Corporate Financial Planning

8/12/2019 Corporate Financial Planning

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CORPOR TEFIN NCI LPL NNING

2008, R.A Oluwatusin


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TheFinancial Framework andLanguage


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Overview of Financial Planning

FP is a process of evaluating the impact of

alternative investing and financing decision on the

operating activities and the achievement of the

goals and objectives of the organization.

Formulation of plan

Implementation

Evaluation of performance

FP is usually carried in three phases:



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Overview of Financial PlanningIn formulating financial plan an organization may

adopt any of the following approaches:

1.Bottom up approach in which planning process

starts at the operatives level and proceed

upward through department and division levelsto managements.

2.Top-down process which starts with the firms

top management through the setting of

strategic plan and goals, and then proceeds

downward through the various strata of the

organization's level.



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Overview of Financial PlanningAt the implementation phase the planned actions are

executed within constraints in which the organizationoperate.

Financial availability of sufficient fund to execute

projects

Human resources necessary skills and know how ofexisting personnel and training opportunities and

exposures to enhance their service delivery system

Environmental - internal and external

During implementation, circumstances do change andunforeseen opportunities may evolve. The plans must be

sufficiently flexible to enable organization adapt to change

with minimal disruption.



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Overview of Financial PlanningThe evaluation phase may be inter-

twined with the implementation stagewhere organization has introduced a

feed forward, rolling budget system into

its financial planning process.

Where it is carried out as post execution

process, it affords the firm to compare its

overall performance to its forecastedplan.



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Financial PlanA financial plan incorporates of three elements : input,

model and output.Inputs consists of financial projections in terms of sales

receipts from customers, costs in term of administrative

and financial changes.

Model expresses and captures the mathematical

relationship among the inputs and outputs. It is a

dependent statement that holds to be true if the

underlying assumptions exists.

Output of financial plan is made up of proforma financial

statements and set of budgets.



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Concept of ValueBasic assumption about which ideas (projects) are

desirable or worth striving for.Represent preferences for ultimate end-states a

company's operations are directed.

The worth of a thing in money or goods at certain

time, that is, the market price.

The intrinsic attributes which make an article or idea

desirable or worthy of esteem for its own sake.

The exchange power which a commodity or servicehas in relation to another.



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oncept of ValueValue operates and exist on the presence of two

phenomenaWhen a product, service or idea attracts humans

desire and can only be obtained in limited quantity by

concerted effort, it will command value.

The value of a thing is the service or labour it

commands in exchange.



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Enterprise Value EV)


A typical value mode for business organization.

The most influential value model encompasses all the

stakeholders interest in determining the worth of a

business firm.

Enterprise Value (EV) Total Enterprise Value (TEV) is

an economic measure reflecting the market value of

the whole business operation of the firm.

It is the sum of claims of all providers of funds both in

term of equity and debt.It is a fundamental metric used in business valuation

financial modeling portfolio analysis, accounting and

other value based analysis.


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EV Model


EV = Emv + PSmv + Dmv + MImv + ACmv less CC

Where

Emv - Ordinary Share (Equity) at current market price

Ps- preference share at current market price

Dmv- Debenture (Debt capital) and current market priceMI- Minority Interest claims at current market price

ACmv - Associated Company Investment at current market

price

CCE- Cash and cash equivalent

Please note that all the components are stated at current

market value, not book value.


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Investors Value Model


The return expected by an investor on capital committed

to a venture is function of possible return from alternativeinvestment and the risk associated with the project.

Investorsvaluation model then consist of the discounted

value of the expected stream of future cashflow.

The minimum return an investor will be ready to accept

on any project is the present value of his capital

commitment.

Any surplus above this benchmark is the value premium

the investor derived from the capital outlay.


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Investors Value Model


Investor value any project in the present value of the

discounted expected cashflow. The discount factor being

the required rate of return from the project plus the risk

premium.

Mathematically this could be expressed as:

t rtVo =n

t =1 (1 + r)n

P


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Shareholders Value Perception


Every shareholder is an investor

The distinctive feature of equity shareholder is thathe carries the burden of the higher risks than other

investors.

The presence of risk differentiate the perception

and value expectation of every shareholder

Rational shareholders are never enticed by the

short term profit making but long term profitability

which underlies wealth maximization.Major corporate failures around the world at the

beginning of this century arose out of wrong

perception about shareholdersvalue.


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Shareholders Value Perception


Generous executive incentive packages and advancing of

personal agenda were vigorously pursued to the detriment of

shareholdersfortune.

The right perception should have been long term sustainable

wealth creation

The maximization of the corporate wealth over a long term

as core objectives of corporate entity ensures theenhancement of shareholder's welfare and corporate value.

This is an efficient market situation that leads to improve

value of the market capitalization of each unit of the

companysequity share.When as a result of sustained continuous growth in earnings

and retention rate, the value of a companys share

responded with increased market value, shareholder's

wealth is maximized.


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Managing ShareholdersValue


The management of corporate wealth directly affect the

shareholdersvalue.Corporate manager manages shareholders value by

continuous investment in project that creates value.

A company create value for shareholders when the

shareholdersreturns exceed the required rate of returnto equity.

This implies that a company creates value in any year

it outperforms its expectations.

The value created for shareholder can be measure

using appropriate parameter: Shareholder Value Added

(SVA)

The Created Shareholder Value = SVA(MVe x ke).


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Component of CorporatePerformance Reports


Corporate performance reports are captured in its

financial statements

The reports reveal the value created with the

operating year by the enterprise

Three key components of statements are:

Income statement - performance report

Balance sheet - position statement

Cash flow statements - liquidity


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Income Statement


An operating statement which shows the net result of

business activities of the enterprise

The scope is usually over an accounting period or a

lesser time frame such as quarterly or half-yearly.

Reveals the net revenue accruable to the business and

its owners after all expenses and other stakeholders

interest had been met.

Gives overall picture of the operating efficiency of the

company

Reveal the standard of resources management of the

executive in charge of the administration of the

enterprise

Reveals the result that determines dividend to be

declared and profit to be retained.


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Balance Sheet


The statement of the financial status of the enterprise as

at the last day of its financial year.

Reflect the cumulative effect of operating performance of

the firm during the financial year.

A composite of accounting equation which expresses the

equality of assets and liabilities.Assets = Liabilities + Owners Capital

A static view of the organization's position being

expressed as asatthe date in which it was prepared.

Matches what the business owns with the claims against

them.

The snapshot of the financial health of the operation of

the enterprise.


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Cashflow Statement


The reports that bridge the unexpressed gap between

Income Statement and Balance Sheet figuresThe statement reveals the receipts and use of cash

and cash equivalent by the organization during the

accounting year.

An unbiased revelation of the cash managementpotential of the business and its top managers

Links the net result from Income Statement to cash

figure on the Balance Sheet

It is prepared strictly in Nigeria through the use of

Direct method which emphasized the cash

transaction component of business activities.


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Conclusion


The value of a business derives from the cumulative result

of its operating performance as shown in its income

statement.

The effect of such performance are reflected in the assets

and liabilities disclosed on the Balance Sheet at the end of

each financial year.

The liquidity position of the business which align its value

with the availability of cash to meet obligation as due is

presented in the cashflow.

The three statements help in defining the shareholders

value creation as perceived by the management of theentity.

This is the umbilical cord that ties financial statement with

the criterion and management of shareholdersvalue.


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2008 R A Oluwatusin

Thank you

Documents

Corporate Financial Planning