ch19 - Chapter 19 Financial Planning and Forecasting...

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Chapter 19 Financial Planning and Forecasting Learning Objectives 1. Explain what a financial plan is and why financial planning is so important. 2. Discuss how management uses financial planning models in the planning process, and explain the importance of sales forecasts in the construction of financial planning models. 3. Discuss how the relation between projected sales and balance sheet accounts can be determined, and analyze a strategic investment decision using a percent of sales model. 4. Describe the conditions under which fixed assets vary directly with sales, and discuss the impact of so-called lumpy assets on this relation. 5. Explain what factors determine a firm’s sustainable growth rate, discuss why it is of interest to management, and compute the sustainable growth rate for a firm. I. Chapter Outline 19.1 Financial Planning A. The Planning Documents 1
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Financial planning relates to the identification of the kinds of projects that a firm needs to undertake and the ways of financing those projects. This results in a financial plan . In putting together a financial plan, four main issues are addressed by management through detailed planning. Strategic plan— Where is the company headed? Investment plan— What capital resources does the management need to get there? Financing plan— How is the firm going to pay for the resources needed? Divisional business plan – What will each division do to achieve the firm’s strategic goals? Cash budget— How is the firm going to pay its day-to-day bills? The financial plan integrates the firm’s basic plans into a single planning document with a detailed budget. Typically, the plan extends over a three- to five-year period called the planning horizon. 1. The Strategic Plan The strategic plan describes the vision of the firm. It provides high-level direction to management for making business decisions and guidance about what the firm will and will not do. The planning is done by the firm’s top management, with the financial manager providing key input, and it has to be approved by the board of directors. 2
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The strategic plan identifies: The line of business that the firm will compete in. Major areas of investment in real assets. Capital expenditures Acquisitions and new lines of business. Mergers, alliances, and divestitures that may happen in the near future. 2. Investment Plan (Capital Budget) The investment plan is the part of the financial plan that describes the firm’s outlay for plant and equipment. A firm’s business strategy determines the capital expenditures it will make. Capital expenditures can be one-time investments or routine investments that allow the firm to continue its operations. 3.
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ch19 - Chapter 19 Financial Planning and Forecasting...

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