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Financial Planning

Financial Planning

Financial Planning
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Requirements for Effective Planning


 Financial planning is a process designed to help the firm
Financial Planning Models analyze and decide which risks are worth and not worth
Planners Beware undertaking
External Financing and Growth
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Financial Planning Financial Planning

 Scenarios in Financial Planning:


 Steps in Financial Planning:
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 Best case
 Analyzing the investment and financing choices open to
the firm  Normal growth
 Projecting the future consequences of current decisions  Retrenchment
 Deciding which alternatives to take
 Measuring subsequent performance against the goals set
forth in the financial plan
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Requirements for Effective Planning Financial Planning Models
 Forecasting - a necessary step in financial planning
 Components of Financial Plans

 Choosing the Optimal Plan - financial managers must choose  Inputs


which alternative they think is the best
 The Planning Model

 Watching the Plan Unfold - a good plan must be flexible and  Output
adaptable

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Source: http://pmtips.net/wp-content/uploads/2011/01/effective-team011.jpg

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Financial Planning Models Financial Planning Models

Case Study - Simplified Financial Statements for 2011


Concepcion Hydroelectric Plant Concepcion Hydroelectric Plant
Concepcion Hydroelectric Plant Concepcion Hydroelectric Plant Statement of Comprehensive Income Statement of Financial Position
Statement of Comprehensive Income Statement of Financial Position
Revenues 5,520,000 Assets P9,200,000
Revenues P4,800,000 Assets P8,000,000 Costs 4,600,000 ` Total P9,200,000
Costs 4,000,000 Total P8,000,000 Net Income 920,000
Net Income P800,000 Debt P3,680,000
Debt P3,200,000 Equity 5,520,000
Equity 4,800,000 Total P9,200,000
Total P8,000,000

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Financial Planning Models Financial Planning Models
Skipper Riley Corporation
Skipper Riley Corporation
Statement of Comprehensive Income for 2012
Statement of Financial Position for 2012

Revenue 6,000,000
ASSETS
Cost of Goods Sold 5,400,000 90% of Sales
Net Working Capital 600,000 10% of Sales
Earnings Before Interest & Taxes 600,000 10% of Sales
Net Fixed Assets 2,400,000 40% of Sales
Interest 120,000 10% of debt at start of year
Total Assets 3,000,000 50% of Sales
Earnings Before Taxes 480,000
Taxes 192,000 40% of earnings before tax
LIABILITIES & SHAREHOLDERS' EQUITY
Net Income 288,000 Long-term Debt 1,200,000
Shareholders' Equity 1,800,000
Dividends 192000 payout ratio 2/3 Total Liabilities & Equity 3,000,000 equals total assets
Retained Earnings 96,000 Net Income - Dividends

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Financial Planning Models Financial Planning Models


Skipper Riley Corporation Skipper Riley Corporation
Statement of Financial Position for 2012 Statement of Financial Position for 2012

ASSETS ASSETS
Net Working Capital 660,000 10% of Sales Net Working Capital 660,000 10% of Sales
Net Fixed Assets 2,640,000 40% of Sales Net Fixed Assets 2,640,000 40% of Sales
Total Assets 3,300,000 50% of Sales Total Assets 3,300,000 50% of Sales

LIABILITIES & SHAREHOLDERS' EQUITY


LIABILITIES & SHAREHOLDERS' EQUITY
Long-term Debt 1,200,000 temporarily held fixed
Long-term Debt 1,200,000 unchanged
Shareholders' Equity 1,908,000 increased by retained earnings
Total Liabilities & Equity 3,108,000 debts plus equity
Shareholders' Equity 2,100,000 17% higher due to Retained
Earnings & new equity
Required external financing 192,000 Balancing item or plug Total Liabilities & Equity 3,300,000 debts plus equity = assets

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Financial Planning Models Planners Beware

Skipper Riley Corporation


Statement of Financial Position for 2012

ASSETS
Net Working Capital 660,000 10% of Sales
Source: http://teachers.saschina.org/mhagen/files/2012/08/caution-beware-sign.jpg

Net Fixed Assets 2,640,000 40% of Sales


Total Assets 3,300,000 50% of Sales
 Pitfalls in model design

LIABILITIES & SHAREHOLDERS' EQUITY  Shortcomings of percentage of sales models


Long-term Debt 1,392,000 16% higher due to new borrowing
Shareholders' Equity 1,908,000 increased by retained earnings
 There is no finance in financial planning models
Total Liabilities & Equity 3,300,000 debts plus equity = assets

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External Financing and Growth


 A firm can achieve a higher growth rate without raising
external capital if:

 It plows back a high proportion of its earnings

 It has a high return on equity (ROE)

 It has a low debt to asset ratio

Source: http://www.greengrowth.org/sites/default/files/GGBP_2.jpg
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