5 Flashcards
What is the financial planning process
Analysing investment and financing choices open to firm
Projecting future consequences of current decisions
Deciding which alternatives to undertake
Measuring subsequent performance against goals set forth in financial planning
What is planning horizon
Time Horizon for a financial plan
What are managers often asked to model
Different possible outcomes:
Optimistic case
Expected case
Pessimistic case
How do financial plans help managers
Insures their financial strategies are consistent with their capital budgets. They highlight financial decisions necessary to support firms operations and investment goals
Why would you make financial plans
Contingency planning
Considering options
Forcing consistency
What is contingency planning
Planners need to worry about unlikely events as well as likely ones. If you think ahead of what could go wrong, then you are less likely to ignore dangerous signals and can respond faster to trouble
What is considering options
Planners need to think whether there are opportunities for company to exploit its existing strength by moving to wholly new area
What is forcing consistency
Financial plans draw out connections between firms plan for growth and financing requirements. Financial plans must ensure that firms goals are mutually consistent
What are inputs
Current financial statements. Forecasts of key variables such as sales or interest rates
What is the planning model
Equations specifying key relationships
What are outputs
Projected financial statements. Financial ratios. Sources and uses of funds
What is the long-term financial planning percentage sales model
Sales forecasts are driving variables and most other variables are assumed to be proportional to sales
Balancing item is a variable that adjusts to maintain consistency of a financial plan. Also called plug
What is included in financial policy and growth
Internal growth rate
Sustainable growth rate
Determinants of growth
What is the internal growth rate
Maximum growth rate that can be achieved with no external financing of any kind
What is the sustainable growth rate
Maximum growth rate that can be achieved with no external equity financing while maintaining a constant debt/equity ratio
What are the determinants of growth
Profit margin
Total asset turnover
Financial policy
Dividend policy
What is profit margin
An increase in profit margin will increase retained earnings therefore, increase sustainable growth
What is total asset turnover
An increase in this, increases sales generated by each unit in assets. This decreases need for new assets as sales growth hence, increases sustainable growth rate
What is financial policy
An increase in debt/equity ratio makes additional debt financing available which increases sustainable growth rate
What is dividend policy
A decrease in dividend payout increases retained earnings hence, increases sustainable growth rate
What are the limitations of financial planning models 
Models ignore cash flow, risk, and timing
Shouldn’t be a mechanical process
Shouldn’t be an iterative process 
