S4: Long Term Financial Planning & Growth Flashcards
Financial Planning
Aka strategic planning, formulates how a firm’s longer term financial goals are achieved. It establishes guidelines for change and growth in a firm
1. Investments in Assets (AI)
2. Degree of Financial Leverage (FL)
3. Dividend Policy (DP)
4. Liquidity and Working Capital amount (LWC)
% of Sales Approach
Approach to developing a financial planning model begins with a firm’s sales forecast and observing how this “flows through” other accounts and items on the financial statements
1. CPT pro form sales = past sales x 1.g
2. Determine items % of past sales (ex: cogs/past sales = 75%)
3. Complete pro forma using forecasted sales and expenses (ex: pro forma sales * .75 = pro forma cogs)
4. Determine Dividend (NI * given %) and plowback amounts (NI * (1 - given %)
5. Determine balance sheet items by % of sales method
6. Increase RE by plowback amount
7. Pro Forma doesn’t balance! Use EFN to do so
**Notes payable, LTD, and common stock don’t vary with sales
Internal Growth Rate
Max growth without requiring additional financing
Sustainable Growth Rate
Max growth rate without changing current D/E ratio
Operating at Capacity
Assumption that firms are 100% utilizing current resources, therefore “turning on existing machines” can reduce EFN