Financial Planning and Forecasting Report 2[1]

8/13/2019 Financial Planning and Forecasting Report 2[1]

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Strategic Planning An organizational management activity

that is used to set priorities, focus energyand resources, strengthen operations,

ensure that employees and otherstakeholders are working towardcommon goals, establish agreement

around intended outcomes/results, andasses and adjust the organizations direction in response to a changing

environment.


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Elements of Strategic Planning

Mission StatementA condensed version of a firms strategic

plan.

Corporate ScopeDefines a firms lines of business and

geographic areas of operation.

Statement of Corporate Objectives

Sets forth specific goals to guide

management.


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Corporate Strategies

Broad approaches developed forachieving a firms goals.

Operating PlanProvides management with detailed

implementation guidance based on the

corporate strategy to help meet thecorporate objectives.


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Financial Planning

The document that includesassumptions, projected financialstatements, and projected ratiosand ties the entire planningprocess together.


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inancial Planning Process

1 Project financial statements and usethese projections to analyze the effects of

the operating plan on projected profitsand various financial ratios.

2 Determine the funds needed to

support the five-year plan.3 Forecast funds availability over thenext five years.


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4 Establish and maintain a system of

controls to govern the allocation and use offunds within the firm.

5 Develop procedures for adjusting the

basic plan if the economic forecasts uponwhich the plan was based do notmaterialize.

6 Establish a performance-basedmanagement compensation system.


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Forecasting Sales

A forecast of a firms unit and dollarsales for some future period.

It is generally based on recent salestrends plus forecasts of the economicprospects.

Prediction based on past salesperformance and an analysis ofexpected market condition.


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Importance of Sales Forecasting

Evaluation of past and current sales level andannual growth

Compare your company to industry benchmarks

Establish polices to monitor prices andoperating costsMake a company aware of minor problems

before they become major problems


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Optimized cash flowKnowing when and how much to buy

The ability to plan for production andcapacity

Ability to determine the expected return

on investment


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Factors Affecting Sales Forecast

Internal FactorsLabor problems

Credit policychanges

Sales motivationplans

Inventory changes

Price changes

Working capital

shortagesChange indistribution method

Productioncapacity changes

New product lines


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External Factors

Seasonality of the business

Direct and indirectcompetition

Political events

Styles or fashions

Consumer earnings

Population changes

Weather

Productivity

changes


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AFN Equation

An equation that shows therelationship of external funds needed

by a firm to its projected increase inassets, the spontaneous increase inliabilities, and its increase inretained earnings.


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AFN Equation


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Capital Intensity Ratio

The ratio of assets requiredper dollar of sales.

Sales Growth

The difference of projectedsales and the last year sales.


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Spontaneously Generated Funds

Funds that arise out of normal business operations from its

suppliers, employees, and thegovernment (such as accounts payableand accrued wages and taxes) thatreduce the firms need for externalfinancing.


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Retention Ratio

The proportion of net incomethat is reinvested in the firm andis calculated as 1 minus thedividend payout ratio.


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Excess Capacity Adjustments

Changes made to the existingasset forecast because the firmis not operating at fullcapacity.


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Full Capacity Sales =Actual SalesPercentage of Capacity at which

FA were operated

= $3 M0.96

=$3,125,000


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Forecasted Financial Statements

Financial statements that projectthe companys financial positionand performance over a period ofyears.


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Part 1 - Inputs


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Part 3 Forecasted Balance Sheet


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Regression Analysis A statistical technique that fits a

line to observed a data points so

that the resulting equation can beused to forecast other data points.


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Documents

Financial Planning and Forecasting Report 2[1]