Chapter 2 (fm)

FINANCIAL PLANNING The planning process starts with development of a firm’s mission, management set goals which are transformed into strategies. To support strategies, policies and

PLANNING SYSTEM

The Planning System

FINANCIAL PLAN • A long term financial plan entails planning in fairly aggregate terms for a period of 3 to 10 years and represents what a firm intends to do in the future. • There is considerable variation in terms of sophistication, details, scope, degree of formality. • Sales forecast are made for 3-5 years to aid investment planning. • Shorter duration sales forecast are used for facilitating working capital requirements.

Factors Affecting Financial Plan • Assumptions about the economic environment -interest rates, tax structure, inflation, growth rate of economy, exchange rate • Sales Forecast: Most financial variables relate to sales figures and thus become the starting point of financial forecast exercise. • Pro-forma Statements: Projected Income statement and Balance Sheet. • Asset Requirements: Fixed Asset and Working Capital • Financing Plan: Alternative sources of finance are investigated.

Benefits of Financial Planning • It helps to identify advance actions to be taken. • Identifies a number of options that can be exercised under different conditions. • Facilitates interaction between investment & financing decisions. • Establishes link between present & future decisions. • Ensure strategic plan is financial viable. • Helps in control function by setting benchmarks for Performance Appraisal.

Estimation of Financial Requirements • Sales Forecast: 3 to 5 years The sales forecasting techniques: Qualitative techniques, Time Series Projection • Pro-forma Profit & Loss A/c: Percentage to Sales Method, Budgeted Expense Method, Combination Method • Pro-forma Balance Sheet: Using the percent of sales method to project some items, Use specific information‘Investments’, Miscellaneous Expenditure and losses, Obtain projected Reserves & Surplus, Projected value of loan funds could be adjusted as per schedule of Repayment, The total of Asset & liabilities side to be adjusted for difference by incorporating external fund required/surplus available funds.

Key Growth Rates • Firms state corporate goals in terms of growth rates.

Growth is an intermediate goal which contributes to value creation

• Internal Growth Rate: Maximum growth rate with no external financing. • Sustainable Growth Rate: Max. growth rate possible with retained earnings matched with debt financing in line with debt – equity policy of the firm.