Chapter 4 Notes - Chapter 4 Long-Term Financial Planning...

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Chapter 4: Long-Term Financial Planning and Growth - Long-range planning is a means of systematically thinking about the future and anticipating possible problems before they arrive - Financial planning establishes guidelines for change and growth in a firm o Concerned with the major elements of a firm’s financial and investment policies without examining the individual components of those policies in detail - Percentage of Sales Approach o To develop an explicit financial plan, managers must establish certain basic elements of the firm’s financial policy 1) The firm’s needed investment in new assets 2) The degree of financial leverage the firm choses to employ. 3) The amount of cash the firm thinks is necessary and appropriate to pay shareholders. 4) The amount of liquidity and working capital the firm needs on an ongoing basis o Decisions a firm makes in these 4 areas will directly affect its future profitability, need for external financing, and opportunities for growth What is Financial Planning? - Financial planning formulates the way in which financial goals are to be achieved - Financial Plan - a statement of what is to be done in the future Growth as a Financial Management Goal - Growth, by itself, is not an appropriate goal for the financial manager - Appropriate goal is increasing the market value of the owners’ equity - Growth is a convenient means of summarizing various aspects of a firm’s financial and investment policies Dimensions of Financial Planning
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- Useful to think of the future as having a short-term and long-term - Planning Horizon - long-range time period on which the financial planning process focuses (usually next 2-5 years) o 1 st dimension of the planning process that must be established - Aggregation - process by which smaller investment proposals of each of a firm’s operational units are added up and treated as one big project o Level of aggregation is the 2 nd dimension of the planning process that needs to be determined - Once the planning horizon and aggregation are established, a financial plan requires inputs in the form of alternative sets of assumptions about important variables - Financial planning might require you to determine 3 alternate business plans for the future: o The worst case o A normal case o A best case - Planning which considers all possible events is particularly important for cyclical businesses What Can Planning Accomplish? - Examining Interactions o Financial plan must make explicit the linkages between investment proposals for the different operating activities of the firm and its available financing choices - Exploring Options o Financial plan allows the firm to develop, analyze, and compare many different scenarios in a consistent way o Options such as marketing new products or closing plants might be evaluated - Avoiding Surprises o Financial planning should identify what may happen to the firm if different events take place Page 2 of 9
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