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Lecture 2-Pro Formas - Financial Planning Budgeting...

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Financial Planning / Budgeting Estimate future revenues, expenses, assets, liabilities and cash flow Primarily interested in an aggregate, long range forecast Establish goals to motivate managers Identify consequences and potential problems of current decisions Proactive vs. Reactive
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Components of the Plan Inputs Current financial statements Forecast of key variables (e.g. sales growth, interest rates etc.) Model Percentage of sales method + modifications Outputs Pro-forma financial statements Projected cash flow statement Key financial ratios
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What Drives the Planning Process? Sales forecast Growth in unit sales Changes in price per unit How to estimate sales growth Historical growth rates: (e.g. average growth rate) Economic analysis: (e.g. relate to GDP growth, interest rates, employment rates etc.) Industry analysis (e.g. firm and competitor analysis, new product development, advertising and credit policy, production capacity)
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