chapter 19 flashcards
what is Financial Planning?
a firm’s task of assessing and planning the cash requirmneets to achieve its goals
Short-term Planning?
- rarely looks farther ahead than the next 12 months
- it seeks to ensure that the firm has enough cash to pay its bills and that short-term borrowing and lending are arranged to the best advantage
what does Long-term planning focus on?
focuses on the firm’s long term goals, the investments that will be needed to meet those goals and the financing that must be raised to fund the investments
whats the typical horizon for long-term panning?
5 years
what is the Financial Planning Process?
- analyzing the investment and financing choices open to a firm
- projecting the future consequences of current decisions
- deciding which alternatives to undertake
- measuring subsequent performance against the goals set forth in the financial plan
what 3 alternatives are departments often asked to submit ?
- Base Case or Aggressive Growth Plan: a plan for heavy capital investment and rapid growth of existing markets
- Normal Growth Plan: division grows with its market but not significant at the expense of tis competitors
- Plan ot Retrenchment : a plan for lean economic times
why do we need to build Financial Plans?
- Contingency Planning: planners need to formulate responses to inevitable surprises
- Considering Options: planners need to determine weather there are opportunities for the company to exploit its existing strrrenghs by moving into a new area. putting in options that create value in the future
- Forcing Consistency: plans draw out the connections between the plans for growth and financing requirements
what are the components of a Financial Planning Model?
- Inputs:
- current financial statements
- forecasts of key variables such as sales and interest rates
- Planning Model:
- equations specifying key relationships such as the cost of producing the forecasted sales and asset investment. looking at the impact of Change in sales
- Outputs:
- projected financial statements (pro forma)
- financial ratios
- sources and uses of cash
what’s a Percentage of Sales Model?
planning models in which sales forecasts are the driving variable and most other variables are proportional to sales
whats a Balancing Item or (plug)?
variable which adjusts to maintain the consistency of a financial plan
what is Net Operating Working Capital (NOWAC)
operating current assets - operating current liabilities (excluding interest bearding debt)
Operating current assets consists of…
current assets needed for the operation of the business, including trade receivables, prepaid expenses, inventory, and cash needed to operate the business
Operating current liebailties includes…
trade payables, accruals, and any other liabilities spontaneously generated by the operation of the firm
what are Pitfalls in Model Design?
many models ignore realities such as depreciation, taxes, etc
what are Assumptions in Percent-of-Sales Models?
these assume that costs and assets increase proportionately with sales which is not always true. capacity is another complication
