CHAPT FINANCIAL PLANNING AND STRATEGY

LEARNING OBJECTIVES
2

Understand the difference between financial forecasting and

financial planning
Explain the components of a financial plan
Discuss the technique of financial forecasting
Develop an approach to construct a financial model
Examine the features and implications of sustainable growth model
Show the linkage between strategic planning and planning
 INTRODUCTION
3

Financial planning indicates a firms growth,

performance, investments and requirements of funds
during a given period of time, usually three to five
years.
It involves the preparation of projected or pro forma
profit and loss account, balance sheet and funds flow
statement.
Financial planning help a firms financial manager to
regulate flows of funds which is his primary concern.
 Strategic Decision-making
Framework
4

Strategy is the foundation for any planning

system of a firm.
The business portfolio models are most popular
and useful to understand the firms strategic
concerns and choices and plan for the future.
The market growth-market share model , popularised
by the Boston Consulting Group (BCG)
The nine-cell matrix model developed by the General
Electric Company
 Market growth-market
5 share model
 Summary of Strategic Decision-
6 Making Framework
A firm operates in a complex environment.
Strategy is a central theme that establishes a match between
the firms competences and opportunities created by
environment changes.
A firm is multi-directed; strategy is a link between the
multiple goals of the firm and its plans and policies.
Product-market scope, competitive advantages, distinctive
competences and synergy are the most important components
of strategy.
Market dominance (particularly, during the growth stage) is
the most desirable strategy.
A firm should have a balanced portfolio of businesses.
 Strategic Financial
7
Planning
Two important tasks of the financial manager are:
Allocation of funds (viz. investment decision).
Generation of funds (viz. financial decision).

The theory of finance makes two crucial assumptions:

First, the objective of the firm is to maximise the wealth of
shareholders.
Second, capital markets are efficient.
 Financial Planning
8

Financing planning process involves the following

facets:
Evaluating the current financial condition of the firm.
Analysing the future growth prospects and options.
Appraising the investment options to achieve the stated growth
objective.
Projecting the future growth and profitability.
Estimating funds requirement and considering alternative
financing options.
Comparing and choosing from alternative growth plans and
financing options.
Measuring actual performance with the planned performance.
 Financial Forecasting
9 and Modelling
Financial forecasting is an integral part of financial
planning. It uses past data to estimate the future financial
requirements.
A financial planning model establishes the relationship
between financial variables and targets, and facilitates the
financial forecasting and planning process.
A financial planning model has the following three
components:
Inputs
Model
Output
 Constructing Financial
10 Model
To prepare the next years proforma profit and loss statement,
balance sheet and funds flow statement, the planning team through
a consultative process in the company, made several assumptions
and models about the relationships between financial variables.

Based on the model inputs and assumptions, the planning team

developed the model equations for proforma profit and loss
statement, funds flow statement and balance sheet.

Prepare proforma financial statements

 Long-term Financial Plan
11

In practice, long-term financial forecasts are prepared

by relating the items of profit and loss account and
balance sheet to sales. This is called the percentage to
sales method.
 Sensitivity Analysis
12

Toexamine the effect of changing assumptions on

a particular firms funds requirement, the finance
manager can perform a sensitivity analysis.

He/she can vary one variable at a time, and analyse

its effect.
 Steps in Financial
13 Planning
Pastperformance
Operating characteristics
Corporate strategy and investment needs
Cash flow from operations
Financing alternatives
Consequences of financial plans
Consistency
 PLANNING FOR
14 SUSTAINABLE GROWTH
A simple way of ascertaining the growth potential
of a company, given its current financial conditions,
is to examine the interaction between four financial
policy goals expressed as ratios:
target sales growth
target return on investment (net assets)
target dividend payout and
target debt-equity (capital structure)
Growth Potential of a Single-
product Company
15

Sustainable growth may be defined as the

annual percentage growth in sales that is
consistent with the firms financial policies
(assuming no issue of fresh equity):
net margin retention leverage
sustainable growth
assets turnover (net margin retention leverage)
 Growth Potential of a
16
Multi-product Company
Sustainable growth rate in the case of multi-
product or multi-division company is to calculate
the sustainable growth rate at the corporate level
in terms of growth in assets.