B. EFN and growth
 The way of calculation based on Projected Sales Growth
The increase in assets required = The original assets × Growth rate
The addition to retained earning = The original + The original×Growth rate
 Projected Sales Growth
At low growth levels: EFN <0 (surplus)
 + Internal financing (projected addition to retained earnings) exceeds the required investment in
assets when the retained earning is still enough for growing sales
+ Debt–equity ratio will decline
As the growth rate increases to a high level: EFN >0 (deficit)
+ The required investment in assets exceeds internal financing because the internal financing will
not be enough and the firm will have to go to the capital markets for financing.
+ Debt–equity ratio will increase
The need for new assets grows at a much faster rate than the addition to retained earnings
Whether a firm runs a cash surplus or deficit depends on growth
C. Financial policy and growth
2 growth rates that are particularly useful in long-range planning
 The Internal Growth Rate: is the rate the firm can maintain with internal financing only
The internal growth rate tells us how much the firm can grow assets in maximum using retained
earnings as the only source of financing.
This internal growth rate is represented by the point where the two lines cross. At this point, the
required increase in assets is exactly equal to the addition to retained earnings, and EFN is zero.
ROA b
Internal Growth Rate = 1−ROA b
ROA is the return on assets
b is the retention ratio or plowback
 The Sustainable Growth Rate : is the maximum growth rate of growth a firm can
achieve without external equity financing and increasing its overall financial leverage
The sustainable growth rate tells us how much the firm can grow by using internally generated
funds without external equity financing to maintain a constant debt ratio.
It refers the maximum growth rate a firm can achieve with no external equity financing and keeps
a constant debt–equity ratio when a firm want to grow more rapidly than internal growth rate.
ROE b
Sustainable Growth Rate = 1−ROE b
* Some reasons why a firm might wish to avoid equity sales
+ New equity sales can be expensive because of the substantial fees that may be involved
+ The current owners may not wish to bring in new owners or contribute additional equity
+ Raising equity finance is demanding, costly and time-consuming
* Reason the debt–equity ratio is constant : total debt will rise to the amount of money which a
company borrows for EFN while owners’ equity will rise because of the addition to retained
earnings. That lead to the increase of debt and equity is equal.
D. Determinants of Growth (The factors important in determining ROE are also important
determinants of growth)
1. Profit margin (operating efficiency) → an increase in profit margin will increase the firm’s
ability to generate funds internally
2. Total asset turnover (asset use efficiency) → an increase in the firm’s total asset turnover
increases the sales generated for each dollar in assets. This decreases the firm’s need for new
assets as sales grow
3. Financial leverage (choice of optimal debt ratio) → an increase in the debt–equity ratio
increases the firm’s financial leverage. Because this makes additional debt financing available,
4. Dividend policy (choice of how much to pay to shareholders versus reinvesting in the firm) →
a decrease in the percentage of net income paid out as dividends will increase the retention ratio
and this increases internally generated equity.
The sustainable growth rate illustrates the explicit relationship between the firm’s four major areas of
concern : operating efficiency , asset use efficiency , dividend policy and its financial policy .
If a firm does not wish to sell new equity and its profit margin, dividend policy, financial policy, and total
asset turnover (or capital intensity) are all fixed, then there is only one possible growth rate.
E. The benefit of financial planning
One of the primary benefits of financial planning is that it ensures internal consistency among the
firm’s various goals. The concept of the sustainable growth rate captures this element nicely.
We can use a financial planning model to test the feasibility of a planned growth rate. If sales are
to grow at a rate higher than the sustainable growth rate, the firm must increase profit margins,
total asset turnover, financial leverage, earnings retention or sell new shares
F. A note about sustainable growth rate calculations
The issue has to do with how ROE is computed
If total equity is taken from an ending balance sheet , then our formula is the right one. if total
equity is from the beginning of the period, then the simpler formula is the correct one.
In principle, you’ll get exactly the same sustainable growth rate regardless of which way you
calculate it (as long as you match up the ROE calculation with the right formula). In reality, you
may see some differences because of accounting-related complications.
When you use the average of beginning and ending equity (as some advocate), yet another formula
is needed.

6/ Some Caveats Regarding Financial Planning Models

 Financial Planning Models in reality
− Financial planning models do not indicate which financial polices are the best. A primary reason
is that they tend to rely on accounting relationships and not financial relationships.
− Financial planning models sometimes do not give the user many meaningful clues about what
strategies will lead to increases in value. Instead, they divert the user’s attention to questions
concerning the association of the debt–equity ratio and firm growth.
− Our models in use today is really an accounting statement generator at heart. Such models are
useful for pointing out inconsistencies and reminding us of financial needs but they offer little
guidance concerning what to do about these problems.
− Models are simplifications of reality, and the world can change in unexpected ways.
 The process of making financial planning
− Financial planning is an iterative process. Plans are created, examined, and modified over and
over. The final plan will be a result negotiated between all the different parties to the process
− Long-term financial planning in most corporations relies on the approach that adjusts
continuously to fit the situation and the plan outlined.
− Upper-level management has a goal in mind. Then the planning staff will rework and
ultimately deliver a feasible plan that meets that goal. The final plan will therefore implicitly
contain different goals in different areas and also satisfy many constraints
− A plan is a means of reconciling the planned activities of different groups and a way of settin
common goals for the future. It don’t need to be a dispassionate assessment of what we think the
future will bring.
− Without some sort of plan, the firm may find itself adrift in a sea of change without a rudder for
guidance.