Upload
adela-gladys-roberts
View
215
Download
0
Embed Size (px)
Citation preview
Long Range Financial Planning
Justin Byrd and John Hanna
Presentation Topics
Planning and the Strategic Plan Trend of revenue and profits Capital investments Cash flows and financing requirements Key statistics Risk Analysis Breakdown by business unit, product line,
and geography Financial position
Planning and the Strategic Plan
Overview of planning process Strategic plan▪ Outlines in general terms the characteristics
and objectives of the firm Development plan▪ Includes new products, services, and markets
in which company plans to engage Operations plan▪ Focuses on existing products and markets
Planning and the Strategic Plan
Strategic plan begins with present and extends as far into future as useful for planning purposes Usually three to five years
Focus on needs, threats, and opportunities facing company
Plan should contain:▪ Statement of Purpose▪ Actions to take▪ Resources to use▪ Goals to meet▪ Time schedules to follow▪ Assumptions made
Planning and the Strategic Plan Important factors for plan decision
makers Economic consensus Planning assumptions Growth strategy Prior year comparison SWOT analysis Business goals Profit plans Financial summaries
Trends of Revenues and Profits Business plan should provide target sales level or
average growth rate to be achieved Growth projections
Adjustments should be made annually, tying revenue to:▪ Changes in demand and new products on market▪ Creation of new business units▪ New geographical areas reached
Profit projections Margin and profit projections should be linked to anticipated
costs of:▪ Creating new products▪ Capital expenditures▪ Marketing campaigns▪ Other growth-related costs
Capital Investments
Long-range plan should indicate key capital investments required to attain revenue and profit projections Important to consider alternative project
management styles
Capital Investments
Investment amount should include working capital requirements▪ Cash invested in receivables+inventories-accounts
payables Should account for events changing
investment revenues and expenses each period
Current market trend Shrinking working capital through reduction
of inventories and receivables Handout and Case Study
Capital Investments
Case study Reduced inventory allowed for
significant decrease in depreciation expense
JIT benefits Lowered holding costs▪ Smaller, more frequent orders
Reduced lead time▪ Ordered when needed
Safety stock reduction
Capital Investments
Capital requirements Should be listed by product, business
unit, or geographical areas
Cash Flows and Financing Requirements
Crucial aspect due to management’s needing to know about risk of future indebtedness May need to issue stocks or bonds to finance
operations▪ Issues associated with debt and equity financing
If future indebtedness is more or less than management finds optimal, then management should perform and an analysis of potential courses of action Ernst and Young survey
Cash Flows and Financing Requirements
Product profitability Assumptions are key component of
projected cash flows Analyses should be carried out on both
individual projects and the company as a whole▪ Should contain both:▪ assumptions regarding expected competition and
other factors that may reduce margins ▪ assumptions including cost reductions and boosts in
revenue that may augment margins
Risk Analysis
The long-range financial plan should contain a thorough investigation of the risks that could occur as a result of the business plan composed by the company. Here are some of the risks…
Competitive Response Competitors will respond to any new product in a
geographical area Response could be price cuts, lawsuits, stricter
regulations
Risk Analysis
Capital Cost Overruns Construction projects that exceed their
budgets▪ Yankee Stadium, Oklahoma State renovations
(T Boone Pickens) Funding requirements
Nationalization of Facilities Management may want to relocate its
facilities if the host country has a tendency of nationalizing certain industries with little or no compensation to the owners
Risk Analysis
Examples: Nationalization of Industry 1968- Cuban Nationalization of all privately owned business 1972-Chilean nationalization of copper mining industry 2007- Venezuela seized operational control of Orinico Belt
crude projects from many of the world’s largest oil companies 2009- Many consider US government’s bailout of banking
industry of over $600 billion a nationalization of large banks
Risk Analysis
Ecological Costs Chemical waste from manufacturing
could result in fines or lawsuits which would destroy any potential profits
Certain industries spurn lawsuits due to products being unsafe▪ Tobacco, asbestos, alcohol, etc.
Risk Analysis
Sales Fluctuations Sometimes inaccurate, be aware of best
and worst-case scenarios▪ Significant losses, or expanding facilities▪ Seasonal Fluctuations
Risk Analysis
Raw Material Scarcity Some raw materials are in short supply or tightly
controlled▪ Oil, computer chips, energy, etc.
Sales may fall short since supply may not equal demand
Deterioration of Margins Competing products may advance into the market
causing margins to lessen The company should look at these issues and
determine national and international competitors who may threaten in the market
Risk Analysis
Technological Advances Obsolete Products Trade literature can show news of
experimental technology since technological advances may be hard to predict
Forecast a decline▪ Netflix vs. Blockbuster
Breakdown by Business
The long-range financial plan should contain aspects such as revenue, margin, profit, and capital expenditure breakdowns
Detailed breakdowns include Business Unit Product Line Geography
Business Unit
Broken down by the individual product Can highlight forecasted problems in a specific
business sector that management can correct
Product Line
This type of business plan is based on the output of a new product line within a company
Marketing, advertising, R&D, capital costs, etc should be included in a summary of the new product
Attached commentary should explain maximum/minimal sales levels, capital cost overruns, competitive responses to the new product line
Geography
May include expansion into various geographical areas The costs associated with advertising and marketing
should be itemized If the facilities are built in foreign countries then the
capital costs should be itemized as well as the working capital cost of the expansion
The breakdown should include these numbers as well as risk assessments concerning the foreign entity, maximum vs. minimum sales forecasts, and capital cost overrun
Examples: Manufacturing industries (Autos, Furniture, etc.)
Financial Position
The overall financial position of the company obviously will not be 100% accurate for the long-range plan
The long-range plan serves as a guide to forecast profits for investors, potential investors, and lenders
Financial Position
The long-range plan should include Balance Sheet P&L Statement
Should extend the statements by similar amounts or percentages
The company may also chose to include a statement of financial highlights which usually includes sales, earnings, ROE, select important expenses, and projected backlogs
Financial Position
Lastly, the main aspect of the financial highlights would be the projected earnings per share and projected net earnings
Sample Pro Forma B/SElvis Products International
Balance SheetAs of Dec. 31, 2008
Assets 2009* 2008% 2008 2007% 2007 Cash and Equivalents 52.00 1.35% 52.00 1.68% 57.60 Accounts Receivable 444.51 10.44% 402.00 10.23% 351.20 Inventory 914.90 21.71% 836.00 20.84% 715.20Total Current Assets 1411.40 33.51% 1290.00 32.75% 1124.00 Plant & Equipment 527.00 13.69% 527.00 14.31% 491.00 Accumulated Depreciation 186.20 4.32% 166.20 4.26% 146.20Net Fixed Assets 340.80 9.37% 360.80 10.05% 344.80Total Assets 1752.20 42.88% 1650.80 42.80% 1468.80
Liabilities and Owner's Equity Accounts Payable 189.05 4.55% 175.20 4.24% 145.60 Short-term Notes Payable 225.00 5.84% 225.00 5.83% 200.00 Other Current Liabilities 163.38 3.64% 140.00 3.96% 136.00Total Current Liabilities 577.43 14.03% 540.20 14.03% 481.60 Long-term Debt 424.61 11.03% 424.61 9.42% 323.43Total Liabilities 1002.04 25.06% 964.81 23.46% 805.03 Common Stock 460.00 11.95% 460.00 13.40% 460.00 Retained Earnings 300.04 5.87% 225.99 5.94% 203.77Total Shareholder's Equity 760.04 17.82% 685.99 19.34% 663.77Total Liabilities and Owner's Equity 1762.08 42.88% 1650.80 42.80% 1468.80
* ForecastedOther Information Forecast Actual ActualSales 4300.00 3850.00 3432.00Dividend 22.00
Sample Pro Forma P&L ACME Corporation
Pro-forma Income Statement
For the Year Ended Dec. 31, 2008 ($ 000's)
2009%* 2009* 2008% 2008 2007% 2007
Sales 100.00% 4,300.00 100.00% 3,850.00 100.00% 3,432.00
Cost of Goods Sold 83.93% 3,609.11 84.42% 3,250.00 83.45% 2,864.00
Gross Profit 690.89 15.58% 600.00 16.55% 568.00
Selling and G&A Expenses 7.79% 334.80 8.58% 330.30 6.99% 240.00
Fixed Expenses 100.00 2.60% 100.00 2.91% 100.00
Depreciation Expense 20.00 0.52% 20.00 0.55% 18.90
EBIT 236.09 3.89% 149.70 6.09% 209.10
Interest Expense 76.00 1.97% 76.00 1.82% 62.50
Earnings Before Taxes 160.09 1.91% 73.70 4.27% 146.60
Taxes @ 40% 64.04 0.77% 29.48 1.71% 58.64
Net Income 96.05 1.15% 44.22 2.56% 87.96
*Forecasted
Works Cited
Atkinson, Charles. "Dell: A Case Study in Low Inventory". Inventory Management Review. November 23, 2009 <http://www.inventorymanagementreview.org/2005/09/dell_computers_.html>.
Atkinson, Charles. "McDonalds: A Guide to the Benefits of JIT". Inventory Management Review. November 23, 2009 <http://www.inventorymanagementreview.org/2005/09/dell_computers_.html>.
Dunn, Roger. "ROI Model: Agile efficiency boosts ROI with constant return". IBM. November 23, 2009 <http://www.ibm.com/developerworks/rational/library/edge/08/may08/dunn/fig1.jpg>.
Fabrikant, Geraldine. "Harvard Endowment Loses 22%". New York Times. <http://www.nytimes.com/2008/12/04/business/04harvard.html?_r=2>.
"Netflix vs. Blockbuster: Rent DVDs Phenomenon Competition". Keep Net Business Profiles. November 22, 2009 <http://www.keepnetflixprofiles.org/business-ideas/netflix-vs-blockbuster-rent-dvds-phenomenon-competition/index.html>.
"Optimize Capital Availability and Deployment". Ernst and Young. November 20, 2009 <http://www.ey.com/Media/vwLUExtFile/LFC_Sector_charts/$FILE/sgf-chart05.jpg>.
Roehl-Anderson, Janice. The Controller's Function. Hoboken: Wiley, 2005. Victor, Antonio. "Blockbuster v. NetFlix: Innovation and Competition".
TheLogicofSuccess.com. November 22, 2009 <http://www.thelogicofsuccess.com/blockbuster-netflix-innovation-competition.htm>.