Plans are created examined and modified over and over

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Unformatted text preview: o do about these problems. In closing our discussion, we should add that 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. In fact, long-term financial planning in most corporations relies on what might be called the Procrustes approach.4 Upper-level management has a goal in mind, and it is up to the planning staff to rework and to 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. For this reason, such a plan need not be a dispassionate assessment of what we think the future will bring; it may instead be a means of reconciling the planned activities of different groups and a way of setting common goals for the future. However it is done, the important thing to remember is that financial planning should not become a purely mechanical exercise. If it does, it will probably focus on the wrong things. Nevertheless, the alternative to planning is stumbling into the future. Perhaps the immortal Yogi Berra (the baseball catcher, not the cartoon character), said it best: “Ya gotta watch out if you don’t know where you’re goin.’ You just might not get there.”5 4 In Greek mythology, Procrustes is a giant who seizes travelers and ties them to an iron bed. He stretches them or cuts off their legs as needed to make them fit the bed. 5 We’re not exactly sure what this means, either, but we like the sound of it. SUMMARY AND CONCLUSIONS This chapter focuses on working with information contained in financial statements. Specifically, we studied standardized financial statements, ratio analysis, and long-term financial planning. 1. We explained that differences in firm size make it difficult to compare financial statements, and we discussed how to form common-size statements to make comparisons easier and more meaningful. CHAPTER 3 Financial Statements Analysis and Long-Term Planning 79 ros82361_ch03.indd 79 7/7/08 3:59:08 PM Confirming Pages 2. Evaluating ratios of accounting numbers is another way of comparing financial statement information. We defined a number of the most commonly used ratios, and we discussed the famous Du Pont identity. 3. We showed how pro forma financial statements can be generated and used to plan for future financing needs. After you have studied the chapter, we hope that you have some perspective on the uses and abuses of financial statement information. You should also find that your vocabulary of business and financial terms has grown substantially. CONCEPT QUESTIONS 1. Financial Ratio Analysis A financial ratio by itself tells us little about a company since financial ratios vary a great deal across industries. There are two basic methods for analyzing financial ratios for a company: time trend analysis and peer group analysis. Why might each of these analysis methods be useful? What does each tell you about the company’s financial health? 2. I...
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This note was uploaded on 10/28/2009 for the course FINA 505 taught by Professor Deborahcernauskas during the Summer '09 term at Northern Illinois University.

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