CHAPTE R 26
Financial Planning and Strategy
LEARNING OBJECTIVES
2
? ? ? ? ? ?
Understand the difference between financial forecasting and financial planning Explain the components of a financial plan Discuss the technique of financial forecasting Develop an approach to construct a financial model Examine the features and implications of sustainable growth model Show the linkage between strategic planning and planning
INTRODUCTION
3
? Financial
planning indicates a firm’s growth, performance, investments and requirements of funds during a given period of time, usually three to five years. ? It involves the preparation of projected or pro forma profit and loss account, balance sheet and funds flow statement. ? Financial planning help a firm’s financial manager to regulate flows of funds which is his primary concern.
Strategic Decision-making Framework
4
? Strategy
is the foundation for any planning system of a firm. ? The business portfolio models are most popular and useful to understand the firm’s strategic concerns and choices and plan for the future.
The market growth-market share model , popularised by the Boston Consulting Group (BCG) ? The nine-cell matrix model developed by the General Electric Company
?
5
Market growth-market share model
6
Summary of Strategic DecisionMaking Framework
? ?
? ?
? ?
A firm operates in a complex environment. Strategy is a central theme that establishes a match between the firm’s competences and opportunities created by environment changes. A firm is multi-directed; strategy is a link between the multiple goals of the firm and its plans and policies. Product-market scope, competitive advantages, distinctive competences and synergy are the most important components of strategy. Market dominance (particularly, during the growth stage) is the most desirable strategy. A firm should have a balanced portfolio of businesses.
Strategic Financial Planning
7
? Two important tasks of the financial
? Allocation
manager are:
of funds (viz. investment decision). ? Generation of funds (viz. financial decision).
? The
theory of finance makes two crucial assumptions:
? First,
the objective of the firm is to maximise the wealth of shareholders. ? Second, capital markets are efficient.
Financial Planning
8
? Financing
facets:
?
planning process involves the following
Evaluating the current financial condition of the firm. ? Analysing the future growth prospects and options. ? Appraising the investment options to achieve the stated growth objective. ? Projecting the future growth and profitability. ? Estimating funds requirement and considering alternative financing options. ? Comparing and choosing from alternative growth plans and financing options. ? Measuring actual performance with the planned performance.
9
Financial Forecasting and Modelling
? Financial
forecasting is an integral part of financial planning. It uses past data to estimate the future financial requirements. ? A financial planning model establishes the relationship between financial variables and targets, and facilitates the financial forecasting and planning process. ? A financial planning model has the following three components:
? Inputs ? Model ? Output
10
Constructing Financial Model
?
To prepare the next year’s proforma profit and loss statement, balance sheet and funds flow statement, the planning team through a consultative process in the company, made several assumptions and models about the relationships between financial variables. Based on the model inputs and assumptions, the planning team developed the model equations for proforma profit and loss statement, funds flow statement and balance sheet. Prepare proforma financial statements
?
?
Long-term Financial Plan
11
? In
practice, long-term financial forecasts are prepared by relating the items of profit and loss account and balance sheet to sales. This is called the percentage to sales method.
Sensitivity Analysis
12
? To
examine the effect of changing assumptions on a particular firm’s funds requirement, the finance manager can perform a sensitivity analysis. can vary one variable at a time, and analyse its effect.
? He/she
13
Steps in Financial Planning
? Past performance ? Operating characteristics ? Corporate strategy and investment ? Cash flow from operations ? Financing alternatives ? Consequences of ? Consistency
needs
financial plans
14
PLANNING FOR SUSTAINABLE GROWTH
? A simple
way of ascertaining the growth potential of a company, given its current financial conditions, is to examine the interaction between four financial policy goals expressed as ratios:
? target
sales growth ? target return on investment (net assets) ? target dividend payout and ? target debt-equity (capital structure)
Growth Potential of a Singleproduct Company
15
? Sustainable
growth may be defined as the annual percentage growth in sales that is consistent with the firm’s financial policies (assuming no issue of fresh equity):
net margin × retention × leverage assets turnover – (net margin × retention × leverage)
sustainable growth =
16
Growth Potential of a Multiproduct Company
? Sustainable
growth rate in the case of multiproduct or multi-division company is to calculate the sustainable growth rate at the corporate level in terms of growth in assets.
doc_819207757.ppt
Financial Planning and Strategy
LEARNING OBJECTIVES
2
? ? ? ? ? ?
Understand the difference between financial forecasting and financial planning Explain the components of a financial plan Discuss the technique of financial forecasting Develop an approach to construct a financial model Examine the features and implications of sustainable growth model Show the linkage between strategic planning and planning
INTRODUCTION
3
? Financial
planning indicates a firm’s growth, performance, investments and requirements of funds during a given period of time, usually three to five years. ? It involves the preparation of projected or pro forma profit and loss account, balance sheet and funds flow statement. ? Financial planning help a firm’s financial manager to regulate flows of funds which is his primary concern.
Strategic Decision-making Framework
4
? Strategy
is the foundation for any planning system of a firm. ? The business portfolio models are most popular and useful to understand the firm’s strategic concerns and choices and plan for the future.
The market growth-market share model , popularised by the Boston Consulting Group (BCG) ? The nine-cell matrix model developed by the General Electric Company
?
5
Market growth-market share model
6
Summary of Strategic DecisionMaking Framework
? ?
? ?
? ?
A firm operates in a complex environment. Strategy is a central theme that establishes a match between the firm’s competences and opportunities created by environment changes. A firm is multi-directed; strategy is a link between the multiple goals of the firm and its plans and policies. Product-market scope, competitive advantages, distinctive competences and synergy are the most important components of strategy. Market dominance (particularly, during the growth stage) is the most desirable strategy. A firm should have a balanced portfolio of businesses.
Strategic Financial Planning
7
? Two important tasks of the financial
? Allocation
manager are:
of funds (viz. investment decision). ? Generation of funds (viz. financial decision).
? The
theory of finance makes two crucial assumptions:
? First,
the objective of the firm is to maximise the wealth of shareholders. ? Second, capital markets are efficient.
Financial Planning
8
? Financing
facets:
?
planning process involves the following
Evaluating the current financial condition of the firm. ? Analysing the future growth prospects and options. ? Appraising the investment options to achieve the stated growth objective. ? Projecting the future growth and profitability. ? Estimating funds requirement and considering alternative financing options. ? Comparing and choosing from alternative growth plans and financing options. ? Measuring actual performance with the planned performance.
9
Financial Forecasting and Modelling
? Financial
forecasting is an integral part of financial planning. It uses past data to estimate the future financial requirements. ? A financial planning model establishes the relationship between financial variables and targets, and facilitates the financial forecasting and planning process. ? A financial planning model has the following three components:
? Inputs ? Model ? Output
10
Constructing Financial Model
?
To prepare the next year’s proforma profit and loss statement, balance sheet and funds flow statement, the planning team through a consultative process in the company, made several assumptions and models about the relationships between financial variables. Based on the model inputs and assumptions, the planning team developed the model equations for proforma profit and loss statement, funds flow statement and balance sheet. Prepare proforma financial statements
?
?
Long-term Financial Plan
11
? In
practice, long-term financial forecasts are prepared by relating the items of profit and loss account and balance sheet to sales. This is called the percentage to sales method.
Sensitivity Analysis
12
? To
examine the effect of changing assumptions on a particular firm’s funds requirement, the finance manager can perform a sensitivity analysis. can vary one variable at a time, and analyse its effect.
? He/she
13
Steps in Financial Planning
? Past performance ? Operating characteristics ? Corporate strategy and investment ? Cash flow from operations ? Financing alternatives ? Consequences of ? Consistency
needs
financial plans
14
PLANNING FOR SUSTAINABLE GROWTH
? A simple
way of ascertaining the growth potential of a company, given its current financial conditions, is to examine the interaction between four financial policy goals expressed as ratios:
? target
sales growth ? target return on investment (net assets) ? target dividend payout and ? target debt-equity (capital structure)
Growth Potential of a Singleproduct Company
15
? Sustainable
growth may be defined as the annual percentage growth in sales that is consistent with the firm’s financial policies (assuming no issue of fresh equity):
net margin × retention × leverage assets turnover – (net margin × retention × leverage)
sustainable growth =
16
Growth Potential of a Multiproduct Company
? Sustainable
growth rate in the case of multiproduct or multi-division company is to calculate the sustainable growth rate at the corporate level in terms of growth in assets.
doc_819207757.ppt